Alma Eikoh Japan Large Cap Equity Fund

Market Review and Outlook

The Topix rose by 6.57% in April, partially recovering the sharp fall experienced in March following the attack on Iran by the US and Israel. The market rebound was triggered by two principal factors; speculation that the conflict in the Middle East would be resolved at an early juncture and growing confidence in the strength and durability of the AI-fueled capital spending boom. Both the oil market and the stock market exhibited dramatic volatility over the month as investors digested conflicting signals from the White House and the Middle East, oil slumping and the market soaring on the announcement of the two-week ceasefire, with oil then resuming its upward trend and closing at over $110 per barrel as prospects for the reopening of Strait of Hormuz dimmed. While those companies perceived as vulnerable to the impact of higher oil prices and imported inflation were weak, losses in this area were more than compensated for by dramatic gains in key beneficiaries of AI investment. The market was led by semiconductors, semiconductor production equipment, electronic components, factory automation and cable manufacturers. Retailers, railways, airlines, autos and game companies all declined over the month. Oil stocks also fell over the period, giving back part of their outsized gains recorded in March. Over the month Topix Growth outperformed Topix Value by 3.58%, however within the value area banks performed strongly. Investors bet on a move to higher rates following a hawkish statement by the BOJ at their April meeting and the upward revision of their core inflation forecast for fiscal 2026 from 1.9% to 2.8% and for 2027 from 2.0% to 2.3%. Investors also noted that while the policy rate was held at 0.75%, there were three dissenters who proposed a move to 1.0%, up from two at the March policy meeting. Year to date, Topix Value still leads Topix Growth, but the degree of outperformance is now modest at +2.13%. Foreign investor flows turned round sharply from the net selling of Y3.6trn in March to net inflows of Y4.1trn in April, leaving the net inflow over the first four months of the year at a substantial Y5.7trn. The Yen was stable, trading at just below Y/$160 for most of the period, however when it breached this level at the end of the month the BOJ intervened in the market, buying Yen, and causing a spike to close the period at 156.6.

Over the last month while there has been little effective change in the situation confronting investors; the fact that there has been no real progress towards a resolution in the Middle East and that such a development appears hard to imagine is worrying. The world faces “the biggest energy crisis in history” according to the International Energy Agency with sharply rising prices and shortages in certain key derivatives set to impact consumers and industrial supply chains, damaging economic growth and potentially social stability. Market insouciance in the face of such an outlook is remarkable, but so too is the strength and depth of the investment boom driven by the adoption of AI and the race to lead this technological wave. While we remain fans of the policy agenda of the Takaichi administration, in practice global macroeconomics and any future adjustments that are made to offset their impact will have a much greater impact on the outlook for Japan. We have made no significant change to our strategy in April and continue our policy of limiting our exposure to wider global economic cyclicals and looking to maintain/add to selected domestic holdings and beneficiaries of AI investment as we think it unlikely that this will be significantly impacted by slower overall growth caused by higher oil prices. We believe the quality of stocks held in the fund is high and expect these companies to be in a strong position to pass on price increases where necessary due to their strengths and competitive positions. We are just entering the full year results season, and this presents an opportunity for us to review and test our theses for individual names. In keeping with the bottom-up nature of the fund we may well make changes to the portfolio as a result of this but the underlying strategy is expected to remain constant. The fund retains a balance between economically sensitive and defensive businesses but with a clear bias in favour of the technology sector within our economic exposure. The portfolio exhibits a higher ROE than the overall market and we believe offers superior growth potential, it is our view that this is not fully discounted in the modest average valuation premium that its constituents trade at relative to the index.

Fund

The fund rose by 10.65% (JPY share class) in April, outperforming Topix (dividends reinvested) by +4.08%.

The fund strongly outperformed the market in April, while both stock selection and sector allocation added significant value, it was sector allocation that made the greater contribution. The fund benefited from the overweight positions held in Semiconductors and Technology Hardware, as well as underweight positions in Pharmaceuticals, Transportation, Media and Autos. Then only significant negative contribution came from the overweight position held in Consumer Durables & Apparel. Turning to stock selection, it was in Capital Goods that the greatest value was added. The fund benefited from the strong performance of the cable manufacturer Fujikura, lifted by AI capital spending, and in addition factory automation plays, Yasukawa and Mitsubishi Electric, both performed strongly. Significant value was also added in the Materials area driven by the sharp rise in Resonac, a beneficiary of strong semiconductor material demand reflecting the buoyant AI area. Lastly performance was also strong in Consumer Durables & Apparel helped by the overweight positions held in Panasonic and Asics and the underweight held in Sony. Value was lost at the stock selection level in Telecom Services and in Technology Hardware. In Telecom Services it was lost reflecting both the dull performance of KDDI and the very strong performance of the AI investment geared Softbank within the sector. In Technology Hardware, our holding in Ibiden performed very strongly but was more than offset by weakness in FujiFilm with investors concerned about the outlook for their digital camera and copier businesses after Canon reported weak numbers in these areas.

During April, we bought two new positions for the fund, selling two existing holdings to help fund them. We sold our position in Sumitomo Chemical, which has held up well despite its general economic gearing, as investors have appreciated the positive short-term impact of the crisis in the Middle East on the earnings of its historically troubled affiliate, Rabigh Petrochemical. While we expect new agrochemical products to lift earnings in fiscal 2027, we are concerned that prospects for dull earnings in 2026 may disappoint the market and with substantial borrowings, the rise in market rates is not good news for the company. We bought a position in the robotics and FA company Yasukawa following recent meetings with management in both London and Tokyo. Their strong position in robotics offers good long-term prospects for growth and we are particularly excited by growth prospects over the next few years for their servomotor business which is benefiting from the secular upturn in semiconductor production equipment investment driven by AI. Marginal profitability is high in this area, and we expect a strong improvement in operating margins. The second position that we bought was the pharmacy/drug retailer Tsuruha. We expect the company to show robust profits growth over the next few years as they extract Y40bn in synergy benefits from their recent merger with competitor, Welcia. The majority of these will be extracted through optimizing suppliers and pricing between the two companies, though in addition to this the greater scale of the combined group should yield additional benefits. With the backing of the Aeon Group, the company is in a strong position to make further gains as the drug store industry consolidates in Japan and after recent underperformance the shares look attractively priced. The purchase of Tsuruha was partially funded through the reduction in the position held in Cosmos Pharmaceutical and, in addition, the sale of the remaining shares of PeptiDream. While we still believe that PeptiDream will in time establish itself with a strong base of recurring earnings, we have downgraded our expectations for how much they are likely to earn through upfront payments for new collaborations over the next 5-10 years before this can be achieved and this had a significant impact on our assessment of current fair value.