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Hennessy Japan Funds First Quarter 2014 Commentary

May 07, 2014 | About:
Holly LaFon

Holly LaFon

250 followers

In 2013, Prime Minister Shinzo Abe introduced his "Three Arrows" program to jumpstart the Japanese economy. Which policies have achieved success and which ones have been more difficult to implement?

Prime Minister Abe's three-prong policy plan includes aggressive monetary easing, a fiscal stimulus package and a series of growth strategies. The first two policies were launched in early 2013. Since the two programs were under the control of the Japanese government, implementation occurred quickly and the impact was more immediate. The third arrow is comprised of a number of structural business and tax reforms geared to provide lasting benefits, such as wage growth on the corporate side and new savings programs aimed at increasing equity ownership by individuals.

These reforms and programs require the cooperation of the Japanese business community and citizens to achieve success and long-term growth. None of these reforms can be implemented overnight and progress will be measured in years and not months. However, we believe that Japan is on the right track and that long-lasting growth and a more robust Japanese economy will likely occur over time.

2. Would you give some examples of progress made as a result of Abe's policies and the impact on the Japanese economy?

In 2013, monetary policy caused the yen to weaken, which made Japanese goods less expensive to purchase by the world community. As a result, exports were very strong and many of these export-oriented companies are expected to post record earnings.

Also, thanks to monetary easing and the weaker yen, inflation is starting to appear once again. The Bank of Japan has set a target inflation rate of 2% before easing will subside. While inflation is not currently at that level, positive inflation is a welcome sign and encourages Japanese citizens to buy now rather than postpone purchases. Additionally, strong corporate earnings and the reappearance of inflation allow companies to increase wages and thereby personal income can rise.

Lastly, the political environment is stable. In July 2013, the ruling party won control of the Upper House. For the next three years, the political landscape should be stable, with elected officials working in unison. This affords Prime Minister Abe the time to implement his various growth policies.

3. The Japanese market was up approximately 50% in yen terms in 2013. Is Japan simply a yen play or are Abe's policies positioning Japan for sustained success? We believe that Japan is much more than a yen play and the seeds for sustained growth have been sown. For example, fueled by exports, corporate earnings are strong and growing rapidly. It is important to keep in mind that corporate operating expenses have been reduced significantly over the years for Japanese companies to stay competitive at a much higher currency rate.

Now with favorable top line and bottom line results, cash flow is enhanced, which can stimulate future capital expenditures and R&D spending. The trickle-down effect should benefit many domestic industries and create a positive economic cycle. We believe that corporate profits should remain strong for years to come. As a result, investors worldwide should take notice and find Japanese equities much more attractive than before.

Important Disclosures

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. This and other important information can be found in the Fund's summary and statutory prospectuses, which can be obtained by calling 800-890-7118 or visiting hennessyfunds.com. Please read the prospectus carefully before investing. Mutual fund investing involves risk; Principal loss is possible.

Small and medium-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Investments in foreign securities involve greater volatility and political, economic and currency risk and differences in accounting methods. The Fund may participate in initial public offerings ("IPOs") which may result in a magnified impact on the performance of the Fund. IPOs are frequently volatile in price and may increase the turnover of the Fund, which may lead to increased expenses.

Each Morningstar category average represents a universe of funds with similar objectives. The Russell/Nomura Total Market Index is a market capitalization-weighted index of Japanese equities. The Tokyo Stock Price Index (TOPIX) is a market capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The Russell/Nomura Total Market Index and TOPIX indices are presented in U.S. Dollar terms. One cannot invest directly in an index.

Morningstar Proprietary Ratings reflect risk-adjusted performance as of 3/31/14. For each fund with at least a three year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar risk-adjusted return measure that accounts for variation in a fund's monthly performance placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in distribution percentage. HJPNX received 4 stars for the three, five and ten year periods ended 3/31/14 among 27, 18 and 9 Japan Stock Funds, respectively. HJPSX received 5 stars for the three and five year periods ended 3/31/14 among 27 and 18 Japan Stock Funds, respectively. Ratings for other share classes may differ. ©Morningstar, Inc. All Rights Reserved. Past performance does not guarantee future results.

Cash Flow can be used as an indication of a company's financial strength and represents earnings before depreciation, amortization, and non-cash charges.


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