Japanese equities posted strong returns over the quarter in both local currency and U.S. dollar terms. It was the best-performing developed market in the first quarter. The equity market has benefited from a number of tailwinds, including purchases by government pension funds, companies improving shareholder returns in response to government pressure, and exporters benefiting from the weak yen. Domestic consumers should benefit from wage increases and low inflation. The macroeconomic data also appear to be improving as the impact of last year's sales tax increase wears off. Although consumer inflation near 0% is significantly below the central bank's target of 2%, this is mostly due to weak oil prices rather than weak domestic demand-which has been improving and should improve as we see further real wage growth.
The Japan Fund returned 13.04% in the quarter compared with 10.50% for the TOPIX Index and 11.46% for the Lipper Japanese Funds Average. For the 12 months ended March 31, 2015, the fund returned 8.97% versus 12.23% for the TOPIX Index and 14.58% for the Lipper Japanese Funds Average. The fund's average annual total returns were 8.97%, 7.89%, and 3.02% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 1.05% as of its fiscal year ended October 31, 2014.
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The Japan Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
We have increased our exposure to the machinery sector, making it the second-largest overweight in the portfolio. With the U.S. showing continued signs of strength and a potential recovery in Europe, we have increased the cyclical growth names in the portfolio. The IT and services segment remains our largest overweight. We are bullish on the communications industry given the scope for improving earnings fundamentals and generally attractive valuations. Elsewhere within the segment, we remain overweight the staffing agencies, which should benefit from signs of tightening in the labor market.
Japan has made several efforts at corporate reform in recent months that could enhance longer-term returns for investors. Corporate tax rates have been lowered, an enhanced corporate governance code has been implemented, and initiatives encouraging married women and foreign workers to join the labor force have been announced. Other significant incentives for corporations to be more shareholder-friendly are also being put in place. For example, the new TOPIX 400 index selectively lists companies that demonstrate a focus on profitability gains and are addressing governance issues. The volume of shareholder buybacks is increasing, while mergers and acquisitions activity is slowly emerging. Where implemented effectively, we expect such actions to be rewarded through higher valuations.