Japanese equities slumped in the three-month period to the end of September as concerns about a slowdown in China reverberated across financial markets. The quarter had begun on a positive note with Japanese stocks rising in July, aided by solid corporate earnings reports, unprecedented monetary stimulus by the Bank of Japan, a weaker yen, and lower oil prices. The market became more volatile in the latter half of August, as Japanese equities tracked a spiraling decent in Chinese stocks. Large-caps led the retreat, followed by mid- and then small-caps. Among industry segments, iron and steel and mining and machinery saw the greatest weakness as expectations for global economic growth were revised lower on the back of China's slowdown, and commodity prices plunged to multiyear lows. Only air transportation and construction finished in positive territory, albeit with modest gains.
The Japan Fund returned −9.29% in the quarter compared with −10.89% for the TOPIX Index and −11.00% for the Lipper Japanese Funds Average. For the 12 months ended September 30, 2015, the fund returned −0.11% versus −0.69% for the TOPIX Index and 0.24% for the Lipper Japanese Funds Average. The fund's average annual total returns were −0.11%, 7.12%, and 0.57% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 1.05% as of its fiscal year ended October 31, 2014.
The portfolio's machinery holdings weighed the most on returns, followed by electrical equipment and automobiles positions. Our Internet software and services and IT services holdings fared best and managed gains for the period. We continue to search for opportunities across the market capitalization spectrum, and we rely on our intensive research to build a focused, high-conviction portfolio.
The recent announcement that the reform program of "Abenomics" was entering a second -stage (arguably before stage one has been -proven) was a negative surprise to some, especially coming at a key point when investors are searching for tangible signs of growth and improvement. For those investors able to take a longer-term view, we still believe there is a fruitful investment opportunity encapsulated within the Japanese journey. Policy efforts should provide further traction in the next 12 to 24 months, and we will continue to look for signs beyond that time horizon that Japan's turnaround will be sustainable.
