Alma Eikoh Japan Large Cap Equity Fund

Market Review and Outlook

For global markets, the first half of March saw a continuation of the sell off in February, caused by concerns of further Tariffs from the Trump administration. After the announcement of a grace period for tariffs on Mexico and Canada there was a slight recovery before a sharp sell-off following the announcement of an additional 25% tariff on all automobile imports into the US. The administration then announced there would be further tariff measures put forward on ‘liberation day’, the 2nd of April, and this caused further uncertainty and de-risking. The Topix followed this pattern with a more exacerbated sell off on the auto tariff announcement to finish down for the second month in a row. With domestic economic conditions remaining positive, expectations for the BOJ’s normalisation of monetary policy continued and this saw the 10-year government bond yield continue to climb, reaching 1.6% at one point, the highest level in 15 years, before ending the month at 1.50%. The Yen ended up very close to where it started the month versus the Dollar at Y/$150. These global macro moves were reflected in the sector performance of the Topix with rate sensitive areas like Insurance and Banks amongst the top performing sectors as well as domestically focused defensive areas like Real Estate, Food, Beverage & Tobacco and Household & Personal Products. Lagging sectors included areas sensitive to the Yen and the wider economy and included Semiconductors & Semiconductor Manufacturing, Technology Hardware & Equipment, Commercial and Professional Services. Foreign investors continued to sell the market to the tune of Y1.5tn on a net basis in March following similar levels of selling in January and February. Value strongly outperformed growth again during the month by 2.4% taking the cumulative outperformance of Topix Value vs Topix Growth to 61% since the start of 2021.

The major domestic economic story over the last few years has been the return of modest inflation to Japan and a key part of this story has been wage hikes which started in earnest in 2023 and reached levels not seen in 30 years in 2024. The BOJ has judged that wage hikes are the key driver for the sustainability of modest inflation in Japan and thus their planned path to rate policy normalisation. The first set of Shunto (spring wage talks) negotiations was published on March the 14th with average 2025 wage hike demand at 5.46%. This compares to 5.28% in 2024 and continues to support the narrative that the current mildly inflationary environment is likely to continue. At the BOJ meeting that followed, the policy rate was left unchanged as Governor Ueda highlighted the risks to the upside for inflation numbers due to stronger-than-expected wage growth and rising food costs whilst also suggesting the need to reconsider forecasts in April following U.S. tariff policy announcements. Inflation numbers remain steady in the 3% range with National CPI (ex-Fresh Food) coming in at 3.0% for February, and the leading Tokyo CPI up marginally to 2.9% for the March reading. Current conditions for business activity remain steady with February industrial production beating expectations up +2.5% in February and machine tool orders continuing to show healthy year over year growth of +3.5%. Forward looking indicators have begun to show signs of falling confidence however. In the March Tankan Survey, large Japanese companies revised down estimates for profit growth in fiscal year 2025 to -1.3%, the overall business conditions outlook DI dropped 7% for large manufacturers and overall planned capex was revised down slightly to +8.7% for FY 2024 and +3.1% for 2025. While there is not yet call for alarm, it is clear that uncertainty around trade policy has become the major risk for the Japanese economy against a backdrop of a healthy domestic outlook.

Over the last year or so, with the uncertain macroeconomic environment, we have ensured the overwhelming majority of risk taken by the portfolio is stock specific. Such risk currently represents 82% of the tracking error, up from 77% a year ago and within the historical range of 50-85% over the fund’s lifetime. We have been meticulously assessing the potential impact of mooted tariffs and discussing the possible impact of such moves with company management teams and believe the manufacturing companies we hold in the fund are in a strong position to weather potential changes. This being said, we have not decided to position the fund either aggressively defensively or with strong economic exposure but instead taking a more balanced approach. In descending order of size, the fund overweights are in Financial Services, Food, Beverage & Tobacco, Pharmaceuticals & Biotechnology, Consumer Durables & Apparel and Banks. The largest underweight positions are held in Capital Goods, Telecommunication Services, Insurance, Transportation and Media & Entertainment. Net currency exposure is modest, and the portfolio continues to exhibit a very modest growth tilt which is a reflection of the relatively low valuation that many growth stocks now trade on. The wider market continues to look attractively valued, trading on 14.4x prospective PER, 1.28x PBR and 2.37% dividend yield. The heightened focus on corporate governance throughout the market is driving higher payouts from cashflow and asset sales as managements think harder about appropriate balance sheet structure and returns. Buybacks in H1 fiscal 2024 were Y8trn, doubling YoY and for the full fiscal year a figure of Y18trn seems likely compared to Y9.4trn in fiscal 2023. Dividends for fiscal 2024 are expected to exceed Y18trn, topping records for the 4th straight year in a row.

Fund

The fund rose by +0.71% (JPY share class) in March, outperforming the Topix (dividends reinvested) by +0.49%.

Stock selection was the key driver of positive relative fund performance in March, whilst sector allocation represented a smaller offsetting negative factor. The fund benefited from the overweight positions in Banks and Food, Beverage & Tobacco, as well as underweights in Media & Entertainment and Telecommunication Services. This was however more than offset by the drag caused by the overweight position in Semiconductors & Semiconductor Equipment, as well as underweights in Insurance, Capital Goods, and Real Estate Management & Development as investors continued to show concern around the impact of further tariffs on the global economy.

At the stock level, industrial conglomerate Mitsubishi Electric outperformed the Capital Goods sector over the month as the market speculated that there would be more defence spending required for countries on which the Trump administration is applying pressure. Additionally, the company also held a briefing for its defence business with a goal of ¥600bn sales and 10% operating margins in FY3/31, whilst the CFO called for an improvement to 10% ROE in two years’ time from current levels of 8%. Recruiting platform operator Visional rallied after releasing solid quarterly results showing high-teen growth, as well as disclosing mid-term targets for their newly launched service ‘Internal BizReach’ which seeks to help companies at risk of losing staff. Megabank Mitsubishi UFJ reached an all-time high after the February CPI exceeded expectations and investors continued to price in the additional benefits from higher Japanese rates. Other sector outperformers included transaction service provider GMO Payment Gateway in Financial Services, peptide platform Peptidream in Pharmaceuticals, engineer staffing agency Open Up Group in Commercial & Professional Services and Sumitomo Chemical in Materials. On the other hand, sports shoe maker Asics gave up some of its recent outperformance though on no specific news, as did space debris removal company Astroscale, which we purchased in January. Other laggards included medical data company JMDC, as well as endoscope manufacturer Olympus, in which we decided to exit our position.

In March, we took advantage of the share sale by Japan Post Holdings to buy a holding in Japan Post Bank, funding this partly with a reduction in the Fund’s position in Mitsubishi UFJ that had come close to the regulatory 10% ceiling of fund net assets. We think that Japan Post bank may end up with the fastest earnings growth amongst the major banks as they stand to benefit heavily from the move out of BOJ deposits to mid-long term JGBs which are also now yielding 1.5%. They also have the least gearing to non-Yen rates and would actively benefit from overseas rates coming down due to reduced foreign currency funding costs. We also purchased a small position in 7&I which looks attractive following its recent underperformance. We think that prospects for recovery in its US operations in 2025 look encouraging and justify a holding in the stock, with the potential for acquisition by Alimentation Couche-Tard an additional incentive. We sold the fund’s holding in Olympus and purchased a position in Hoya. We are concerned about prospects for recovery of Olympus’s Chinese operations where share loss seems to be a problem and on a wider basis about the company’s need to spend to improve systems and the degree to which overall margins may be able to improve. We like Hoya’s strong market position in its core areas of business and sustainably high profit margins. We expect steady expansion in the healthcare operations and strong growth in mask blanks and HDD use glass disks with the company expected to retain its leadership in cutting edge mask blanks and dominance in glass disc production even as usage expands beyond Seagate. In the components area we took advantage of recent strength in Murata to sell our position there and switch into the package substrate maker Ibiden. While Murata’s leading position in ceramic capacitors appears secure, the growth potential it offers seems relatively limited without a surge in AI enabled handsets and other devices. Ibiden holds the leading position in high end semiconductor packaging and the trend towards complex packaging solutions and the use of chiplets is a structural growth driver for the company. While the company has been hit hard over the past couple of years by problems at key client, Intel, and the switch in hyperscaler investment priority away from general use servers to those use for generative AI, growth in AI packages for NVIDIA has been dramatic and is starting to repair this damage. NVIDIA became their largest client in Q4 and with strong growth expected from the transition to Blackwell and in time Rubin, prospects look good for a strong recovery in earnings.