International small-cap equities fell sharply in U.S. dollar terms during the third quarter but fared better than their large-cap counterparts. The quarter was marked by pronounced volatility as worries about the faltering Chinese economy and its impact on worldwide economic growth contributed to investor uncertainty. Small-cap stocks in Europe, not including the UK, fell the least over the quarter, while concerns over Chinese growth hit small-cap stocks in Latin America and Asia outside of Japan.
The International Discovery Fund returned −7.29% in the quarter compared with −9.70% for the S&P Global ex-U.S. Small Cap Index and −7.56% for the Lipper International Small/Mid-Cap Growth Funds Average. For the 12 months ended September 30, 2015, the fund returned 1.75% versus −5.34% for the S&P Global ex-U.S. Small Cap Index and −2.11% for the Lipper International Small/Mid-Cap Growth Funds Average. The fund's average annual total returns were 1.75%, 8.39%, and 7.50% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 1.21% as of its fiscal year ended October 31, 2014.
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if it did, the performance would be lower.
The consumer discretionary sector remains our largest absolute position and a sizable overweight to the benchmark. In terms of regions, the portfolio is particularly overweight emerging Asia and Japan, where we continue to find interesting investment opportunities at relatively attractive valuations. In Japan, skepticism around President Abe's ability to deliver structural reform and kick-start inflation has recently provided us an opportunity to add a number of cyclically exposed companies.
We feel that prospects for U.S.-based investors are improving. Expansive monetary policy from the Bank of Japan and the European Central Bank (ECB) has led to sharp depreciations of the yen and euro, which should help their respective economies. The ECB's asset purchase program is expected to run until at least the end of next year, and ECB officials have recently suggested that the purchases might increase if the economic recovery falters. The slowdown in China has weighed on expectations for higher growth and inflation. However, we remain encouraged by President Abe's determination to carry through with reforms. We also continue to believe that investors are not appreciating the progress in Japanese corporate governance, and we see pockets of real value in smaller Japanese companies. Generally, the indiscriminate selling in both domestic and international Chinese companies provided an opportunity to add to high-quality names in the region. Although international small-cap valuations remain slightly above their long-term averages, they are much more reasonable on a cyclically adjusted basis and compare favorably with their U.S. counterparts. Going forward, we expect that a wide diversity of returns in the asset class will reward careful stock picking. Abundant liquidity and low cost of capital should continue to encourage more mergers and acquisitions, which should also help returns.