Alma Eikoh Japan Large Cap Equity Fund

Market Review and Outlook

The fund fell by -1.20% (JPY share class) in September, underperforming the Topix (dividends reinvested) by -0.93%.

Both stock selection and sector allocation detracted over the month, with the former accounting for the majority of the underperformance. Sector allocation was hurt by overweight positions in Commercial & Professional Services and Health Care Equipment & Services, as well as the lack of exposure to Insurance. The losses were not fully offset by gains from the overweight in Semiconductors & Semiconductor Equipment and underweights in Automobiles & Components and Media & Entertainment. In stock selection, KDDI underperformed in Telecommunication Services, where the sector is heavily skewed by large moves in the shares of SoftBank Group, the technology holding company. SoftBank Group rose 24% during the month, initially supported by positive newsflow around OpenAI’s release of the GPT-6 Astra model and Meta’s launch of its agentic AI application Muse, before later giving back some gains amid concerns over AI safety and calls to slow development. KDDI also lagged other telecom carriers, reversing its relative outperformance through July. Other underperformers included factory automation manufacturer Omron, industrial conglomerate Kawasaki Heavy Industries, drugstore operator Tsuruha, and payment processing company GMO Payment Gateway, although there was no obvious company-specific news. On the positive side, photomask inspection company Lasertec outperformed SPE peers following confirmation from TSMC and Samsung of their adoption of high-NA EUV equipment. Sega Sammy led Consumer Durables & Apparel and Japanese game producers, and Sumitomo Chemical also rose within Materials.

In September, following a very strong run of earnings and share price performance, we decided to exit our position in IC substrate maker Ibiden and used the proceeds to buy semiconductor dicing and grinding equipment manufacturer Disco. We see the recent weakness in Disco’s share price as an attractive entry point for one of Japan’s best companies with a dominant market position in grinders for advanced technologies like HBM-DRAM and silicon interposers used in generative AI chip packaging, supported by its unique, highly efficient and results-oriented corporate culture. We strongly expect the company to continue to benefit from evolving technology trends in the semiconductor cycle and we are confident in their ability to capture demand across a wide array of potential server configurations in the next iterations of AI. We also sold our small position in real estate developer Mitsubishi Estate and bought a small position in pharmaceutical company Shionogi. We believe Shionogi is well positioned to grow with its position in the long-acting injectable (LAI) HIV market, where new product releases should win market share in the coming years. We are positive on the company’s wider portfolio of smaller assets and their intention to improve capital policy in favour of shareholders.

Market Review and Outlook

In September, the Topix had its first down month in the 6 months since the beginning of hostilities in Iran and the Strait of Hormuz begun in March. Overall market dispersion and performance was more muted than in recent months however the core themes of the AI investment cycle, the Iran conflict and its impact on supply chains and prices and the overall interest rate cycle continued to dominate headlines and market news. In the first half of the month, concerns continued to grow around the Iran conflict and wider disruption to oil and gas markets with Houthi forces claiming to have captured the Bab el-Mandeb port town of Mocha on September the 10th; this pushed prices up further with Brent crude rising to $109 at one point before retracing slightly into the month end on news that crude flows out of Hormuz were recovering. This backdrop and the resulting increased expectations for interest rate hikes provided a difficult backdrop for equity markets. On the 17th of September the Fed delivered a unanimous 25bp rate hike back up to 4% and US 10 year yields rose very sharply over the month from 4.75% to 5.3%. In Japan, the BOJ, as was widely expected, also raised the policy rate by 25bps to 1.25% though on a 7-2 vote and a less hawkish tone than the noises coming from the FOMC. Japanese 10 year yields continued their rise on a similar trend as they have been over the last year, finishing the month at 3.05% – the first time the 10 year yield has exceeded 3% since 1996. The Yen appreciated rapidly in the first week of September, rising to Y/$ 153 at one point but after the difference in tone and signaling between the BOJ and the Fed, this reversed and ended the month at Y157. On the AI front, sentiment oscillated dramatically throughout the month with news on the 11th of September of a new highly memory-efficient DeepSeek model sending memory stocks in particular plummeting and increasing concerns about AI safety from frontier labs and various others also weighing on the sector; Anthropic’s CEO Dario Amodei published a hefty blog post calling for moderation on the 14th of September for example. Towards the end of the month however, it emerged that the adoption rate of Meta’s consumer focused model ‘Muse’ was running well above expectations and the announcement of the new hardware device ‘Muse Charm’ on the 23rd of September added to excitement. Alongside the announcement of OpenAI’s intent to carry out another large funding round, sentiment lifted towards the end of the month and AI-themed stocks rose sharply.

In Japan, sentiment and market themes broadly followed those of global indices whilst domestic economic indicators continued on their steady path. The real GDP growth estimate for Q2 was revised up to +1.4% and the August economy watchers survey current conditions DI continued to rise for a 4th straight month to 46.4 and the future conditions DI also rose. The Japan CPI ex fresh food remained steady at 1.7% and the leading Tokyo core-CPI rose to 2.7% for September with subsidy drop-out effects on water and childcare in particular contributing to the headline figures. In the corporate sector and especially the manufacturing sector, conditions are very positive. In the September Tankan Survey the large manufacturer’s balance rose to +24 – the highest reading since March 2018, boosted by strong semiconductor and AI-related investment demand. All-industry domestic fixed investment is now forecast up 7.6% year-on-year (large companies +11.6%) and recent rumours of plans for a large new SK Hynix memory fab, the acquisition by Micron of JDI’s Mobara plant are adding to expectations. The government remains especially supportive of capital investment into Japan’s technology industry. Throughout the month the market leading sectors were Telecommunications (driven by Softbank, the technology investment conglomerate), Electronic Components, Semiconductor Production Equipment and Regional Banks which have so far lagged major banks in this rate cycle. Laggards included Department Stores & GMS, Internet Media and Restaurants.

In descending order of size, key sector overweights are Healthcare Equipment & Services, Semiconductors & Semiconductor Equipment, Commercial & Professional Services, Software & Services, and Consumer Durables & Apparel. Key underweights are Automobiles & Components, Insurance, Food, Beverage & Tobacco, Transportation and Consumer Discretionary & Retail. Other than exiting our small real estate position and purchasing a small pharmaceutical position, we made little change to portfolio structure over the month; exposures include both economically geared and more defensive areas of the economy as well as a number of globally competitive businesses. We are encouraged by the strong results reported by most portfolio constituents during the recent results season and the continued development of fundamental themes which we expect them to benefit from. The fund retains a growth tilt versus the index, this is the largest element of factor risk, and we are confident in the strong potential for growth of portfolio constituents to justify this. While the external environment and Geopolitics remain volatile, the Takaichi led government offers a relatively stable administration, clearly focused on enhancing economic growth, and Japan is in a very good position to capitalize on the opportunities that the current strong US and Asian industrial cycles offer.

Fund

The fund fell by -1.80% (JPY share class) in July, underperforming Topix (dividends reinvested) by -2.02%.

The fund’s underperformance over the month was driven equally by sector allocation and stock selection, and largely reflected the market’s rotation out of AI/data centre supply chain names into defensive laggards and sectors perceived as facing AI displacement risk. In sector allocation, the fund was hurt by overweight positions in Semiconductors & Semiconductor Equipment, as well as underweights in Insurance, Automobiles & Components, Transportation, and Media & Entertainment. These losses were only partly offset by overweight positions in Commercial & Professional Services, Software & Services, Financial Services, and Consumer Durables & Apparel. In stock selection, the main detractors included several AI beneficiaries that led the market in the first half of this year. These included cooling device and optical cable maker Furukawa Electric, NAND flash memory specialist Kioxia, semiconductor materials producer Resonac, and sanitary equipment and electrostatic chuck maker TOTO. Robot and servomotor maker Yaskawa Electric underperformed both the Capital Goods and the narrower factory automation sector after Q1 earnings disappointed, as production was disrupted by the implementation of a new ERP system. On the other hand, technology and medical conglomerate Fujifilm outperformed Technology Hardware & Equipment as investors rotated away from capacitor and passive component names that had surged on AI demand, while an end-of-month broker target price upgrade and a positive earnings preview also supported the share price. Tsuruha outperformed Consumer Staples Distribution & Retail and other drugstore operators after strong Q1 results highlighted solid cost control and merger synergies with Welcia. In Capital Goods, industrial conglomerate Hitachi advanced after reporting strong order momentum and profitability in its power grid business. KDDI also continued to outperform telecom peers despite no company-specific news.

In July we sold Yaskawa Electric as we believe the ERP-related disruption may make it hard for the company to achieve full-year guidance, and the company’s plan to achieve normalisation of production by September is not risk free. We also sold electronics conglomerate Panasonic, judging that risk/reward has become less attractive following recent strong share price gains, with strength in AI-related battery backup units (BBUs) and capacitors potentially offset by uncertainty surrounding its automotive battery business and possible impairment at its US software subsidiary, Blue Yonder. We participated in the equity offering of Kawasaki Heavy Industries (KHI). We believe the financing provides an attractive entry point into KHI’s exposure to structural growth areas including civil and defence aerospace, gas turbines for power generation, and customised industrial robotics through its exposure to semiconductor robots and physical AI. We repurchased a position in Sumitomo Chemical, held earlier in the year by the fund, reflecting both the recent underperformance of the stock which leaves valuations looking very attractive, and our expectation that trading conditions have remained firmer than we had feared. Longer term we like prospects for their electronic materials and agrochemicals businesses and think that the stock is likely to be rerated higher over the next few years as these businesses grow and develop.