UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-05992
JAPAN SMALLER CAPITALIZATION FUND, INC.
Two World Financial Center, Building B
New York, NY 10281
Nomura Asset Management U.S.A. Inc.
Two World Financial Center, Building B
New York, NY 10281
Registrant's telephone number, including area code: (800) 833-0018
Date of fiscal year end: February 28, 2007
Date of reporting period: February 28, 2007
ITEM 1. REPORT TO SHAREHOLDERS
----------------------------------------------------------------------------
JAPAN SMALLER CAPITALIZATION FUND, INC.
April 20, 2007
To Our Shareholders:
We present the Annual Report of Japan Smaller Capitalization Fund, Inc.
(the "Fund") for the fiscal year ended February 28, 2007.
The Net Asset Value per share ("NAV") of the Fund decreased by 12.1% and
the closing market price of the Fund decreased 6.4% for the year after giving
effect for the reinvestment of income dividends and long term distributions.
The closing market price of the Fund on February 28, 2007, on the New York
Stock Exchange was $12.98 representing a premium of 10.0% to the NAV of
$11.80. The net assets of the Fund totaled $250,603,740 on February 28, 2007.
The Fund's benchmark--the Russell/Nomura Small Cap(TM) Index--decreased
by 7.9% in United States (U.S.) dollar terms. The TOPIX, consisting of all
companies listed on the First Section of the Tokyo Stock Exchange (the "TSE"),
increased by 3.3% and the Nikkei Average Index, a price-weighted index of the
225 leading stocks on the TSE, increased by 6.3% in U.S. dollar terms for the
year ended February 28, 2007. The Japanese yen ("Yen") depreciated by 2.4%
against the U.S. dollar during the year.
During the year ended February 28, 2007, the Fund underperformed the
Russell/Nomura Small Cap(TM) Index by 4.2%.
The Portfolio
Equity holdings represented 99.2% of the Fund's net assets at February
28, 2007. The Fund was diversified into 103 issues, of which 77 were TSE First
Section stocks, 11 were TSE Second Section stocks, 12 were JASDAQ stocks and
3 were other smaller capitalization stocks, comprising 72.5%, 11.0%, 13.5% and
2.2%, respectively, of net assets on February 28, 2007. In terms of the sector
allocation strategy, the overweight positions in Glass & Ceramics Products and
Electric Power & Gas sectors produced the largest positive contributions.
However, underweight positions in the Foods and Iron & Steel sectors had a
negative impact.
Stock attribution analysis shows some holdings in the Information &
Communication sector, such as JUPITER TELECOMMUNICATIONS CO., LTD, SRA
HOLDINGS, INC., and SORUN CORPORATION, contributed to the relative
performance. Stock holdings from other sectors, such as WORKMAN CO., LTD,
SHIMAMURA CO., LTD, and SURUGA CORPORATION, also added value during the review
period. Meanwhile, some holdings such as MEIKO ELECTRONICS CO., LTD, JACCS,
and KIMMON MFG. CO., LTD had a negative impact on the relative performance.
Market Review
The Russell/Nomura Small Cap(TM) Index declined by 5.9% in local
currency terms for the year ended February 28, 2007. Meanwhile, the broad
Japanese stock market (TOPIX) appreciated by 5.6% in local currency terms and
outperformed the smaller capitalization stocks. Unlike large capitalization
stocks, small capitalization stocks failed to gain despite healthy corporate
earnings announcements. Poor liquidity in small capitalization markets and
subdued sentiment among retail investors could be the main reasons behind this
performance differential.
The Russell/Nomura Small Cap(TM) index declined by 8.4% in local
currency terms for the six months ended August 31, 2006, underperforming the
broad Japanese stock market, represented by the TOPIX index, which declined by
just 1.6%.
Amid a firm recovery in stock prices, the TOPIX posted a gain of 4.6% in
March 2006 and the index climbed above the 1,700 level for the first time in
more than five years. Confirmation from the Bank of Japan ("BOJ") on March 9,
2006 that it would gradually reduce the level of liquidity available to the
banking sector helped to relieve some of the market uncertainty over the
direction of the BOJ's policy.
Investor sentiment began to deteriorate in mid-April, shortly after the
market had reached its highest level since February 2000, and the downturn
accelerated towards mid-June. After climbing more than 50% over the previous
12 months, the relatively high valuations in the Japanese small capitalization
market invited further profit taking after conservative corporate earnings
projections had triggered the initial decline. Meanwhile, increased risk
aversion saw a global downturn in stock markets that resulted in the first
full quarter of net selling by overseas investors since 2002. However,
purchases by domestic investors helped to mitigate the impact of this selling
pressure.
Several external events buffeted the Japanese and other global stock
markets early in July including the sudden worsening of global geopolitical
risk. Mid-way through the month, the BOJ finally increased its official bank
rate to 0.25% for the first time since August 2000, but the market's reaction
was limited, as the news seemed to be already priced in. An upward trend in
the Tokyo stock market since the middle of July extended further in August.
Japanese stocks had been moving in parallel with global stock markets over
these two months. Therefore, the rebound in United States stock prices on the
back of the Federal Reserve's decision to suspend its monetary tightening
activity had provided some support to the Japanese market. Favorable corporate
earnings results for April-June quarter also helped to underpin the market.
The Russell/Nomura Small Cap(TM) Index gained 2.7% in local currency
terms for the six months ended February 28, 2007, but once again
underperformed the broad Japanese stock market, as the TOPIX appreciated by
7.2%.
Growing risk aversion seemed to induce foreign investors to cut their
international equity exposures, which dragged the overall performance of the
Tokyo market at the beginning of September. Despite a rebound towards the end
of the month, in response to positive domestic macroeconomic figures, the
market was unable to make up for the
earlier losses. The appointment of Shinzo Abe as the successor to former Prime
Minister Koizumi in mid-September had no impact on the market, as this outcome
had already been thoroughly discounted.
Lingering concerns over near-term macroeconomic conditions tended to
weigh on the stock market, especially through mid-November when the market
declined more than 7% below its recent high. Subsequently, a global rally and
expectations of additional growth in Mergers and Acquisitions activity among
Japanese companies helped to push stock prices higher in Tokyo. There has been
an increase in net inflows by foreign investors, especially towards the end of
2006. Although the inflows came on the back of the Tokyo market's lagging
performance relative to its global peers, the extra liquidity provided
additional support for Japanese stocks.
Along with signs of a possible recovery in near-term economic
conditions, the favorable start to the third quarter earnings announcements
and rising expectations for a near-term earnings upgrade also helped to push
the market higher in January. Further inflows from foreign investors also
helped to sustain the rally. Although the market experienced a sharp decline
on the last trading day of February, along with most other major bourges, the
steady price gains earlier helped to push the TOPIX above its previous peak
recorded in April 2006. These gains were not wiped out by the month-end
correction. The encouraging announcement of strong Japanese real gross
domestic product data for the October-December fiscal year third quarter,
together with the release of favorable earnings results for the same period,
supported the overall market rally. Continuing inflows from foreign investors,
which to some extent were attracted by the Japanese market's relative
underperformance, also helped to underpin the small capitalization markets,
with the exception of the Mothers index.
Outlook and Future Strategy
In spite of the recent market consolidation, there has been no change to
the 12-month forecast target of 1,850 for the TOPIX. In valuation terms,
Japanese stocks are still trading around the mid point of what is considered
to be a reasonable range. Based on expected aggregate earnings per share
figures for fiscal year 2007, the market price earnings ratio valuation is
around 18.
Now that the BOJ has confirmed that it will adopt a gradual approach to
normalizing interest rates, following the latest 25 basis point increase in
the overnight lending rate on February 21, the Fund can expect domestic
liquidity conditions to remain supportive. With no sign of Consumer Price
Index data accelerating soon, the Fund believes the central bank will probably
wait until after the July election for the House of Councilors, Japan's upper
house of parliament, before raising interest rates again.
Meanwhile, despite the sudden increase in market volatility that has
accompanied the correction since the end of February, the Fund believes there
is still plenty of support from fundamentals both globally and domestically.
The overall framework for Japan's underlying economic conditions remains
robust. The continuing recovery in the Organization for Economic Cooperation
and Development ("OECD") leading indicator points to a likely recovery in the
export sector, while lower energy prices and continuing labor market
tightening should help to underpin domestic market conditions. Looking more
widely, global fundamentals appear generally supportive too. Data releases
from the United States that exacerbated the recent market correction were
themselves notoriously volatile, including home sales and business activity
indicators.
Although underlying conditions, such as economic growth, inflation, and
corporate earnings are expected to remain generally supportive globally, the
Fund believes the recent market sell off and rise in volatility will have an
impact on investors' risk tolerance and therefore market trends globally.
Eventual net impact on the Japanese market is unclear, given that a reduction
in fund inflows from overseas could be balanced by the retention of domestic
liquidity within the Japanese markets, as local investors start to shy away
from currency risk. The result could therefore be a period of return reversal
in the Japanese stock market, even though this scenario would only emerge if
the higher Japanese yen-United States dollar rate does not result in a
significant squeeze on the corporate earnings growth rate.
Stock selection opportunities are now more plentiful as long-running
trends begin to unwind and volatility increases. The Fund will consider this
investment environment when making stock selection decisions, and in
maintaining the emphasis on stocks that can demonstrate relatively steady
earnings growth, but have remained under-valued so far.
We appreciate your continuing support of your Fund.
Sincerely,
/s/ Hiroshi Terasaki
Hiroshi Terasaki
President
------------------------------------------------------------------------------
BENCHMARK
The Russell/Nomura Small Cap(TM) Index represents approximately 15% of
the total market capitalization of the Russell/Nomura Total Market(TM) Index.
It measures the performance of the smallest Japanese equity securities in the
Russell/Nomura Total Market(TM) Index. Currently, there are 1,300 securities
in the Russell/Nomura Small Cap(TM) Index.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHAREHOLDERS ACCOUNT INFORMATION
Shareholders whose accounts are held in their own name may contact the
Fund's registrar, Computershare Trust Company, N.A. at (800) 426-5523 for
information concerning their accounts.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
PROXY VOTING
A description of the policies and procedures that the Fund uses to vote
proxies relating to portfolio securities is available (1) without charge, upon
request, by calling toll-free 1-800-833-0018; and (2) on the Securities and
Exchange Commission's web site at http://www.sec.gov. Information about how
the Fund voted proxies relating to securities held in the Fund's portfolio
during the most recent 12-month period ended June 30 is available (1) without
charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the
Securities and Exchange Commission's web site at http://www.sec.gov.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's
Web site at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
FUND CERTIFICATION
In January 2007, the Fund filed its Chief Executive Officer
Certification with the New York Stock Exchange pursuant to Section 303A. 12(a)
of the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were
filed with the Fund's Form N-CSR and are available on the Securities and
Exchange Commission's Web site at http://www.sec.gov.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
INTERNET WEBSITE
Nomura Asset Management U.S.A. Inc. has established an Internet website
which highlights its history, investment philosophy and process and products,
which include the Fund. The Internet web address is www.nomura.com. We invite
you to view the Internet website.
------------------------------------------------------------------------------
JAPAN SMALLER CAPITALIZATION FUND, INC.
FUND HIGHLIGHTS--FEBRUARY 28, 2007
KEY STATISTICS
Net Assets.................................................................. $250,603,740
Net Asset Value per Share................................................... $11.80
Closing NYSE Market Price................................................... $12.98
Percentage Change in Net Asset Value per Share*+............................ (12.1%)
Percentage Change in NYSE Market Price*+.................................... (6.4%)
MARKET INDICES
Percentage change in market indices:* YEN U.S.$
--- ------
Russell/Nomura Small Cap(TM) Index ......................................... (5.9%) (7.9%)
TOPIX ...................................................................... 5.6% 3.3%
Nikkei Average ............................................................. 8.6% 6.3%
*From March 1, 2006 through February 28, 2007.
+Reflects the percentage change in share price adjusted for reinvestment of income dividends and long term capital
gain distributions and capital share transactions.
ASSET ALLOCATION
Japanese Equities
TSE First Section Stocks.................................................. 72.5%
TSE Second Section Stocks................................................. 11.0
JASDAQ Stocks............................................................. 13.5
Other Smaller Capitalization Stocks....................................... 2.2
Cash and Cash Equivalents................................................... 0.5
------
Total Investments......................................................... 99.7
Other Assets less Liabilities, Net.......................................... 0.3
------
Net Assets................................................................ 100.0%
======
INDUSTRY DIVERSIFICATION
% of % of
Net Assets Net Assets
---------- ----------
Miscellaneous Manufacturing................. 13.9 Information and Software....................... 4.8
Services.................................... 12.2 Wholesale...................................... 3.4
Machinery and Machine Tools................. 10.7 Telecommunications............................. 2.7
Retail...................................... 8.3 Electric....................................... 2.3
Real Estate and Warehouse................... 8.0 Food Manufacturing............................. 1.9
Chemicals and Pharmaceuticals............... 7.8 Textiles and Apparel........................... 1.8
Automotive Equipment and Parts.............. 6.6 Transportation................................. 1.4
Electronics................................. 6.0 Restaurants.................................... 0.8
Banks and Finance........................... 5.9 Oil and Gas.................................... 0.7
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE
Market % of
Value Net Assets
Security ----- ----------
Nichias Corporation................................................................... $8,099,810 3.2
Jupiter Telecommunications Co., Ltd................................................... 6,709,054 2.7
Suruga Corporation.................................................................... 6,128,671 2.5
Shimamura Co., Ltd.................................................................... 5,648,139 2.3
Tokai Rubber Industries............................................................... 5,631,544 2.3
Hisamitsu Pharmaceutical Co., Inc..................................................... 5,567,927 2.2
Mani, Inc............................................................................. 5,056,784 2.0
Futaba Industrial Co., Ltd............................................................ 4,872,871 1.9
Sorun Corporation..................................................................... 4,828,104 1.9
SRA Holdings, Inc..................................................................... 4,812,464 1.9
JAPAN SMALLER CAPITALIZATION FUND, INC.
------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of
Japan Smaller Capitalization Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Japan
Smaller Capitalization Fund, Inc. (the "Fund"), including the schedule of
investments, as of February 28, 2007, and the related statements of
operations, changes in net assets for each of the three years in the period
then ended and the financial highlights for each of the three years in the
period then ended. These financial statements and financial highlights for the
year then ended are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The financial highlights for each of
the two years in the period ended February 29, 2004 were audited by other
auditors whose report, dated April 21, 2004, expressed an unqualified opinion
on those financial highlights.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly we express no such opinion. An audit also
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of February 28, 2007 by correspondence with the custodian
and others or by other appropriate auditing procedures where replies from
others were not received. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund at February 28, 2007, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the years in the period
then ended in conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP
New York, New York
April 11, 2007
------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS*
FEBRUARY 28, 2007
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
EQUITY SECURITIES
Automotive Equipment and Parts
Eagle Industry Co., Ltd........................... 184,000 $ 1,795,601 $ 1,998,225 0.8
Valves and mechanical seals
Futaba Industrial Co., Ltd........................ 204,100 4,606,017 4,872,871 1.9
Exhaust system parts
Nittan Valve Co., Ltd............................. 344,200 2,944,938 3,543,086 1.4
Engine valves
Sanoh Industrial Co., Ltd......................... 97,800 972,927 643,046 0.3
Tubes, wires and electrical products
Showa Corporation................................. 75,000 1,270,342 1,201,775 0.4
Hydraulic products
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 2007
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Teikoku Piston Ring Co., Ltd...................... 120,300 $ 1,160,223 $ 1,123,444 0.5
Piston rings and cylinder liners
Tokai Rika Co., Ltd............................... 130,800 3,228,606 3,211,274 1.3
------------- ------------- -------
Electronic parts
Total Automotive Equipment and Parts.............. 15,978,654 16,593,721 6.6
------------- ------------- -------
Banks and Finance
Aizawa Securities Co., Ltd........................ 130,600 1,451,751 1,153,408 0.5
Financial services
Asset Managers Co., Ltd........................... 1,290 3,389,590 2,518,403 1.0
Real estate investment services
Iwai Securities Co., Ltd.......................... 176,300 4,494,874 3,322,620 1.3
Financial services
Kansai Urban Banking Corp......................... 1,019,000 4,269,366 4,547,070 1.8
General banking services
Kenedix, Inc...................................... 259 1,215,507 1,365,865 0.5
Real estate investment services
Sapporo Hokuyo Holdings, Inc...................... 180 1,722,068 1,871,118 0.8
------------- ------------- -------
General banking services
Total Banks and Finance........................... 16,543,156 14,778,484 5.9
------------- ------------- -------
Chemicals and Pharmaceuticals
Denki Kagaku Kogyo K K............................ 440,000 1,848,740 1,989,436 0.8
Chemical manufacturer
Hisamitsu Pharmaceutical Co., Ltd................. 182,500 5,080,131 5,567,927 2.2
Salonpas brand pharmaceuticals
Koatsu Gas Kogyo Co., Ltd......................... 218,000 1,223,320 1,385,472 0.6
High-pressured gases and chemicals
Nissan Chemical Industries........................ 279,000 3,371,675 3,576,953 1.4
Chemical producer
Sakata Inx Corp................................... 225,000 1,250,837 1,237,904 0.5
Printing inks
Taiyo Ink MFG Co., Ltd............................ 65,900 3,511,193 3,764,919 1.5
Resist inks for printed circuit boards
Towa Pharmaceutical Co., Ltd...................... 55,600 1,680,220 2,001,741 0.8
------------- ------------- -------
Generic medicine
Total Chemicals and Pharmaceuticals............... 17,966,116 19,524,352 7.8
------------- ------------- -------
Electric
Mirai Industry Co., Ltd.+......................... 271,100 2,597,495 3,665,836 1.5
Plastic molded electric materials
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 2007
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
SMK Corporation .................................. 301,000 $ 2,068,352 $ 1,966,389 0.8
------------- ------------- -------
Switches and connectors
Total Electric ................................... 4,665,847 5,632,225 2.3
------------- ------------- -------
Electronics
Daishinku Corp. .................................. 314,000 1,867,848 2,120,313 0.9
Monolithic crystal filters
Iriso Electronics Co., Ltd. ...................... 90,100 2,719,344 2,946,858 1.2
Electronic connectors
Jeol Ltd. ........................................ 199,000 1,221,492 1,256,311 0.5
Electronic optics instruments
Macnica, Inc. .................................... 58,600 1,864,346 1,842,316 0.7
Semiconductors
Meiko Electronics Co., Ltd. ...................... 115,700 4,935,073 4,761,961 1.9
Printed circuit boards
Shinko Shoji Co., Ltd. ........................... 21,700 318,642 319,287 0.1
Integrated circuits
Tokyo Seimitsu Co., Ltd. ......................... 17,400 839,810 655,855 0.2
Semiconductors
Tomen Devices Corporation ........................ 59,600 1,243,523 1,211,392 0.5
------------- ------------- -------
Semiconductors
Total Electronics ................................ 15,010,078 15,114,293 6.0
------------- ------------- -------
Food Manufacturing
DyDo Drinco, Inc. ................................ 27,700 1,065,487 1,123,685 0.4
Coffee, green tea & other beverages
Ozeki Co., Ltd. .................................. 120,600 3,535,682 3,383,833 1.4
Supermarket chain
Sansei Foods Co., Ltd. ........................... 23,100 516,847 343,596 0.1
------------- ------------- -------
Candy products
Total Food Manufacturing ......................... 5,118,016 4,851,114 1.9
------------- ------------- -------
Information and Software
Daiwabo Information System Co., Ltd. ............. 92,500 1,298,565 1,282,062 0.5
Information systems and software
Hitachi Information Systems ...................... 49,800 1,022,430 1,064,813 0.4
Software data processing
Jastec Co., Ltd. ................................. 13,200 155,604 122,378 0.1
Applications software
Sorun Corporation ................................ 544,600 4,207,445 4,828,104 1.9
Computer software development
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 2007
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
SRA Holdings, Inc.+ .............................. 289,200 $ 3,699,593 $ 4,812,464 1.9
------------- ------------- -------
Business application software
Total Information and Software ................... 10,383,637 12,109,821 4.8
------------- ------------- -------
Machinery and Machine Tools
Disco Corporation ................................ 71,900 4,566,437 4,332,533 1.7
Cutting and grinding industrial machinery
Hitachi Construction Machinery Co., Ltd. ......... 88,100 2,239,298 2,524,057 1.0
Construction machinery
Kato Works Co., Ltd. ............................. 331,000 1,357,892 1,656,049 0.7
Construction and industrial machinery
Makino Milling Machine Co., Ltd. ................. 175,000 2,115,266 2,209,592 0.9
Industrial machinery
Nippei Toyama Corp. .............................. 109,000 1,164,009 1,197,549 0.5
Industrial machinery
NS Tool Co., Ltd. ................................ 7,300 390,403 323,279 0.1
Industrial cutting tools
O-M Ltd. ......................................... 194,000 962,076 990,288 0.4
Automation packaging equipment
Sanyo Denki Co., Ltd. ............................ 267,000 2,034,212 2,064,695 0.8
Small precision motors
Senshu Electric Co., Ltd. ........................ 61,500 1,435,159 1,473,505 0.6
Electric wire and cables
Yamatake Corp. ................................... 186,500 4,494,125 4,507,839 1.8
Industrial automation equipment
Yokohama Rubber Co., Ltd. ........................ 681,000 4,046,065 4,218,660 1.7
Rubber products
Yuken Kogyo Co., Ltd. ............................ 362,000 1,227,407 1,275,757 0.5
------------- ------------- -------
Hydraulic equipment
Total Machinery and Machine Tools ................ 26,032,349 26,773,803 10.7
------------- ------------- -------
Miscellaneous Manufacturing
Dainichi Co., Ltd. ............................... 87,800 827,223 723,473 0.3
Oil heating equipment
Dowa Holdings Co., Ltd. .......................... 346,000 3,392,928 3,576,235 1.4
Various metal-related products
Kinki Sharyo Co., Ltd. ........................... 480,000 2,193,043 1,967,463 0.8
Passenger trains
Mani, Inc. ....................................... 69,900 1,859,424 5,056,784 2.0
Medical goods and equipment
Milbon Co., Ltd. ................................. 24,400 876,078 746,486 0.3
Hair care products for beauty salons
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 2007
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Mitsubishi Pencil Co., Ltd. ...................... 61,100 $ 808,685 $ 952,711 0.4
Writing instruments
Nichias Corporation .............................. 926,000 5,849,438 8,099,810 3.2
Building and construction materials
Nichiha Corporation .............................. 57,200 1,020,232 832,432 0.3
Ceramic exterior walls and fiber boards
Sanyo Special Steel Co., Ltd. .................... 187,000 1,231,797 1,447,640 0.6
Specialty steel products
Seiko Corp. ...................................... 197,000 1,562,240 1,280,313 0.5
Medical and commercial equipment
Sumitomo Osaka Cement Co., Ltd. .................. 358,000 1,205,825 1,170,894 0.5
Cement
Tokai Rubber Industries .......................... 295,500 4,562,775 5,631,544 2.3
Rubber and plastic products
Toppan Forms Co., Ltd. ........................... 246,000 3,412,376 3,264,061 1.3
------------- ------------- -------
Commercial printing
Total Miscellaneous Manufacturing ................ 28,802,064 34,749,846 13.9
------------- ------------- -------
Oil and Gas
Shizuoka Gas Co., Ltd. ........................... 240,500 1,976,536 1,798,796 0.7
------------- ------------- -------
Natural gas supplier
Real Estate and Warehouse
Daibiru Corporation .............................. 297,700 2,684,207 4,158,868 1.7
Leases office buildings, apartments and hotels
First Juken Co., Ltd. ............................ 105,200 1,047,003 1,055,334 0.4
Residential buildings
Haseko Corporation+ .............................. 1,073,500 3,824,705 4,127,974 1.6
Institutional buildings
Mitsui Home Co., Ltd. ............................ 15,000 119,453 100,401 0.1
Residential housing
Noel Co., Ltd. ................................... 1,064 2,626,473 2,310,991 0.9
Maintains real estate property
Sanyo Housing Nagoya Co., Ltd. ................... 476 680,318 659,742 0.2
Interior and exterior design
Suruga Corporation ............................... 82,500 5,558,139 6,128,671 2.5
Multi-unit commercial and residential building
Takara Leben Co., Ltd. ........................... 101,300 1,593,152 1,491,355 0.6
------------- ------------- -------
Condominiums
Total Real Estate and Warehouse .................. 18,133,450 20,033,336 8.0
------------- ------------- -------
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 2007
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Restaurants
Hiday Hidaka Corp. ............................... 211,100 $ 1,876,141 $ 2,065,952 0.8
------------- ------------- -------
Chinese restaurant chain
Retail
Arc Land Sakamoto Co., Ltd. ...................... 38,000 638,263 569,076 0.2
Operates home centers
Felissimo Corporation ............................ 60,200 1,750,732 1,577,181 0.6
Catalog shopping
IK Co., Ltd. ..................................... 799 1,066,060 1,053,404 0.4
Used motorcycles dealer
Isetan Co., Ltd. ................................. 13,500 233,882 246,440 0.1
Department stores
Ryohin Keikaku Co., Ltd. ......................... 65,900 4,795,713 4,511,219 1.8
Knitwear, food and household items
Seijo Corporation ................................ 56,800 1,305,866 1,351,295 0.5
Drug chain stores
Shimamura Co., Ltd. .............................. 49,800 4,811,195 5,648,139 2.3
Clothing chain
Takashimaya Co., Ltd. ............................ 18,000 235,867 236,096 0.1
Department stores
Village Vanguard Co., Ltd. ....................... 479 2,596,364 2,586,782 1.0
Books, music, videos and office supplies
Yaoko Co., Ltd. .................................. 118,800 2,758,864 3,112,445 1.3
------------- ------------- -------
Supermarkets
Total Retail ..................................... 20,192,806 20,892,077 8.3
------------- ------------- -------
Services
Aeon Delight Co., Ltd. ........................... 172,500 3,874,684 4,519,332 1.8
Building management
Chintai Corporation .............................. 4,002 3,280,253 2,678,710 1.1
Real estate information magazines
DTS Corporation .................................. 125,800 4,364,217 4,305,853 1.7
System and network engineering
Human Holdings Co., Ltd. ......................... 485 810,302 413,987 0.2
Exam preparation classes
Meiko Network Japan Co., Ltd. .................... 582,200 3,264,355 2,981,730 1.2
Private schools and academic tutoring
Relocation Holdings Inc. ......................... 85,200 1,611,077 1,972,939 0.8
Housing maintenance
Resorttrust, Inc. ................................ 113,500 3,163,163 3,165,434 1.3
Timeshare resort hotels
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 2007
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Septeni Holdings Co., Ltd. ....................... 1,060 $ 1,314,164 $ 1,128,756 0.4
Operations manager
Tempstaff Co., Ltd. .............................. 3,361 5,250,039 4,800,414 1.9
Employment and outsourcing
Yahagi Construction Co., Ltd. .................... 526,000 3,108,667 2,573,877 1.0
General contractor
Yusen Air & Sea Service Co., Ltd. ................ 87,200 1,962,522 2,074,524 0.8
------------- ------------- -------
Domestic and international air freight forwarding
Total Services ................................... 32,003,443 30,615,556 12.2
------------- ------------- -------
Telecommunications
Jupiter Telecommunications Co., Ltd.+ ............ 8,084 6,153,040 6,709,054 2.7
------------- ------------- -------
Cable television broadcasting
Textiles and Apparel
Workman Co., Ltd. ................................ 90,900 1,968,253 4,448,012 1.8
------------- ------------- -------
Uniforms
Transportation
Alps Logistics Co., Ltd. ......................... 108,100 1,173,720 1,927,665 0.8
Trucking
Iino Kaiun Kaisha, Ltd. .......................... 131,800 1,182,903 1,500,398 0.6
------------- ------------- -------
Oil tankers
Total Transportation ............................. 2,356,623 3,428,063 1.4
------------- ------------- -------
Wholesale
Hitachi High-Technologies Corporation ........... 97,700 2,508,623 2,733,040 1.1
Computers and electrical devices
Impact 21 Co., Ltd. .............................. 8,600 157,308 151,904 0.1
Ladies apparel
Kondotec, Inc. ................................... 244,500 1,949,575 2,056,011 0.8
Construction materials
Nagase & Co., Ltd. ............................... 129,000 1,620,580 1,704,010 0.6
Dyestuff
Ryoden Trading Co., Ltd. ......................... 230,000 1,723,040 1,906,867 0.8
------------- ------------- -------
Electronic components
Total Wholesale .................................. 7,959,126 8,551,832 3.4
------------- ------------- -------
TOTAL INVESTMENTS IN EQUITY SECURITIES ........... $ 233,119,335 $ 248,670,337 99.2
------------- ------------- -------
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 2007
% of
Principal Market Net
Amount Cost Value Assets
INVESTMENTS IN FOREIGN CURRENCY
Hong Kong Shanghai Bank-Tokyo
Non-interest bearing account ................... JPY129,281,296 $ 1,081,235 $ 1,092,595 0.5
-------------- --------------- ------
TOTAL INVESTMENTS IN FOREIGN CURRENCY ............ $ 1,081,235 $ 1,092,595 0.5
-------------- --------------- ------
TOTAL INVESTMENTS ................................ $ 234,200,570 $ 249,762,932 99.7
-------------- --------------- ------
OTHER ASSETS LESS LIABILITIES, NET ............... 840,808 0.3
--------------- ------
NET ASSETS ....................................... $ 250,603,740 100.0
=============== ======
* The description following each investment is unaudited and not covered by
the Report of Independent Registered Public Accounting Firm.
+ Non-income producing security.
Portfolio securities and foreign currency holdings were translated
at the following exchange rate as of February 28, 2007.
Japanese Yen JPY (Y) 118.33 = $1.00
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 2007
ASSETS:
Investments in securities, at market value (cost--$233,119,335) ...................... $248,670,337
Investments in foreign currency, at market value (cost--$1,081,235) .................. 1,092,595
Receivable for investments sold ...................................................... 2,532,451
Receivable for dividends and interest, net of withholding taxes ...................... 304,919
Prepaid expenses ..................................................................... 52,454
Cash or cash equivalents ............................................................. 1,024,388
------------
Total Assets ................................................................. 253,677,144
------------
LIABILITIES:
Payable for investments purchased .................................................... 2,638,203
Accrued management fee ............................................................... 176,278
Other accrued expenses ............................................................... 258,923
------------
Total Liabilities ............................................................ 3,073,404
------------
NET ASSETS:
Capital stock (par value of 21,242,170 shares of capital stock outstanding, authorized
100,000,000, par value $0.10 each) ................................................ 2,124,217
Paid-in capital ...................................................................... 236,685,938
Accumulated net realized loss on investments and foreign currency transactions ....... (3,706,092)
Unrealized net appreciation on investments and foreign exchange ...................... 15,582,503
Distribution in excess of net investment income ...................................... (82,826)
------------
Net Assets ................................................................... $250,603,740
------------
Net asset value per share ............................................................ $11.80
======
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 2007
INCOME:
Dividend income (net of $232,298 of withholding taxes) ....................................... $3,086,248
Interest income .............................................................................. 88,873
---------
Total Income ................................................................................. $3,175,121
------------
EXPENSES:
Management fees .............................................................................. 2,552,606
Custodian fees ............................................................................... 377,900
Legal fees ................................................................................... 225,340
Annual meeting expenses ...................................................................... 159,245
Directors' fees and expenses ................................................................. 149,875
Auditing and tax reporting fees .............................................................. 87,125
Shareholder reports .......................................................................... 65,207
Insurance .................................................................................... 41,870
Registration fees ............................................................................ 25,618
Miscellaneous fees ........................................................................... 14,121
Transfer agency fees ......................................................................... 12,910
---------
Total Expenses ......................................................................... 3,711,817
------------
INVESTMENT LOSS--NET ......................................................................... (536,696)
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized gain/(loss) on investments and foreign currency transactions:
Net realized gain on investments ............................................................. 13,228,041
Net realized loss on foreign exchange ........................................................ (109,655)
------------
Net realized gain on investments and foreign exchange ........................................ 13,118,386
Change in net unrealized appreciation (depreciation) on translation of foreign currency
and other assets and liabilities denominated in foreign currency ........................... 920,522
Change in net unrealized appreciation (depreciation) on investments .......................... (51,229,571)
------------
Net realized and unrealized loss on investments and foreign exchange ......................... (37,190,663)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................................... ($37,727,359)
============
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended
February 28, 2007 February 28, 2006
----------------- -----------------
FROM INVESTMENT ACTIVITIES:
Net investment loss ........................................................ $ (536,696) $ (830,270)
Net realized gain on investments ........................................... 13,228,041 36,025,536
Net realized gain (loss) on foreign exchange ............................... (109,655) 104,916
Change in net unrealized appreciation (depreciation) on investments
and foreign exchange ..................................................... (50,309,049) 32,590,786
------------- --------------
Increase (decrease) in net assets derived from investment activities
and net increase (decrease) in net assets ................................ (37,727,359) 67,890,968
------------- --------------
FROM CAPITAL SHARE TRANSACTIONS:
Reinvestment of 113,658 shares ............................................. 1,432,387 --
Net asset value of shares issued to shareholders on rights offering ........ -- 70,416,485
------------- --------------
Increase in net assets derived from capital share transactions ............. 1,432,387 70,416,485
------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
From net capital gains ..................................................... (35,126,187) --
------------- --------------
Decrease in net assets ..................................................... (35,126,187) --
------------- --------------
NET ASSETS:
Beginning of year .......................................................... 322,024,899 183,717,446
------------- --------------
End of year ................................................................ $250,603,740 $322,024,899
============= ==============
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2007
1. Significant Accounting Policies
Japan Smaller Capitalization Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund was incorporated in Maryland on January 25, 1990
and investment operations commenced on March 21, 1990.
The following is a summary of significant accounting policies followed
by the Fund. In the opinion of management, all material adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation have been included.
(a) Valuation of Securities--Investments traded in the over-the-counter
market are valued at the last reported sales price as of the close of business
on the day the securities are being valued or, if none is available, at the
mean of the bid and offer price at the close of business on such day or, if
none is available, the last reported sales price. Portfolio securities which
are traded on stock exchanges are valued at the last sales price on the
principal market on which securities are traded or lacking any sales, at the
last available bid price. Short-term debt securities which mature in 60 days
or less are valued at amortized cost if their original maturity at the date of
purchase was 60 days or less, or by amortizing their value on the 61st day
prior to maturity if their term to maturity at the date of purchase exceeded
60 days. Securities and other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
(b) Foreign Currency Transactions -- Transactions denominated in Yen are
recorded in the Fund's records at the current prevailing rate at the time of
the transaction. Asset and liability accounts that are denominated in Yen are
adjusted to reflect the current exchange rate at the end of the year.
Transaction gains or losses resulting from changes in the exchange rate during
the reporting period or upon settlement of foreign currency transactions are
included in operations for the current period.
The net assets of the Fund are presented at the exchange rate and market
values at the end of the year. The Fund does not isolate that portion of the
change in unrealized appreciation (depreciation) included in the statement of
operations arising as a result of changes in Yen rates at February 28, 2007 on
investments and other assets and liabilities. Net realized foreign exchange
gains or losses includes gains or losses arising from sales of portfolio
securities, sales and maturities of short-term securities, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid.
(c) Security Transactions, Investment Income and Distributions to
Shareholders--Security transactions are accounted for on the trade date.
Dividend income and distributions are recorded on the ex-dividend date and
interest income is recorded on the accrual basis. Realized gains and losses on
the sale of investments are calculated on the first in first out basis.
Distributions from net investment income and net realized gains are
determined in accordance
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
NOTES TO FINANCIAL
with Federal income tax regulations, which may differ from generally accepted
accounting principles. To the extent these "book/tax" differences are
permanent in nature (i.e., that they result from other than timing of
recognition--"temporary"), such accounts are reclassified within the capital
accounts based on their Federal tax-basis treatment; temporary differences do
not require reclassification. Dividends and distributions which exceed net
realized gains for financial reporting purposes, but not for tax purposes, are
reported as distributions in excess of net realized gains.
(d) Income Taxes -- A provision for United States income taxes has not
been made since it is the intention of the Fund to qualify as a regulated
investment company under the Internal Revenue Code and to distribute within
the allowable time limit all taxable income to its shareholders.
Under Japanese tax laws, a withholding tax is imposed on dividends at a
rate of 7% (7% effective 1/1/04 to 3/31/08) and on interest at a rate of 10%
and such withholding taxes are reflected as a reduction of the related
revenue. There is no withholding tax on realized gains.
At February 28, 2007 the components of accumulated earnings on a tax
basis were as follows:
Accumulated capital and other
loss deferrals ($3,661,505)
Unrealized appreciation on
investments 15,455,090
------------
Total accumulated earnings $11,793,585
The tax character of distributions paid during the fiscal years ended
February 28, 2007 and February 28, 2006 were as follows:
February-07 February-06
Ordinary Income $ 1,127,165 --
Capital Gains $33,999,022 --
In accordance with U.S. Treasury regulations, the Fund has elected to
defer $3,578,679 and $82,826 of net realized capital and currency losses,
respectively, arising after October 31, 2006. Such losses are treated for tax
purposes as arising on March 1, 2007.
(e) Capital Account Reclassification -- For the year ended February 28,
2007, the Fund's accumulated net investment loss was decreased by $453,870,
the accumulated net realized loss was decreased by $360,758 and paid in
capital was decreased by $814,628. These differences were primarily due to the
result of the reclassification of foreign currency gains, taxable
overdistributions and the net operating losses.
(f) Use of Estimates in Financial Statement Preparation -- The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from these estimates.
(g) Concentration of Risk -- A significant portion of the Fund's net
assets consists of Japanese securities which involve certain considerations
and risks not typically associated with investments in the United States. In
addition to the smaller size, and greater volatility, there is often
substantially less publicly available information about Japanese issuers than
there is about U.S. issuers. Future economic and political developments in
Japan could adversely affect the value of securities in which the Fund is
invested. Further, the Fund may
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
be exposed to currency devaluation and other exchange rate fluctuations.
(h) Indemnifications--Under the Fund's organizational documents, its
officers and directors are indemnified against certain liabilities arising
from the performance of their duties to the Fund. Additionally, in the normal
course of business, the Fund enters into contracts that contain a variety of
representations which provide general indemnifications. The Fund's maximum
exposure under these agreements is unknown as this would involve future claims
that may be made against the Fund that have not yet occurred. However, based
on experience, the Fund expects the risk of loss to be remote.
2. Management Agreement and Transactions With Affiliated Persons
Nomura Asset Management U.S.A. Inc. (the "Manager") acts as the manager
of the Fund pursuant to a management agreement. Under the agreement, the
Manager provides all office space, facilities and personnel necessary to
perform its duties. Pursuant to such management agreement, the Manager has
retained its parent company, Nomura Asset Management Co., Ltd. (the
Investment Adviser"), to act as investment adviser for the Fund.
As compensation for its services to the Fund, the Manager receives a
monthly fee at the annual rate of 1.10% of the value of the Fund's average
weekly net assets not in excess of $50 million, 1.00% of the Fund's average
weekly net assets in excess of $50 million but not exceeding $100 million,
..90% of the Fund's average weekly net assets in excess of $100 million but not
exceeding $175 million, .80% of the Fund's average weekly net assets in excess
of $175 million but not exceeding $250 million, .70% of the Fund's average
weekly net assets in excess of $250 million but not exceeding $325 million,
..60% of the Fund's average weekly net assets in excess of $325 million, but
not exceeding $425 million and .50% of the Fund's average weekly net assets in
excess of $425 million. Under the Management Agreement, the Fund accrued fees
to the Manager of $2,552,606 for the year ended February 28, 2007. Under the
Investment Advisory Agreement, the Manager informed the Fund that the
Investment Adviser earned fees of $1,314,248 for the year ended February 28,
2007. At February 28, 2007, the fee payable to the Manager, by the Fund, was
$176,278.
Certain officers and/or directors of the Fund are officers and/or
directors of the Manager. Affiliates of Nomura Holdings, Inc. (the Manager's
indirect parent) earned no commissions on the execution of portfolio security
transactions for the year ended February 28, 2007. The Fund pays each Director
not affiliated with the Manager an annual fee of $10,000 plus $1,000 per
meeting attended, together with such Director's actual expenses related to
attendance at meetings. Mr. Barker who had been designated by the Directors
not affiliated with the Manager to serve as Lead Director, is paid an
additional annual fee of $5,000. Such fees and expenses for unaffiliated
Directors aggregated $149,875 for the year ended February 28, 2007.
3. Purchases and Sales of Investments
Purchases and sales of investments, exclusive of investments in foreign
currencies and short-term securities, for the year ended February 28, 2007
were $240,575,172 and $274,958,093, respectively.
As of February 28, 2007, net unrealized appreciation on investments,
exclusive of investments in
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
foreign currency for Federal income tax purposes was $15,423,589 of which
$24,229,999 related to appreciated securities and $8,806,410 related to
depreciated securities. The aggregate cost of investments, exclusive of
investments in foreign currencies of $1,081,235, at February 28, 2007 for
Federal income tax purposes was $233,246,748.
4. Rights Offering
The Fund issued to its shareholders of record as of the close of
business on November 21, 2005 transferable Rights to subscribe for up to an
aggregate of 5,282,128 shares of Common Stock of the Fund at a rate of one
share of Common Stock for three Rights held ("Primary Subscription"). During
December 2005, the Fund issued a total of 5,282,128 shares of Common Stock on
exercise of such Rights at the subscription price of $13.98 per share,
compared to a net asset value per share of $15.09 and a market value per share
of $15.51. A sales load of 3.75% was included in the subscription price.
Offering costs of approximately $650,000 and the sales load were charged
directly against the proceeds of the Rights Offering.
5. Recent Accounting Pronouncements
On July 13, 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48 "Accounting for Uncertainty in Income
Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions
should be recognized, measured, presented and disclosed in the financial
statements. FIN 48 requires the evaluation of tax positions taken or expected
to be taken in the course of preparing the Fund's tax returns to determine
whether the tax positions are "more-likely-than-not" of being sustained by the
applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold would be recorded as a tax benefit or expense
in the current year. Adoption of FIN 48 is required for fiscal years beginning
after December 15, 2006 and is to be applied to all open tax years as of the
effective date. At this time, management is evaluating the implications of FIN
48 and its impact on the financial statements has not yet been determined.
On September 20, 2006, the FASB released Statement of Financial
Accounting Standards No. 157 "Fair Value Measurements" ("FAS 157"). FAS 157
establishes an authoritative definition of fair value, sets out a framework
for measuring fair value, and requires additional disclosures about fair value
measurements. The application of FAS 157 is required for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. At this time, management is evaluating the implications of FAS 157 and
its impact on the financial statements has not yet been determined.
JAPAN SMALLER CAPITALIZATION FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding
throughout the year.
For the Year Ended
--------------------------------------------------------------------
February 28, February 29, February 28,
---------------------------------- ----------- ------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Net asset value, beginning of year ................. $15.24 $11.59 $9.40 $5.74 $5.86
--------- --------- --------- --------- --------
Net investment loss@ ............................. (0.03) (0.05) (0.06) (0.03) (0.05)
Net realized and unrealized gain (loss)
on investments and foreign currency ............ (1.75) 4.14 2.25 3.69 (0.07)
--------- --------- --------- --------- --------
Total from investment operations ................. (1.78) 4.09 2.19 3.66 (0.12)
Distributions from net capital gains ............... (1.66) 0.00 0.00 0.00 0.00
Fund Share Transactions
Dilutive effect of Rights Offering* ................ -- (0.22) -- -- --
Offering costs charged to paid-in capital in
excess of par .................................. -- (0.22) -- -- --
--------- --------- --------- --------- --------
Total Fund share transactions ...................... -- (0.44) -- -- --
--------- --------- --------- --------- --------
Net asset value, end of year ....................... $11.80 $15.24 $11.59 $9.40 $5.74
========= ========= ========= ========= ========
Market value, end of year .......................... $12.98 $15.75 $12.20 $10.79 $6.38
Total investment return+ ........................... (6.4%) 29.1% 13.1% 69.1% 15.4%
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000) ............... $250,604 $322,025 $183,717 $149,012 $90,930
Operating expenses ............................... 1.32% 1.32% 1.54% 1.47% 1.63%
Net investment loss .............................. (0.19%) (0.37%) (0.57%) (0.41%) (0.75%)
Portfolio turnover ............................... 86% 81% 86% 28% 28%
+Based on market value per share, adjusted for reinvestment of income dividends and long term capital gain
distributions, and capital share transactions. Total return does not reflect sales commissions.
@ Based on average shares outstanding.
*Decrease is due to the Rights Offering (see note 4).
JAPAN SMALLER CAPITALIZATION FUND, INC.
SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited)
The 2006 Annual Meeting of the Shareholders of the Fund was held at the
offices of Nomura Securities International, Inc. at Two World Financial
Center, Building B, New York, New York on November 17, 2006 and then adjourned
to December 13, 2006. The purpose of the meeting was (1) to elect two Class
III Directors each to serve for a term to expire in 2009, (2) to amend the
fundamental investment restrictions of the Fund to permit the Fund to lend its
portfolio securities; and (3) to transact such other business as may properly
come before the Meeting or any adjournment thereof.
At the meeting, Rodney A. Buck and David B. Chemidlin received a
majority of the votes cast for the election of directors. Accordingly, they
were elected to new three-year terms. The proposal to amend the fundamental
investment restrictions of the Fund also received a majority of the votes
cast. The results of the voting at the Annual Meeting were as follows:
1. To elect the Fund's Class III Directors:
% of % of
Shares Voted Outstanding Shares Voted Outstanding
For Shares Withhold Authority Shares
------------ ----------- ------------------ -----------
Rodney A. Buck.................. 12,502,518 59.0 920,820 4.3
David B. Chemidlin.............. 12,482,971 58.9 940,367 4.4
2. Amendment of a fundamental investment restriction:
% of % of % of
Shares Voted Outstanding Shares Voted Outstanding Shares Voted Outstanding
For Shares Agains Shares Absentee Shares
------------ ----------- ------------ ----------- ------------------ -----------
9,099,623 43.0 1,739,593 8.2 470,742 2.2
INTERESTED DIRECTOR
Biographical and other information relating to a Director who is an
"interested person," as defined in the Investment Company Act of 1940 ("1940
Act"), of the Fund is set out below.
Other
Term of Number of Public
Position(s) Office and Funds in the Directorships
Held with Length of Principal Occupation(s) Fund Complex Held by the
Name, Address and Age the Fund Time Served During Past Five Years Overseen** Director
-------------------------- ----------- ------------- ------------------------------------- --------------- -----------------
Hiroshi Terasaki (51)* Class II President President of NAM-U.S.A. since 2005; 2 registered None
c/o Nomura Asset Director since Managing Director and Chief investment
Management U.S.A. Inc. August Executive Officer, Nomura Asset companies
("NAM-U.S.A.") 2005 and Management U.K. Limited from 2003 consisting of
Two World Financial Director to 2005; General Manager, Fixed 2 portfolios
Center, Building B since June Income Investment Department of
New York, 2005 Nomura Asset Management, Ltd.
New York 10281 ("NAM") from 2000 to 2003.
-----------------
* Mr. Terasaki is an "interested person," as defined in the 1940 Act, of the Fund based on his positions with NAM and its
affiliates. Mr. Terasaki is a director of Korea Equity Fund, Inc. for which NAM-U.S.A. acts as manager and NAM acts as investment
adviser.
** In addition to the Fund, the "Fund Complex" includes Korea Equity Fund, Inc.
JAPAN SMALLER CAPITALIZATION FUND, INC.
INDEPENDENT DIRECTORS
Number of
Term of Funds in Fund Other
Position(s) Office and Complex* Directorships
Held with Length of Principal Occupation(s) Overseen by Held by
Name, Address and Age the Fund Time Served During Past Five Years Director Director
-------------------------- ----------- ------------- ------------------------------------- --------------- -----------------
William G. Barker, Jr. Class I Director Retired. 2 registered None
(74) Director since 1993 investment
111 Parsonage Road companies
Greenwich, consisting of
Connecticut 06830 2 portfolios
Rodney A. Buck (58) Class III Director Owner, Buck Capital Manage- 2 registered None
1857 West County Road Director since 2006 ment (private investment man- investment
Caalais, VT 05648 agement firm) since 2005; Execu- companies
tive Vice President and Chief consisting of
Investment Officer, National Life 2 portfolios
Group (insurance holding com-
pany) from 2000 to 2005; Chief
Executive Officer, Sentinel Advi-
sors Company (investment advi-
sor) from 1996 to 2005.
David B. Chemidlin (49) Class III Director Corporate Controller, Advance 2 registered None
67 Glen Eagle Drive Director since 2006 Magazine Publishers, Inc. (d/b/a investment
Watchung, NJ 07060 Conde Nast) since 1995. companies
consisting of
2 portfolios
Chor Weng Tan (70) Class II Director Retired since 2004; Managing 2 registered None
6245 Paseo Privado Director since 1990 Director for Education, the Ameri- investment
Carlsbad, can Society of Mechanical companies
California 92009 Engineers from 1991 to 2004. consisting of
2 portfolios
Class I Director 2 registered None
John F. Wallace (78) Director since 1990 Retired since 2000; Vice Presi- investment
17 Rhoda Street dent of the Fund from 1997 to companies
West Hempstead, 2000 and Secretary and Treasurer consisting of
New York 11552 of the Fund from 1990 to 1997; 2 portfolios
Senior Vice President of NAM-
U.S.A. from 1981 to 2000,
Secretary from 1976 to 2000,
Treasurer from 1984 to 2000 and
Director from 1986 to 2000.
*In addition to the Fund, the "Fund Complex" includes Korea Equity Fund, Inc.
JAPAN SMALLER CAPITALIZATION FUND, INC.
Committees and Directors' Meetings. The Board of Directors has a
standing Audit Committee and a standing Nominating Committee, each of which
consists of the Directors who are not "interested persons" of the Fund within
the meaning of the 1940 Act and are "independent" as defined in the New York
Stock Exchange listing standards. Currently, Messrs. Barker, Buck, Chemidlin,
Tan, and Wallace are members of these Committees. The Fund has no standing
Compensation Committee. The non-interested Directors have retained independent
legal counsel to assist them in connection with their duties.
During the fiscal year ended February 28, 2007, the Board of Directors
held twelve meetings, the Audit Committee held two meetings and the Nominating
Committee held two meetings. Each incumbent Director attended at least 75% of
the aggregate number of meetings of the Board of Directors held during the
period for which he served and, if a member, of the aggregate number of
meetings of the Audit and Nominating Committees held during the period for
which he served.
Officers of the Fund. Officers of the Fund are elected and appointed by
the Directors and hold office until they resign, are removed or are otherwise
disqualified to serve. Certain biographical and other information relating to
the officers of the Fund is set out below:
Name, Address* and Position(s) Held Term of Office** and Principal Occupation(s)
Age of Officers with the Fund Length of Time Served During Past Five Years
--------------- ------------- --------------------- ----------------------
Hiroshi Terasaki (51) President and President since 2005 President of NAM-U.S.A. since 2005. Managing
Class II Director Director and Chief Executive Officer, Nomura As-
set Management U.K. Limited from 2003 to 2005;
General Manager, Fixed Income Investment De-
partment of the NAM from 2000 to 2003.
Kenneth L. Munt (60) Vice President Vice President since Senior Vice President and Secretary of NAM-
2001 U.S.A. since 1999.
Rita Chopra- Treasurer Treasurer since 2002 Vice President of NAM-U.S.A. since 2001.
Brathwaite (38)
Neil Daniele (46) Secretary Secretary since 2002 Senior Vice President and Chief Compliance Offi-
and Chief cer of NAM-U.S.A. since 2002; Vice President and
Compliance Compliance Officer of Munich Re Capital Manage-
Officer ment Corp. (asset management firm) from 2001 to
2002.
-----------------
* The address of each officer listed above is Two World Financial Center,
Building B, New York, New York 10281.
** Elected by and serves at the pleasure of the Board of Directors.
JAPAN SMALLER CAPITALIZATION FUND, INC.
REVIEW OF THE FUND'S MARKET PRICE COMPARED TO NET ASSET VALUE
Shares of closed-end investment companies, including funds focusing on a
single country, have at various times traded at both premiums and discounts to
their net asset value ("NAV"). Although the shares of the Fund have traded at
such a premium, they also have traded at a discount from NAV.
Since the Fund was established, the Board of Directors on a quarterly
basis has reviewed the trading price of the Fund's shares. The purpose of such
review has been to determine whether a discount exists and, if so, whether it
would be in shareholders' overall best interests for the Fund to conduct share
repurchases, make an issuer tender offer for shares or consider another means
of possibly reducing the discount. For example, the Board of Directors has
also considered whether it would be in the best interests of the Fund to
convert to an open-end fund or to an interval fund, which is a form of
investment company that makes periodic share repurchases at prices based on
NAV.
To date, the Board of Directors has not authorized open-market share
repurchases or a tender offer for shares of the Fund. The Board of Directors
also has not felt that it would be in the best interests of the Fund or its
shareholders to convert to an open-end fund or an interval fund. As a "country
fund" emphasizing a smaller capitalization segment of the market, the Fund's
NAV is more volatile than might be the case for a fund with a broader
investment focus. The Board of Directors believe that converting the Fund to
either an open-end or interval fund would subject the Fund to redemptions or
repurchases at times when liquidation of portfolio securities could
disadvantage remaining shareholders, and the Directors believe that the recent
volatility of the financial markets in Japan supports their view.
Additionally, since an open-end fund has a limited ability to invest in
illiquid securities, such a conversion could hinder the Fund's ability to
pursue its investment objectives. The Board of Directors intends to continue
to review, on a quarterly basis, the trading market for the Fund's shares.
JAPAN SMALLER CAPITALIZATION FUND, INC.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan (the "Plan") is available automatically
for any holder of Common Stock with shares registered in his/her own name who
wishes to purchase additional shares with income dividends or capital gains
distributions received on shares owned, unless such shareholder elects to
receive all dividends and capital gain distributions in cash, paid by check
and mailed to the shareholder. If a shareholder holds shares in his/her own
name, communications regarding the Plan should be addressed to the Plan Agent,
Computershare Trust Company, N.A., 250 Royall Street, Canton, Massachusetts
02021. Under the Plan, shareholders appoint the Plan Agent to reinvest
dividends and distributions in shares of the Fund. Such shares will be
acquired by the Plan Agent for shareholders either through open market
purchases if the Fund is trading at a discount or through the issuance of
authorized but unissued shares if the Fund is trading at net asset value or a
premium. If the market price of a share on the payable date of a dividend or
distribution is at or above the Fund's net asset value per share on such date,
the number of shares to be issued by the Fund to each shareholder receiving
shares in lieu of cash dividends or distributions will be determined by
dividing the amount of the cash dividends or distributions to which such
shareholder would be entitled by the greater of the net asset value per share
on such date or 95% of the market price of a share on such date. If the market
price of a share on such distribution date is below the net asset value per
share, the number of shares to be issued to such shareholders will be
determined by dividing such amount, less brokerage commission, by the per
share market price.
Purchases will be made by the Plan Agent from time to time on the New
York Stock Exchange (the "Exchange") or elsewhere to satisfy dividend and
distribution investment requirements under the Plan. Purchases will be
suspended on any day when the closing price (or the mean between the closing
bid and ask prices if there were no sales) of the shares on the Exchange on
the preceding trading day was higher than the net asset value per share. If on
the dividend payable date, purchases by the Fund are insufficient to satisfy
dividend or distribution investments and on the last trading day immediately
preceding the dividend payable date the closing price or the mean between the
closing bid and ask prices of the shares is lower than or the same as the net
asset value per share, the Plan Agent will continue to purchase shares until
all investments by shareholders have been completed or the closing price or
the mean between the bid and ask prices of the shares becomes higher than the
net asset value, in which case the Fund will issue the necessary additional
shares from authorized but unissued shares. If on the last trading day
immediately preceding the dividend payable date, the closing price or the mean
between the bid and ask prices of the shares is higher than the net asset
value per share and if the number of shares previously purchased on the
Exchange or elsewhere is insufficient to satisfy dividend investments, the
Fund will issue the necessary additional shares from authorized but unissued
shares. There will be no brokerage charges with respect to shares issued
directly by the Fund to satisfy the dividend investment requirements. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Fund's open market purchases of shares. In each case, the
cost per share of shares
purchased for each shareholder's account will be the average cost, including
brokerage commissions, of any shares purchased in the open market plus the
cost of any shares issued by the Fund. For the fiscal year ended February 28,
2007, the Fund issued 113,658 new shares for dividend reinvestment purposes.
Shareholders who elect to hold their shares in the name of a broker or
other nominee should contact such broker or other nominee to determine whether
they may participate in the Plan. To the extent such participation is
permitted, the Plan Agent will administer the Plan on the basis of the number
of shares certified from time to time by the broker as representing the total
amount registered in the shareholder's name and held for the account of
beneficial owners who are participating in such Plan. Shareholders that
participate in the Plan holding shares in a brokerage account may not be able
to transfer the shares to another broker and continue to participate in the
Plan. Shareholders who are participating in the Plan may withdraw from the
Plan at any time. There will be no penalty for withdrawal from the Plan, and
shareholders who have previously withdrawn from the Plan may rejoin it at any
time. Changes in participation in the Plan should be made by contacting the
Plan Agent if the shares are held in the shareholder's own name and must be in
writing and should include the shareholder's name and address as they appear
on the account registration. If the shares are held in the name of a broker or
other nominee, such person should be contacted regarding changes in
participation in the Plan. Upon withdrawal from the Plan, the Plan Agent will
deliver to the shareholder a certificate or certificates for the appropriate
number of full shares and a cash payment for any fractional shares. In lieu of
receiving a certificate, the shareholder may request the Plan Agent to sell
part or all of the shareholder's shares at the market price and remit the
proceeds to the shareholder, net of any brokerage commissions. A $2.50 fee
will be charged by the Plan Agent upon any cash withdrawal or termination. An
election to withdraw from the Plan will, until such election is changed, be
deemed to be an election by a shareholder to take all subsequent distributions
in cash. An election will be effective only for a dividend or distribution if
it is received by the Plan Agent not less than 10 days prior to such record
date.
The Plan Agent will maintain all shareholders' accounts in the Plan, and
furnish written confirmation of all transactions in such account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant may be held by the Plan Agent in non-certificated form
in the name of the participant, and each shareholder's proxy will include
those shares purchased or received pursuant to the Plan.
The automatic reinvestment of dividends will not relieve participants of
any income taxes that may be payable (or required to be withheld) on such
dividends. Shareholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for Federal income
tax purposes as receiving a distribution in an amount equal to the amount of
money that the shareholders receiving cash dividends or distributions will
receive and should have a cost basis in the shares received equal to such
amount.
The Fund reserves the right to amend or terminate the Plan as applied to
any dividend paid subsequent to written notice of the change sent to
participants in the Plan at least 90 days before the record date for such
dividend. There is no service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable
by the participants. All correspondence concerning the Plan, including
requests for additional information about the Plan, should be directed to the
Plan Agent.
JAPAN SMALLER CAPITALIZATION FUND, INC.
Board Review of the Management and Investment Advisory Agreements
The Board of Directors of the Fund (the "Board") consists of six
directors, five of whom are independent or non-interested directors (the
"Independent Directors"). The Board considers matters relating to the Fund's
management and investment advisory agreements throughout the year. On an
annual basis, the Board specifically considers whether to approve the
continuance of these agreements. The specific agreements (the "Agreements")
consist of the Fund's management agreement with Nomura Asset Management U.S.A.
Inc. (the "Manager") and the investment advisory agreement between the Manager
and its parent, Nomura Asset Management Co., Ltd. (the "Investment Adviser").
The Board, including the Independent Directors, most recently approved
the continuance of the Agreements at a meeting held on November 8, 2006.
Previously, on August 17, 2006, the Board approved the continuance of the
Agreements for an interim period of three months to permit the Independent
Directors to consider whether it was appropriate to seek amendments to the fee
schedules of the Agreements that would have the effect of reducing the
aggregate management fee payable by the Fund. As described below, at the
November 8, 2006 meeting, the Independent Directors determined to approve
additional breakpoints in the management fee schedule that had been proposed
by the Manager.
In connection with their deliberations on November 8, 2006, and at
separate meetings held on that date and in August 2006, the Independent
Directors received materials that included, among other items, information
provided by the Manager regarding (i) the investment performance of the Fund,
performance of other investment companies and performance of the Fund's
benchmark, (ii) expenses of the Fund and the management fee paid by the Fund
to the Manager and the advisory fee paid by the Manager to the Investment
Adviser, and (iii) the profitability of the Agreements to the Manager and the
Investment Adviser. The Independent Directors sought and received additional
information from the Investment Adviser. The Independent Directors were
advised by independent counsel in considering these materials and the
continuance of the Agreements.
In approving the continuance of the Agreements at the meeting held on
November 8, 2006, the Board, including the Independent Directors, did not
identify any single factor as determinative. Matters considered by the
Directors in connection with their approval of the Agreements included the
following:
The nature, extent and quality of the services provided to the Fund
under the Agreements. The Board considered the nature, extent and quality of
the services provided to the Fund by the Manager and the Investment Adviser
and the resources dedicated by the Manager and the Investment Adviser. These
services included both investment advisory services and related services such
as the compliance oversight provided by the Manager. The Independent Directors
commented favorably on the portfolio management personnel involved with
management of the Fund. The Independent Directors
also commented favorably on the compliance personnel at the Manager and the
services they provided in monitoring portfolio transactions and other
compliance functions, and the financial administration provided by the
Manager. Based on its review of all of these services, the Board, including
the Independent Directors, concluded that the nature, extent and quality of
these services supported the continuance of the Agreements.
Investment performance. The Board considered performance information
provided by the Manager regarding the Fund's investment performance over a
number of time periods, including the one-year, three-year and five-year
periods recently ended. The Manager also provided the Directors with
comparative performance information that they requested. Such information
indicated that the Fund outperformed its benchmark index for the one, three
and five year periods ended June 30, 2006 and, based on changes in net asset
value for the year ended June 30, 2006, outperformed three of five other U.S.
investment companies identified by the Manager that invest primarily in
Japanese equity securities.
In response to requests for additional information by the Independent
Directors, the Board received data on the Fund's expense ratio and components
thereof, and comparative fee, expense ratio and performance information for
other funds investing primarily in Japanese stocks.
After considering all factors deemed appropriate, the Board, including
the Independent Directors, concluded that the Fund's performance supported the
continuance of the Agreements.
The costs of the services to be provided and the profits to be realized
by the Manager and its affiliates from their advisory relationships with the
Funds. The Board considered the fee payable under the Fund's management
agreement in connection with other information provided for the Directors'
consideration. The Manager and its affiliates also act as advisers to one
additional investment company registered under the Investment Company Act of
1940 and the Board compared the advisory arrangements and fees for these two
companies. The Board recognized that the nature of the services provided by
the Manager and the Investment Adviser to other investment vehicles and
separate accounts differed from the range of services provided to the two
registered investment companies.
The Manager also provided the Board with information prepared by the
Manager and the Investment Adviser indicating the profitability of the
Agreements to these advisers. The Independent Directors reviewed this
information with the Manager and requested and received certain supplemental
information from the Manager and the Investment Adviser with respect to the
methodologies used to charge and allocate expenses to the Fund.
After reviewing the information described above, the Independent
Directors concluded that the management fee charged to the Fund was reasonable
and that the costs of the services provided pursuant to the Agreements and the
profitability of the Agreements to the Manager and the Investment Adviser
supported the continuance of the Agreements.
Economies of scale. The Board also considered whether the Manager
realizes economies of scale as the Fund grows larger and the extent to which
any economies of scale are shared with the Fund and its shareholders. The
Board noted that the management agreement in effect at the time of their
discussions contained three separate breakpoints in the management fee for net
assets above $50 million, with the last breakpoint applicable to net assets in
excess of $175 million. The Fund had net assets of approximately $273 million
at August 17, 2006. The Independent Directors recognized that the existing
breakpoints had provided benefits to the Fund over time but determined that
adjustments to the fee schedule would be appropriate, particularly in light of
increases in the Fund's assets resulting from the rights offering completed in
early 2006. Prior to the Board meeting held on November 8, 2006, the Manager
proposed three additional breakpoints in the fee schedules in the Fund's
management and investment advisory agreements, effective as of January 1, 2007
for net assets of the Fund in excess of $250 million, $325 million and $425
million, respectively, and the Independent Directors determined to accept such
proposal.
Based on an evaluation of all factors deemed relevant, including the
factors described above, the Board, including each of the Independent
Directors, concluded that each of the Agreements, with the additional
breakpoints as described above, should be continued through August 31, 2007.
BOARD OF DIRECTORS ========================================================
William G. Barker, Jr. ========================================================
Rodney A. Buck
David B. Chemidlin ========================================================
Chor Weng Tan
Hiroshi Terasaki
John F. Wallace
OFFICERS
Hiroshi Terasaki, President
Kenneth L. Munt, Vice President
Rita Chopra-Brathwaite, Treasurer
Neil A. Daniele, Secretary and Chief Compliance Officer
MANAGER
Nomura Asset Management U.S.A. Inc.
Two World Financial Center, Building B
New York, New York 10281
Internet Address
www.nomura.com
INVESTMENT ADVISER JAPAN
Nomura Asset Management Co., Ltd.
1-12,1-Chome, Nihombashi, Chuo-ku, Smaller Capitalization
Tokyo 103-8260, Japan
Fund, Inc.
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
COUNSEL
Sidley Austin LLP
787 Seventh Avenue
New York, New York 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ANNUAL REPORT
Ernst & Young LLP
5 Times Square FEBRUARY 28, 2007
New York, New York 10036
JAPAN SMALLER CAPITALIZATION FUND, INC.
TWO WORLD FINANCIAL CENTER, BUILDING B
NEW YORK, NEW YORK 10281
-------------------------------------------------------
This Report, including the Financial Statements, is
transmitted to the Shareholders of Japan Smaller
Capitalization Fund, Inc. for their information. This ========================================================
is not a prospectus, circular or representation
intended for use in the purchase of shares of the Fund ========================================================
or any securities mentioned in the Report. ========================================================
ITEM 2. CODE OF ETHICS
------------------------------------------------------------------------------
(a) As of February 28, 2007, the Registrant had adopted a code of ethics
that applies to the Registrant's Principal Executive Officer, Principal
Financial Officer, Principal Accounting Officer or Controller, or
persons performing similar functions, regardless of whether these
individuals are employed by the Registrant or a third party.
(b) There were no amendments during the fiscal year ended February 28, 2007
to a provision of the code of ethics that applies to the Registrant's
Principal Executive Officer, Principal Financial Officer, Principal
Accounting Officer or Controller, or persons performing similar
functions, and that relates to any element of the code of ethics
definition enumerated in paragraph (b) of Item 2 of Form N-CSR.
(c) Not applicable.
(d) Not applicable.
(e) A copy of the Registrant's code of ethics is attached as an exhibit.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
------------------------------------------------------------------------------
The Registrant's Board of Directors has determined that David B. Chemidlin, a
member of the Registrant's Audit Committee, is an "audit committee financial
expert" and "independent," as such terms are defined in this Item. This
designation will not increase the designee's duties, obligations or liability
as compared to his duties, obligations and liability as a member of the Audit
Committee and of the Board; nor will it reduce the responsibility of the other
Audit Committee members.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------------------------------------
PricewaterhouseCoopers LLP ("PwC") resigned as the Accountant to the
Registrant in November 2004 because PwC had been appointed to provide
non-audit services to certain affiliates of Nomura Asset Management U.S.A.,
Inc. ("NAM-USA"), the Registrant's manager, that could be viewed as
inconsistent with auditor independence with respect to the Registrant. The
Registrant's Board of Directors appointed Ernst & Young LLP ("E&Y") as the
Accountant to the Registrant for the Registrant's fiscal year ended 2/28/05.
(a) Audit Fees for the Registrant were $68,000* and $55,000* for the fiscal
years ended 2/28/07 and 2/28/06, respectively.
(b) Audit-Related Fees for the Registrant were $9,500* and $9,000** for the
fiscal years ended 2/28/07 and 2/28/06, respectively. These amounts represent
procedures performed in connection with the review of the Registrant's
semi-annual reports and for the fiscal year ended 2/28/06, the Registrant's
registration statement.
In addition, there were no Audit-Related Fees billed in the fiscal years ended
2/28/07 and 2/28/06 for assurance and related services by the Accountant to
the Registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by or
under common control with the investment adviser that provides ongoing
services to the Registrant ("service affiliates"), that were reasonably
related to the performance of the annual audit of the service affiliates.
Accordingly, there were no such fees that required pre-approval by the Audit
Committee for the fiscal years ended 2/28/07 and 2/28/06, respectively.
(c) Tax Fees for the Registrant were $1,000* and $1,000** for the fiscal years
ended 2/28/07 and 2/28/06, respectively. These amounts represent aggregate
fees paid for tax compliance, tax advice and tax planning services, which
include (the filing and amendment of federal, state and local income tax
returns, timely RIC qualification review and tax distribution and analysis
planning) rendered by E&Y to the Registrant.
There were no other fees billed for tax services by E&Y to service affiliates
for the fiscal years ended 2/28/07 and 2/28/06, respectively, that required
pre-approval by the Audit Committee.
(d) There were no fees billed for all other non-audit services rendered by E&Y
to service affiliates for the fiscal years ended 2/28/07 and 2/28/06,
respectively, that required pre-approval by the Audit Committee.
(e) (1) The Charter for the Audit Committee of the Registrant requires the
Audit Committee (a) to preapprove all auditing services to be provided to the
Registrant by the Registrant's independent accountants; (b) to preapprove all
non-audit services, including tax services, to be provided to the Registrant
by the Registrant's independent accountants in accordance with the Securities
Exchange Act of 1934, as amended (the "1934 Act"); provided, however, that the
preapproval requirement with respect to the provision of non-audit services to
the Registrant by the Registrant's independent accountants may be waived by
the Audit Committee under the circumstances described in the 1934 Act; and (c)
to preapprove non-audit services to be provided to the Registrant's investment
adviser (and any entity controlling, controlled by or under common control
with the investment adviser that provides ongoing services to the Registrant)
if the engagement relates directly to the operations and financial reporting
of the Registrant.
(f) N/A
(g) Non-audit fees billed by E&Y for services rendered to the Registrant and
NAM-USA and any entity controlling, controlled by, or under common control
with NAM-USA that provides ongoing services to the Registrant were $2.8
million and $2.8 million for the fiscal years ended 3/31/06 and 3/31/05,
respectively. These amounts represent aggregate fees paid for tax compliance,
tax advice and tax planning services and non-audit related services rendered
by the E&Y to service affiliates.
(h) Yes. The Registrant's Audit Committee has considered whether the provision
of non-audit services that were rendered to service affiliates which were not
pre-approved (not requiring pre-approval) is compatible with maintaining the
Auditor's independence. All services provided by the Accountant to the
Registrant or to service affiliates which were required to be pre-approved
were pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
------------------------------------------------------------------------------
(a) The Registrant's Board of Directors has a standing Audit Committee,
which consists of the Directors who are not "interested persons" of the
Registrant within the meaning of the Investment Company Act of 1940, as
amended. Currently, Messrs. William G. Barker, Rodney A. Buck, David B.
Chemidlin, Chor Weng Tan, and John F. Wallace are members of the Audit
Committee.
(b) Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
------------------------------------------------------------------------------
The Registrant's investments in securities of unaffiliated issuers as of
2/28/07 are included in the report to shareholders filed under Item 1 of this
Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
------------------------------------------------------------------------------
Proxy Voting Policy
-------------------
NOMURA ASSET MANAGEMENT
NOMURA ASSET MANAGEMENT CO., LTD.
NOMURA ASSET MANAGEMENT U.S.A. INC.
NOMURA ASSET MANAGEMENT U.K. LIMITED
NOMURA ASSET MANAGEMENT SINGAPORE LIMITED
NOMURA ASSET MANAGEMENT HONG KONG LIMITED
May 2005
I. Basic Policy for Proxy Voting
-----------------------------
This Proxy Voting Policy has been adopted by NOMURA ASSET MANAGEMENT Co., Ltd.
and its investment advisory subsidiaries.* These companies are hereinafter
collectively referred to as "NOMURA ASSET MANAGEMENT". The overall objective
of NOMURA ASSET MANAGEMENT is to increase the value of its clients'
investments. We recognize that to establish the power to influence management
through voting rights is an effective way to achieve such an objective. NOMURA
ASSET MANAGEMENT believes the proxy voting right is an important financial
asset that must be managed with the same care and diligence as any other
client asset. We exercise proxy voting decisions solely in the best long-term
interests of our clients. When we acquire a company's equity securities, we
believe that they are a good investment. We will not acquire equity securities
simply to obtain control of an issuer.
* (NOMURA ASSET MANAGEMENT Hong Kong Limited, NOMURA ASSET MANAGEMENT
Singapore Limited, NOMURA ASSET MANAGEMENT U.K. Limited, NOMURA ASSET
MANAGEMENT U.S.A. Inc.)
II. Proxy Voting Guidelines
-----------------------
NOMURA ASSET MANAGEMENT closely examines the voting agendas of a company in
the cases listed below. Where we believe that a specific agenda item is not in
shareholders' interests, NOMURA ASSET MANAGEMENT shall decide either to vote
against, or to abstain from voting, on the item.
(1) Where it is found that the company violated the law or otherwise engaged
in antisocial activity. However, NOMURA ASSET MANAGEMENT shall not
exercise the proxy voting rights solely as a means to address specific
social or political issues, irrespective of investment returns of the
company.
(2) Where the auditor's opinion on the company is qualified (for Japanese
equity securities).
(3) Where the company's disclosure is determined to be inadequate, and
therefore, deemed harmful to the shareholders' interests.
(4) Where the company continuously reports sluggish business performance,
poor investment returns and management's efforts for improvement are
found
inadequate.
(5) Where the company accumulates a large amount of financial assets, which
are not effectively used nor distributed to the shareholders adequately.
(6) Where the company's business and financial strategies are deemed to harm
shareholders' interests.
(7) Where the composition and size of the company's board of directors or
the composition of its statutory auditors are deemed inadequate, and
likely to harm the shareholders' interest.
(8) Shareholder proposals.
(9) Extraordinary agenda items, such as amendments to the company's articles
of incorporation, which are likely to harm shareholders' interest.
III. Positions on Specific Issues
----------------------------
(1) Election of Directors
NOMURA ASSET MANAGEMENT votes on the candidates nominated by the
issuer's management when it is determined that such candidates would
best serve our clients' best interests.
The size of the board should be adequate considering the nature of the
company's business and its scale.
If the company's business performance remains sluggish over a long
period and little remedial effort is ascertained, or if the company is
found to have engaged in any antisocial activity or any activity that
would harm shareholder value, NOMURA ASSET MANAGEMENT will carefully
weigh the qualification of the directors who have served during the said
period or at the time of such activity in voting on their reelection.
In principle, we vote for election of outside directors, provided that
we take into consideration such elements as the competence and
experience of the candidates for the outside director.
With respect to proposals that call for a staggering of the terms of the
directors, when it is determined that such a change would harm the
effectiveness of corporate governance, we would oppose such a proposal.
Because outside directors of companies that have adopted the committee
system play an especially essential role in each of the three committees
- nomination, compensation and audit - special consideration should be
paid to the directors' qualifications, such as independence. Companies
have transferred the decision-making for many important matters, such as
disposition of profits, from shareholders to the executive officers and
the board of directors of the company. In consideration of this fact,
the qualifications of the director for the office should be judged upon
careful review of the assessment of the board of directors.
(2) Election of Auditors
Auditors are expected to be qualified to audit the business of directors
on behalf of shareholders, and to function adequately for that purpose.
Where the company has engaged in a certain antisocial or illegal
activity in which an auditor is found responsible for any part thereof,
or determined to have failed to fully perform his/her duties, we will
form a negative opinion on the reelection of such auditor.
It is desirable to ensure that the outside auditors are independent of
management. It is undesirable to have the audit committee composed of
outside auditors who all lack independence. Where a reduction in the
number of auditors is proposed, there should be proper justification for
such a reduction.
(3) Executive Compensation
NOMURA ASSET MANAGEMENT votes for management compensation plans that in
its view, are reasonable, especially equity-based compensation plans
which are linked to the long-term interest of the company's
shareholders. However, we vote against plans that are inconsistent with
or inequitable compared to the company's overall financial condition or
that would substantially dilute the interests of shareholders.
When a company's antisocial activities are found, we expect to see
corrective
measures reflected in management's compensation.
It is desirable for the company to disclose management's compensation so
that shareholders can determine its adequacy.
(4) Stock Option
In principle, we vote for stock option plans when the conditions of the
plan, such as eligibility and its amount, are properly set forth for the
purpose of promoting the incentives of the executives and employees.
However, we vote against such plans when the conditions are deemed to be
improper.
(5) Capital Policy
(1) Distribution policy
In deciding on the distributions to its shareholders, the company should
ensure that such distributions are consistent with its long-term
investment plan. While we view the acquisition of the company's own
stock positively as a means to enhance the company's value, it is always
necessary to check whether it is an adequate means for the sake of the
company's long-term capital structure.
(2) Change in authorized shares
An increase in the number of authorized shares is required for a variety
of legitimate business purposes, including financing, stock splits,
corporate reorganizations, or debt for equity exchanges. NOMURA ASSET
MANAGEMENT will vote for a company's proposed increase in the number of
authorized shares unless it is considered a special circumstance
proposal. Such proposals will be dealt with on a case-by-case basis.
(3) Issuance of preferred and other classes of shares
NOMURA ASSET MANAGEMENT will carefully scrutinize proposals with respect
to the issuance of shares in special cases, such as to authorize the
board of directors to issue preferred shares with discretion to
determine such conditions as voting rights, conversion, dividend and
transferability ("Blank Check" Preferred Shares). We recognize that
while such classes of shares are generally issued for financing
purposes, it may thwart an increase in shareholders' value.
(6) Corporate Restructurings
(1) Mergers, acquisitions and other corporate restructurings
NOMURA ASSET MANAGEMENT reviews all proposals for mergers, acquisitions
and other forms of corporate restructurings on a case-by-case basis by
evaluating the financial impact on our clients.
(2) Anti-takeover measures
NOMURA ASSET MANAGEMENT will not vote, in principle, for proposals that
make it more difficult for a company to be acquired by another company.
We believe that anti-takeover measures can depress the company's market
value.
However, we may vote for proposals based on individual analysis only
when they are found primarily intended to protect shareholder value
rather than the management itself.
(7) Corporate and Social Responsibility
The management of a company is responsible for the firm's day-to-day
business activities. Rather than rendering a judgment on specific social
or political matters, NOMURA ASSET MANAGEMENT will, in principle, honor
the management's business judgment on such matters. However, NOMURA
ASSET MANAGEMENT may decide to vote on such social or political matters
on a case-by-case basis when such matters may have an impact on
investment return. In making judgments on such proposals, we pay close
attention to individual circumstances in each country.
IV. Conflicts of Interest
---------------------
In exercising voting rights, there may arise conflicts of interest (for
example, NOMURA ASSET MANAGEMENT may have a business relationship with an
issuer whose securities are held in client portfolios and over which we have
proxy voting
discretion).
When such a conflict of interest arises, NOMURA ASSET MANAGEMENT shall vote,
in order to remain impartial in the exercising of proxy voting rights, based
on recommendations made by third-party proxy voting service vendors. We
recognize a necessity of such recommendations by these vendors only when
NOMURA ASSET MANAGEMENT generates from its business relationship with an
issuer amounts to more than 1 percent of the total revenue of NOMURA ASSET
MANAGEMENT, and when the proposal to be voted on may provide an undue
enrichment to the director, officer, or another affiliate of such issuer.
Where the revenue from a business relationship with the issuer is more than
0.5 percent of the total revenue of NOMURA ASSET MANAGEMENT, we will closely
examine the proposal to see whether there is any potential conflict of
interest.
With respect to shares of Nomura Holdings, Inc. that are held in client
portfolios, we shall seek advice from third-party proxy voting service
vendors.
***************
Principles on Corporate Governance of Portfolio Companies
Purpose of the Principles
-------------------------
1. For a company to manage its business operations with due consideration
for shareholders' interests and steady long-term earnings, it is crucial
the company's corporate governance functions adequately. As an
investment manager, NOMURA ASSET MANAGEMENT has established basic
corporate governance principles (described below) that it looks for in
portfolio companies. We monitor the business operations of companies in
which we invest to ensure consistency with these principles. We believe
that companies that follow these principles operate their businesses
with autonomy in a way that enhances shareholders' interests/value in
the long term. On the other hand, where no continued expansion of
shareholder value is recognized in a company, or where the company's
business performance or investment return has been sluggish, we will
seek to promote investors' (beneficiaries') interests by demanding the
company take corrective measures.
Ideal Form of Corporate Governance
----------------------------------
2. We believe the following are ideal forms of corporate governance to
serve long-term shareholders' interests:
(1) The board consists of an adequate number of directors qualified
for rendering proper business judgment and functioning
effectively.
(2) The statutory auditors are qualified to audit the activities and
functions performed by directors on behalf of shareholders.
(3) Where the board of directors has designated committees of the
board to carry out specific functions, each committee shall
consist of qualified members and operate with independence.
(4) Executives' compensation is well balanced with long-term
investment return reflecting improved shareholders' value and
appropriate management incentives.
(5) The corporate governance system is in place to ensure sufficient
internal control in terms of compliance and internal auditing.
Accountability through Disclosure
---------------------------------
3. We will request companies to maintain their accountability through
timely and proper public disclosure in order for us to monitor their
corporate governance. We will demand full disclosure and explanation as
well as corrective measurements taken with respect to any illegal or
antisocial activity if any.
Dialogue with Companies
-----------------------
4. NOMURA ASSET MANAGEMENT, as an investment manager, will step up its
dialogue with companies regarding their corporate governance efforts.
Exercise of the Voting Rights
-----------------------------
5. NOMURA ASSET MANAGEMENT will vote proxies on behalf of its clients in a
manner consistent with the corporate governance principles stated above
and seek that companies manage their business operations with due
consideration for shareholders' long-term interests.
*********************
Organizational Structure and Decision-Making Process regarding the Exercise of
------------------------------------------------------------------------------
Proxy Voting Rights
-------------------
The Proxy Voting Committee
May 2005
I. Organizational Structure regarding the Exercise of Proxy Voting Rights
-------------------------------------------------------------------------
The Proxy Voting Committee at NOMURA ASSET MANAGEMENT is primarily responsible
for final determinations on the exercise of proxy voting rights. The
day-to-day operational activities relating to the exercise of proxy voting
rights are performed at the departments designated within NOMURA ASSET
MANAGEMENT.
The exercise of proxy voting rights with respect to the equity securities held
by the discretionary investment accounts managed by NOMURA ASSET MANAGEMENT's
overseas affiliates shall be instructed through such affiliates.
(1) Proxy Voting Committee
----------------------
The Proxy Voting Committee is composed of members selected by its
chairman, who is appointed by the board of directors at NOMURA ASSET
MANAGEMENT's headquarters. The Proxy Voting Committee makes the final
determinations on the exercise of proxy voting rights.
The Proxy Voting Committee shall review the agenda items for voting in
accordance with the "Proxy Voting Guidelines" and decide to vote for or
against, or abstain from voting on, each item.
A meeting of the Proxy Voting Committee may be held whenever necessary.
The Corporate Research Department at NOMURA ASSET MANAGEMENT's
headquarters serves as its office. The process and results of the review
of each agenda item shall be reported to the Management Committee or the
Board of Directors of NOMURA ASSET MANAGEMENT's headquarters, as the
case may be.
(2) Fund Operation Department
-------------------------
The Fund Operation Department has the primary responsibility for
handling proxy voting instructions with respect to equity securities
held by the discretionary investment accounts and Japanese investment
trusts managed by NOMURA ASSET MANAGEMENT's headquarters. The
Department also provides necessary support to NOMURA ASSET
MANAGEMENT's overseas affiliates in their handling of proxy voting
instructions.
The Fund Operation Department shall forward all notices of
shareholders meetings with respect to Japanese equities received from
the trust banks to the Corporate Research Department of NOMURA ASSET
MANAGEMENT's headquarters. The agenda items in these notices shall be
reviewed by the Corporate Research Department or the Proxy Voting
Committee, and the Fund Operation Department shall instruct the trust
banks to exercise the proxy voting rights in accordance with their
determinations. The agenda items, for which determinations have not
yet been made, shall be monitored by the Fund Operation Department
until the return date for the proxy voting. Records regarding proxy
voting instructions and notices of shareholders meetings shall be
maintained for six years.
The Fund Operation Department shall forward the notices of
shareholders meetings with respect to non-Japanese equities received
from the trust banks to the Corporate Research Department. This,
however, is not the case when the proxy materials are made available
through information sources. The Fund Operation Department shall
instruct the trust banks to exercise the proxy voting rights in
accordance with the determinations made by the Corporate Research
Department based on the reviews and recommendations of the overseas
affiliates. When necessary, the Fund Operation Department shall
instruct the trust banks to exercise the proxy voting rights in
accordance with the determinations made by the Proxy Voting Committee.
Records regarding proxy voting instructions shall be maintained for
six years.
(3) Operation Departments at Overseas Affiliates
--------------------------------------------
The operation department of each overseas affiliate ("Overseas
Operation Department") handles proxy voting instructions in accordance
with the discretionary investment agreements entered into with its
clients in its territory.
The Overseas Operation Department shall also provide necessary support
to NOMURA ASSET MANAGEMENT's headquarters or other overseas affiliates
in handling proxy voting instructions.
The Overseas Operation Department, after receiving notices of
shareholder meetings and other proxy materials from the custodian, shall
forward such notices and materials, when necessary, to the department in
charge at NOMURA ASSET MANAGEMENT's headquarters or other relevant
overseas affiliates. This, however, is not the case when notices of
shareholders meetings and other proxy materials are made available to
NOMURA ASSET MANAGEMENT's headquarters or other overseas affiliates
through information sources. After having the agenda items reviewed by
NOMURA ASSET MANAGEMENT's headquarters or other relevant overseas
affiliates, the Overseas Operation Department shall instruct the
custodian to exercise the proxy voting rights.
Records regarding proxy voting instructions shall be maintained for six
years.
(4) Corporate Research Department
-----------------------------
The Corporate Research Department, as an office of the Proxy Voting
Committee, plays an important role in reviewing the agenda items for
voting.
For Japanese Equity Issuers, the Corporate Research Department shall
evaluate the agenda items forwarded from the Fund Operation Department,
and refer a specific agenda item to the Proxy Voting Committee for
deliberation, if necessary. The Corporate Research Department shall
communicate the determinations made at the meeting of the Proxy Voting
Committee to the Fund Operation Department by the return date for
voting, and shall keep the minutes of the Proxy Voting Committee
meeting. The Corporate Research Department shall maintain written
records regarding such proxy voting determinations for six years.
The Corporate Research Department also provides information on the
exercise of proxy voting rights with respect to Japanese issuers whose
equity securities are held in the accounts managed by NOMURA ASSET
MANAGEMENT's overseas affiliates.
For non-Japanese issuers whose equity securities are held in Japanese
investment trusts and discretionary investment accounts managed by
NOMURA ASSET MANAGEMENT's headquarters, the Corporate Research
Department shall handle the determinations to vote for or against the
agenda items. Further, the Corporate Research Department shall forward
the proxy materials received from the Fund Operation Department or made
available through information sources to the relevant overseas affiliate
that is engaged primarily in researching the issuer in question.
However, this is not the case when proxy materials are made available
through information sources at the overseas affiliates. For the
investment trusts or accounts where investment management is delegated
to third party investment advisers, the Corporate Research Department
may consult with such investment advisers when necessary. The person in
charge of the exercise of proxy voting rights at the Corporate Research
Department makes a determination whether to vote "for" or "against"
based on the recommendations of overseas affiliates or the investment
advisers. The Corporate Research Department may refer a specific agenda
item to the Proxy Voting Committee for further deliberation if
necessary.
The Corporate Research Department shall maintain, for six years, written
records regarding notices of shareholders meetings and proxy voting
determinations with respect to all agenda items evaluated for voting.
(5) Investment Department at Overseas Affiliate
-------------------------------------------
The investment department of each overseas affiliate ("Overseas
Investment Department") shall provide to the Corporate Research
Department with its recommendations to vote for or against on the agenda
items regarding non-Japanese issuers of equity securities in its region,
which it has received from NOMURA ASSET MANAGEMENT's headquarters.
NOMURA ASSET MANAGEMENT U.K. Limited is responsible for recommendations
on proxy voting with respect to the European issuers, NOMURA ASSET
MANAGEMENT U.S.A. Inc. is responsible for recommendations on proxy
voting with respect to the North and South American issuers, and
NOMURA ASSET MANAGEMENT Singapore Limited is responsible for Asian
equity proxy voting recommendations with respect to the Asian issuers.
The three Overseas Investment Departments scrutinize and evaluate agenda
items from the viewpoint of their fiduciary duties, by utilizing
third-party proxy voting service providers (e.g., Institutional
Shareholder Services (ISS)). The record of grounds for determinations
and notices of shareholders meeting or proxy materials evaluated for
voting shall be maintained for six years.
The Overseas Investment Department shall also provide its
recommendations on proxy voting regarding non-Japanese issuers of equity
securities to other overseas affiliates that manage the discretionary
accounts which invest in such securities. The Overseas Operation
Department of the overseas affiliate managing such accounts sends proxy
voting instructions to the custodian based on the recommendations by the
Overseas Investment Department of the relevant overseas affiliate that
is responsible for such recommendations. The relevant overseas affiliate
shall be responsible for final determinations on proxy voting in
accordance with the process described above.
II. Proxy Voting Process for Japanese Equities
----------------------------------------------
NOMURA ASSET MANAGEMENT follows the proxy voting decision-making process
described below for Japanese equities:
1. The Fund Operation Department records all of the notices of shareholders
meetings received with respect to the issues held, and forwards the
notices to the Corporate Research Department.
2. The Corporate Research Department individually evaluates all of the
notices of shareholders meetings in accordance with the proxy voting
guidelines set forth in the Proxy Voting Policy. If no issue is found,
the Corporate Research Department shall tell the Fund Operation
Department to instruct the trust banks to vote for the agenda items. If
any issue is found, the Corporate Research Department shall refer the
agenda items in question to the Proxy Voting Committee.
3. The Proxy Voting Committee shall evaluate the agenda items referred from
the
Corporate Research Department based on the Proxy Voting Guidelines, and
determine whether to vote for or against, or abstain from voting. The
Proxy Voting Committee shall communicate its determinations to the Fund
Operation Department.
4. The agenda items reviewed by the Proxy Voting Committee shall be
reported to NOMURA ASSET MANAGEMENT's Management Committee or Board of
Directors.
5. For Japanese issuers whose equity securities are held in overseas
affiliates' discretionary investment accounts, the Overseas Operation
Departments shall obtain the information on the exercise of the proxy
voting right, and forward to the Corporate Research Department if
necessary. The Corporate Research Department shall provide the
information necessary for the exercise of proxy voting rights to
Overseas Operation Departments.
III. Proxy Voting Process for Non-Japanese Equities
---------------------------------------------------
NOMURA ASSET MANAGEMENT follows the proxy voting decision-making process
described below for non-Japanese equities:
1. NOMURA ASSET MANAGEMENT shall instruct to vote for or against, or
abstain from voting, in principle, with respect to all issues held in
the discretionary accounts we manage, upon the consent of the clients
and taking into consideration the stable cash-flows of such accounts,
where the investment management agreements with the clients authorize us
to do so.
2. NOMURA ASSET MANAGEMENT shall instruct, in principle, exercise of the
proxy voting rights with respect to the issues held in Japanese
investment trusts. However, we may not instruct exercise of the proxy
voting rights in the country or market, taking into consideration the
frequent cash-flows of such trusts, where such exercise of the proxy
voting rights would impose any restriction on disposition of such issues
during the proxy voting period. Also, NOMURA ASSET MANAGEMENT, in
instructing proxy voting, shall consider costs and benefits associated
therewith. For that purpose, the Proxy Voting Committee shall set the
screening criteria and determine the "Watch List" for non-Japanese
equities, and exercise the voting rights, in principle, only for
companies on the "Watch
List".
3. The Fund Operation Department shall forward proxy materials received
from the trust banks to the Corporate Research Department. This,
however, is not the case where proxy materials are made available
through information sources. Where the custodian has not sent proxy
materials, but the exercise of proxy voting rights is possible, the
Corporate Research Department may seek information through informational
sources.
4. The Corporate Research Department shall forward the proxy materials to
the relevant overseas affiliates or investment advisers which are
researching the issuer in question and seek their recommendations on the
agenda items. When the proxy materials are available at overseas
affiliates or investment advisers through information sources, it may
seek recommendations without forwarding the proxy materials.
5. Each overseas affiliate or investment adviser shall review and examine
the proxy materials from the viewpoint of their fiduciary duties, and
provide recommendations to the Corporate Research Department.
6. The Corporate Research Department, based on recommendations received
from the overseas affiliates or investment advisers, shall instruct the
exercise of the proxy voting rights through the Fund Operation
Department. When necessary, the Corporate Research Department may refer
specific agenda items to the Proxy Voting Committee for its
deliberation. The Proxy Voting Committee shall closely review the agenda
items in accordance with the Proxy Voting Guidelines. If the Proxy
Voting Committee believes the agenda items referred to are not in the
shareholders' interests, it shall determine either to vote against or to
abstain from voting on such agenda items, and instruct exercise of the
proxy voting rights accordingly through the Fund Operation Department.
7. The conclusions reached at the Proxy Voting Committee shall be reported
to NOMURA ASSET MANAGEMENT's Management Committee or Board of Directors.
8. For non-Japanese issuers whose equity securities are held in overseas
affiliates' discretionary investment accounts, the Overseas Operation
Department of an overseas affiliate shall obtain the proxy materials of
the issuers of non-Japanese equities held in their discretionary account
and instruct the custodian based on the recommendations made by the
other relevant overseas affiliate. Final determinations at the overseas
affiliate will be made in the same process as mentioned above.
IV. The Screening Criteria for The Exercise of Proxy Voting Rights
------------------------------------------------------------------
In order to facilitate the proxy voting process with respect to Non-Japanese
issues held in the Japanese investment trust, NOMURA ASSET MANAGEMENT shall
set forth the screening criteria and, based on such criteria, prepare the
"Non-Japanese Companies Watch List."
Non-Japanese Companies Watch List
---------------------------------
A non-Japanese company shall be placed on the Watch List if:
(1) The company, which meets the following quantitative screening criteria
due to its noticeably poor business performance and investment return,
shall be listed on the Watch List taking into consideration the impact
NOMURA ASSET MANAGEMENT's exercise of proxy voting rights would have on
their management.
(1) Investment return has been below the sector index return (i.e., an
index based upon the MSCI's 10 sectors) by 40 percent for the past
three consecutive years (on an EPS basis). If sector
classification information is not available for a certain company,
the company is compared with the MSCI country index to which the
issuer belongs;
(2) Investment return has been below the sector return index (i.e., an
index based upon the MSCI's 10 sectors) by more than 70 percent
for the past three consecutive years. If sector classification
information is not available for a certain company, the company is
compared with the MSCI country index to which the issuer belongs;
(3) NOMURA ASSET MANAGEMENT holds more than one percent of all the
outstanding shares of a certain issuer.
(2) The Corporate Research Department shall send the Watch List that has
been prepared by the aforementioned quantitative screening to the
overseas affiliates and other relevant departments. Each overseas
affiliate shall review the companies on the Watch List, in accordance
with the Proxy Voting Guidelines, and may remove a company from the
Watch List if it reasonably believes that its inclusion on the list is
not warranted. On the other hand, if a company's performance appears
inadequate in the light of the Proxy Voting Guidelines and it is not yet
included in the list, then the company shall be added to the Watch List.
(3) General Managers of the Corporate Research Department are responsible
for making the final determinations regarding the addition or deletion
of certain companies to and from the Watch List, and approve the Watch
List for non-Japanese companies. The Corporate Research Department shall
maintain all records regarding such determinations
(4) The Watch List generally shall be up-dated on a semi-annual basis.
Screening criteria shall be reviewed when necessary, and any changes to the
criteria must be approved by the Proxy Voting Committee.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
----------------------------------------------------------------------------
(a) (1) As of February 28, 2007, Takeshi Ebihara is the Registrant's portfolio
manager (the "Portfolio Manager") and has served as such since April 2004. The
Portfolio Manager is a CMA (Chartered Member of the Security Analysts
Association of Japan) and Senior Portfolio Manager of the investment adviser
of the Registrant. The Portfolio Manager has been with the investment adviser
of the Registrant since 1997 as a portfolio manager and analyst. The Portfolio
Manager is
primarily responsible for the day-to-day portfolio management for the
Registrant. The Portfolio Manager oversees investment decisions and activities
and reviews research analysis.
(2) As of February 28, 2007, the Portfolio Manager was primarily
responsible for the day-to-day portfolio management for the Registrant, for
one other pooled investment vehicle that is not a registered investment
company under the 1940 Act (with total assets of 691 million yen as of March
31, 2007) and for 10 other accounts (with total assets of 73.34 billion yen as
of March 31, 2007). None of the investment advisory fees with respect to these
accounts is based on the performance of the account. Real, potential or
apparent conflicts of interest may arise where a portfolio manager has
day-to-day responsibilities with respect to more than one account. These
conflicts include the following: (i) the process for allocation of investments
among multiple accounts for which a particular investment may be appropriate,
(ii) allocation of a portfolio manager's time and attention among relevant
accounts and (iii) circumstances where the Registrant's investment adviser has
an incentive fee arrangement or other interest with respect to one account
that does not exist with respect to other accounts.
(3) The Portfolio Manager receives a combination of base compensation
and discretionary compensation consisting of a cash bonus. The methodology
used to determine the Portfolio Manager's compensation is applied across all
accounts managed by the Portfolio Manager. Generally, the Portfolio Manager
receives fixed salary compensation based on his duties and performance. The
amount of base salary is reviewed annually after completion of the formal
performance appraisal process. In order to appraise the Portfolio Manager's
performance, certain measures are used, such as a review of his specialties
and expertise, a review of his capabilities to achieve assigned duties and a
review of his management and communication skills. In addition to base
compensation, the Portfolio Manager may receive discretionary compensation in
the form of a cash bonus. The bonus, which is paid semi-annually, is based on
both quantitative and qualitative scores. The quantitative score is determined
prior to payment based on the performance of the Portfolio Manager's accounts,
measured on a pre-tax basis for rolling three-year periods against the RN
Small Cap Index. The quantitative scoring for purposes of the bonus comprises
60 percent of the performance appraisal measurement. The qualitative score is
determined by analyzing the quality of the Portfolio Manager's contribution to
the Registrant's investment adviser. While the bonus can range up to 100
percent or more of base salary, the Registrant's investment adviser has
indicated that cash bonuses typically represent approximately 20 to 40 percent
of its portfolio managers' aggregate cash compensation.
(4) As of February 28, 2007, the Portfolio Manger did not own
beneficially any securities issued by the Registrant.
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
------------------------------------------------------------------------------
(a) Not applicable
(b) Not applicable
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------------------------
The principal purpose of the Registrant's Nominating Committee is to select
and nominate the Directors of the Registrant. It evaluates candidates'
qualifications for Board membership and, with respect to nominees for
positions as independent directors, their independence from the Registrant's
manager and its affiliates and other principal service providers.
The Nominating Committee will consider potential director candidates
recommended by Registrant shareholders provided that the proposed candidates
satisfy the director qualification requirements provided in the Nominating
Committee's Charter; are not "interested persons" of the Registrant or the
Registrant's investment adviser within the meaning of the Investment Company
Act; and are "independent" as defined in the New York Stock Exchange listing
standards. The Committee has determined that potential director candidates
recommended by Registrant shareholders must satisfy the Securities and
Exchange Commission's ("SEC") nominee requirements found in Regulation 14A of
the Securities and Exchange Act of 1934, as amended ("1934 Act"). Shareholders
recommending potential director candidates must substantiate compliance with
certain requirements at the time of submitting their proposed director
candidate to the attention of the Registrant's Secretary.
The Nominating Committee identifies prospective candidates from any reasonable
source and has the ability to engage third-party services for the
identification and evaluation of potential nominees. The Committee meets
annually to identify and evaluate nominees for Director and makes its
recommendations to the Board. In identifying and evaluating a potential
nominee to serve as an independent Director of the Registrant, the Nominating
Committee will consider, among other factors: (i) whether the individual has
any material relationships that could create any appearance of impropriety
with respect to or a lack of independence from NAM-U.S.A. or any of its
affiliates; (ii) whether the individual has the integrity, independence of
mind and personal qualities to fulfill the fiduciary duties of an independent
Director of the Registrant and to protect the interests of Registrant
shareholders; (iii) the individual's corporate or other business experience in
significant positions which demonstrate sound business judgment; (iv) whether
the individual has financial and accounting experience; (v) the individual's
ability to and attend at least four regular meetings a year and (vi) whether
the individual can add to the balance of experience of the present independent
Directors. The standard of the Nominating Committee is to treat all equally
qualified nominees in the same manner.
ITEM 11. CONTROLS AND PROCEDURES
------------------------------------------------------------------------------
The Registrant's Principal Executive Officer and Principal Financial Officer
have evaluated the Registrant's disclosure controls and procedures within 90
days of the filing of this report and have concluded that they are effective
in providing reasonable assurance that the information required to be
disclosed by the Registrant in its reports or statements filed under the 1934
Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
There were no changes in the Registrant's internal control over financial
reporting that occurred during the Registrant's last fiscal half-year (the
Registrant's second fiscal half-year in the case of an annual report) that
have materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS
------------------------------------------------------------------------------
(a) (1) Code of Ethics.
(a) (2) Certifications of Principal Executive Officer and Principal
Financial Officer pursuant to Rule 30a-2 under the Investment
Company Act of 1940 are attached hereto as an exhibit.
(a) (3) Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 are furnished herewith as an exhibit.
3
SIGNATURES
------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Korea Equity Fund, Inc.
By: /s/ Hiroshi Terasaki
-------------------------------------
Hiroshi Terasaki, President
(Principal Executive Officer)
Date: May 2, 2007
-------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Rita Chopra-Brathwaite
-------------------------------------
Rita Chopra-Brathwaite, Treasurer
(Principal Financial Officer)
Date: May 2, 2007
-------------------------------------
4