Performance

In June, the Fund rose by 2.2% in yen terms, which was in line with the Morningstar Sector Average's return of +2.1%. The returns in other currencies were flat as the yen continued to decline.

Positive contributors included Genda (9166), a gaming and entertainment business, which saw a 7% rise. New M&A activity is expected to be accretive very shortly, with the acquisitions of National Entertainment Network and Kiddleton solidifying their foothold in the U.S. market, while the core business flourishes. The shares trade at an attractive valuation of less than 1x future sales. Additionally, TSI Holdings (3608), a clothing company, rose by 8.7%, with investors responding positively to further capital allocation changes, including the announcement of at least 10% share buybacks in the next few years. Sun Corporation (3768) received a tender offer from True Wind Capital for a 20% stake at a 19% premium. Sun’s management has been reluctant to offer any opinion, but our sense is that they are now very concerned about retaining their prized asset. A sum-of- the-parts analysis still shows that Sun Corp is trading significantly below its intrinsic value. Its equity-accounted affiliate is worth over ¥200bn, and with ¥25bn of net cash, the shares of Sun trade at only 45% of their adjusted NAV.

Portfolio

We added a new position in Sanken Electric (6707), a discrete Integrated Circuit manufacturer that is expected to see a resurgence in its parent business due to a normalisation of inventory corrections at their end clients and a return to normal production following recent earthquake damage. In addition, their U.S. subsidiary, Polar Semiconductor, is undergoing a restructuring process. Similar to Sun Corp, Sanken Electric's shares are trading significantly below their intrinsic value. The company's stake in Allegro Microsystems is valued at ¥450bn, which starkly contrasts with their own market capitalisation of only ¥172bn. With two engaged activists holding 30% of the outstanding shares, we expect substantial changes in capital allocation. We decided to exit our position in Pasona Group (2168) where our recent communications with the company have been disappointing. Trust in the president is in short supply, particularly after the sale of Benefit One (2412) to Daiichi-Life (8750), as only 10% of the cash received from the transaction (¥9bn of the ¥90bn) will be returned to shareholders.

Market Snippets

The gap between the S&P and Japanese indices in USD terms has continued to widen. The yen has continued its steep fall despite somewhat more hawkish comments from the Bank of Japan and mildly weaker US data. The outlook for Japanese corporate earnings remains very conservative. Exporters have forecast the yen at ¥145/$1, but revision of earnings probably will not occur in early August at first-quarter reporting time. This may have to wait until the end of September. Whilst US long bonds have seen yields decline from 4.7% to 4.3%, in Japan, 10-year government bonds now yield over 1%. Recent AGM meetings have been encouraging for activists. Strategic Capital has made a significant breakthrough at Daidoh (3205) where three new board members proposed by Strategic Capital were elected. Approval rates for many company presidents have fallen sharply. The corporate governance story has a long way to run, but as highlighted in earlier reports, this will likely lead to smaller stocks performing somewhat better as much of the good news is already priced into large mega-cap shares. We will be reporting soon on the first quarter results season.