Market Commentary and Fund Performance

Tad Fujimura of Tokyo-based SPARX Asset Management Co., Ltd., sub-advisor to the Hennessy Japan Small Cap Fund, shares his insights on the market and Fund performance.

March 2021
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Fund Performance Review

In February, U.S. equities performed well on expectations for economic recovery, fueling solid performance in Japanese stocks. Nevertheless, as the month ended, interest rates rose as the U.S. economic recovery became more pronounced, and the stock market plummeted due to concerns about future shifts in monetary policy. In the Japanese stock market, large-caps gained prominence due to increased trading, primarily among foreign investors. Simultaneously, cyclicals and financials, which had been undervalued, made gains due to economic recovery and rising interest rates. As a result, the Tokyo Stock Price Index (TOPIX) rose 1.33% month-over-month, while the Russell/Nomura Small Cap™ Index rose 0.77%. The Fund’s performance (HJSIX) declined by 1.38%, falling below its benchmark. This decline is primarily because the Fund’s small exposures to this month’s significant beneficiaries such as cyclicals, securities companies, and banks.

The most significant contributor to the Fund’s performance this month was Musashi Seimitsu Industry Co., Ltd. As electric vehicle (EV) related news garners increasing attention, the market sees promise for growth in the firm’s products. Siix Corporation, an assembler of parts primarily for automobiles, also saw its share price rise. In the previous fiscal year, the firm’s profits fell by 20% due to COVID-19, but the market is bullish on Siix’s forecast profit growth of more than 40%.

Meanwhile, the Fund’s worst-performing stock was Nihon Unisys, Ltd. Pessimism about its short-term performance drove down the share price after the company demonstrated Q3 FY3/2021 earnings progress that fell below market expectations. Despite its better-than-average quarterly performance, METAWATER Co., Ltd., which develops and maintains municipal water and sewage equipment, saw its share price decline due to profit taking from the stock’s recent positive performance.

Click here for full, standardized Fund Performance.

Outlook for March 2021

The sharp upturn in U.S. interest rates at the end of February coincided with plummeting share prices, as the market saw rising concerns about future speculation. We anticipate a greater risk that foreign growth stocks, which appear highly overvalued, will fall due to coming interest rate movements. Nevertheless, interest rates are not significantly increasing in Japan, and the economic recovery is slow, so the impact of interest rate fluctuations should be relatively minor. Moreover, the Fund’s target investments of small-cap stocks are mostly not overvalued, so they should perform relatively well going forward. As for our investment strategy, we intend to expand the Fund’s investment in those struggling domestic demand service-related stocks with a high potential for earnings recovery, as we expect the market to finally grow in the post-COVID-19 era when most people will be vaccinated. We will also increase the Fund’s weight in stocks with few adverse effects from the turnaround in market conditions and interest rates.

Click here for Fund Holdings.

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Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted and can be found here. Performance data current to the most recent month end may be obtained from HennessyFunds.com Hennessy Funds Standardized Performance

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Mutual fund investing involves risk. Principal loss is possible. Current and future holdings are subject to risk. Small and medium-sized companies may have more limited liquidity and greater price volatility than larger companies. Investments in foreign securities may involve political, economic, and currency risks, greater volatility, and differences in accounting methods. The Focus, Total Return, Balanced, Large Cap Financial, Small Cap Financial, and Midstream Funds are considered non-diversified funds. A non-diversified fund, which may concentrate its assets in fewer individual holdings than a diversified fund, is more exposed to individual stock volatility than a diversified fund. A fund that concentrates its investments within one country, one sector, or a small group of industries, such as Japan, Technology, Financials, or Energy, may be subject to a higher degree of market risk. Investments in debt securities typically decrease in value when interest rates rise. The risk is greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Mortgage- and asset-backed securities are subject to prepayment risk, which is the risk that the borrower will prepay some or all of the principal owed to the issuer. Funds that invest in pooled investment vehicles (including ETFs) may experience higher fees. The formula-based strategy employed by some Funds may cause those Funds to buy or sell securities at times when it may not be advantageous.

ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a Fund’s ability to sell its shares. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.

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Master Limited Partnerships (MLPs) and MLP investments have unique characteristics. A Fund does not receive the same tax benefits as a direct investment in an MLP.

The prices of MLP units may fluctuate abruptly and trading volume may be low, making it difficult for a Fund to sell its units at a favorable price. MLP general partners have the power to take actions that adversely affect the interests of unit holders. Most MLPs do not pay U.S. federal income tax at the partnership level, but an adverse change in tax laws could result in MLPs being treated as corporations for federal income tax purposes, which could reduce or eliminate distributions paid by MLPs to the Fund. If the Energy Transition Fund’s MLP investments exceed 25% of its assets, it may not qualify for treatment as a regulated investment company (“RIC”) under the Internal Revenue Code (“Code”), and the Fund would be taxed as an ordinary corporation, which could substantially reduce its net assets and its distributions to shareholders. The Midstream Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes, and therefore, is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. The Midstream Fund will not benefit from current favorable federal income tax rates on long-term capital gains, and Fund income and losses will not be passed on to shareholders. The Midstream Fund accrues deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV, and as a result, the Fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.

Glossary of Terms contains definitions and additional information.

To view the top 10 holdings of a Fund, please click the Fund name: Cornerstone Growth, Focus, Cornerstone Mid Cap 30, Cornerstone Large Growth, Cornerstone Value, Total Return, Equity and Income, Balanced, Energy Transition, Midstream, Gas Utility, Japan, Japan Small Cap, Large Cap Financial, Small Cap Financial, Technology. Fund holdings are subject to change and not recommendations to buy or sell any security.

Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.

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To view the Morningstar ratings for the Japan Fund, please click here. (Media - TD Ameritrade)

To view the Morningstar ratings for the Focus Fund, please click here. (Media - CNBC-B. Macualey).

1 USD = 105.36 Yen as of 07/27/2020 (Media - Ticker - M. Takeda)

Tom White is a TD Ameritrade Network contributor and is not affiliated with the Hennessy Funds. Content is not investment advice, or a recommendation of any security, strategy, or account type. Options involve risks and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.(Media - TD Ameritrade-Rothberg)

To view the Morningstar ratings, please click here.

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