We present the Annual Report of Korea Equity Fund, Inc. (the “Fund”) for the fiscal year ended October 31, 2014. The Net Asset Value per share (“NAV”) of the Fund increased by 0.9% and the closing market price of the Fund (on the New York Stock Exchange) increased by 4.9% for the fiscal year after giving effect to the reinvest- ment of income dividends and long-term cap- ital gains distributions. The closing market price of the Fund on October 31, 2014 was $8.23, representing a discount of 8.4% to the NAV of $8.98. The net assets of the Fund to- taled $87,448,010 on October 31, 2014. The Korea Composite Stock Price Index (“KOSPI”) decreased from 2,030.09 to 1,964.43, or 3.2% in local currency terms, for the fiscal year. Including the South Korean Won (“Won”) depreciation of 1.0% during the fiscal year, this represented a total decrease of 4.2% in United States (“U.S.”) dollar terms. The Fund’s NAV outperformed the KOSPI, in U.S. dollar terms, by 5.1 percentage points during the fiscal year. For the quarter ended October 31, 2014, the KOSPI decreased from 2,076.12 to 1,964.43, or 5.4% in local currency terms, which, including the Won depreciation of 4.0% for the quarter, represented a total de- crease of 9.4% in U.S. dollar terms. The NAV of the Fund decreased by 8.6% and outper- formed the KOSPI, in U.S. dollar terms, by 0.8%. The Fund’s share price decreased by 7.0% during the quarter. South Korean Economy The Bank of Korea (“BOK”) cut its policy rate by 25 basis points in October to a new historical low of 2.0%. As justification for the unprecedented rate cut, the BOK cited unex- pectedly slow economic growth, reduced in- flationary pressures, and weak economic sen- timent which could delay the recovery. Growth forecasts for 2014 and 2015 were also reduced by 0.3% to 3.5% and by 0.1% to 3.9%, respectively. Headline Consumer Price Index (“CPI”) inflation forecasts for 2014 and 2015 were also adjusted down by 0.5% and 0.3% to 1.4% and 2.4%, respectively. These downward revisions have resulted in the expected dissipation of the negative out- put gap being delayed to the second half of 2015. The rate cuts should support the econ- omy along with the recent fiscal stimulus al- though they are unlikely to trigger a strong economic recovery. Korean exports increased by 2.5% year- over-year (“yoy”) in October, compared with consensus expectations of 1.4% yoy. By re- gion, exports to the U.S. increased by 33.4% KOREA EQUITY FUND, INC. December 29, 2014 To Our Shareholders:
Transcript
We present the Annual Report of KoreaEquity Fund, Inc. (the “Fund”) for the fiscalyear ended October 31, 2014.
The Net Asset Value per share (“NAV”) ofthe Fund increased by 0.9% and the closingmarket price of the Fund (on the New YorkStock Exchange) increased by 4.9% for thefiscal year after giving effect to the reinvest-ment of income dividends and long-term cap-ital gains distributions. The closing marketprice of the Fund on October 31, 2014 was$8.23, representing a discount of 8.4% to theNAV of $8.98. The net assets of the Fund to-taled $87,448,010 on October 31, 2014.
The Korea Composite Stock Price Index(“KOSPI”) decreased from 2,030.09 to1,964.43, or 3.2% in local currency terms, forthe fiscal year. Including the South KoreanWon (“Won”) depreciation of 1.0% during thefiscal year, this represented a total decreaseof 4.2% in United States (“U.S.”) dollar terms.The Fund’s NAV outperformed the KOSPI, inU.S. dollar terms, by 5.1 percentage pointsduring the fiscal year.
For the quarter ended October 31, 2014,the KOSPI decreased from 2,076.12 to1,964.43, or 5.4% in local currency terms,which, including the Won depreciation of4.0% for the quarter, represented a total de-crease of 9.4% in U.S. dollar terms. The NAV
of the Fund decreased by 8.6% and outper-formed the KOSPI, in U.S. dollar terms, by0.8%. The Fund’s share price decreased by7.0% during the quarter.
South Korean EconomyThe Bank of Korea (“BOK”) cut its policy
rate by 25 basis points in October to a newhistorical low of 2.0%. As justification for theunprecedented rate cut, the BOK cited unex-pectedly slow economic growth, reduced in-flationary pressures, and weak economic sen-timent which could delay the recovery.Growth forecasts for 2014 and 2015 werealso reduced by 0.3% to 3.5% and by 0.1%to 3.9%, respectively. Headline ConsumerPrice Index (“CPI”) inflation forecasts for 2014and 2015 were also adjusted down by 0.5%and 0.3% to 1.4% and 2.4%, respectively.These downward revisions have resulted inthe expected dissipation of the negative out-put gap being delayed to the second half of2015. The rate cuts should support the econ-omy along with the recent fiscal stimulus al-though they are unlikely to trigger a strongeconomic recovery.
Korean exports increased by 2.5% year-over-year (“yoy”) in October, compared withconsensus expectations of 1.4% yoy. By re-gion, exports to the U.S. increased by 33.4%
KOREA EQUITY FUND, INC.
December 29, 2014
To Our Shareholders:
yoy while exports to Europe declined by27.7% yoy. Exports to China and Hong Kongincreased by 4.1% yoy and 6.9% yoy, re-spectively. Exports to the Association ofSoutheast Asian Nations (“ASEAN”) countriesdeclined by 1.3% yoy.
South Korean Stock MarketThe Textiles and Apparel sector outper-
formed, driven by stable order momentumand solid earnings delivery. The Utility sectoralso outperformed due to expectations ofmargin improvement. The Food and Beveragesector also performed well during the periodas the market expected price hikes to driveearnings growth going forward. SK Hynix Inc.,in the Electronic Appliances and Componentssector, continued to perform well backed bysolid earnings improvement from a recoveryin the memory industry. The Financing Busi-ness sector outperformed due to expecta-tions of stable loan growth and margin im-provements.
On the other hand, Transportation Equip-ment stocks such as Hyundai Motor Com-pany and Kia Motors Corporation underper-formed during the year given concernsregarding their poor capital managementstrategy. Weak shipment growth due to cur-rency appreciation was also a negative factor.The Machinery sector also underperformedas the market became concerned that cur-rency appreciation would weaken machinerymanufacturers’ global competitiveness.Meanwhile, the Chemicals sector continuedto underperform given the uncertainty over ademand recovery.
Portfolio Management ActivityIn December 2013 and January 2014, the
Fund added Hana Financial Group Inc. on ex-pectations of an earnings improvement fromthe acquisition of the Korea Exchange Bankalong with a domestic economic turnaround.The Fund increased its position in HyundaiDevelopment Company in February 2014,which is likely to benefit from an improvinghousing market and is expected to achievehigher pre-sales than its peers in 2014. TheFund also increased its position in E-MartCo., Ltd. in February 2014 due to growth insame-store sales and expectations that itsonline business will improve in the secondhalf of the year. In May 2014, CJ Korea Ex-press Corp. was added to the portfolio as thecompany is expected to see an earnings im-provement from hikes in the Average SalesPrice (“ASP”) for its parcel delivery business.The Fund also added Industrial Bank of Koreain April 2014, believing this company will be akey beneficiary of the domestic economic re-covery. Loan growth would be sustainablefrom small and medium-size enterprises,while the high dividend yield of 3% to 4%looks attractive as well. In May 2014, theFund also increased its position in BS Finan-cial Group, Inc., which has maintained stablecore earnings from both its banking and non-banking (capital) operations. The Fund addedKT&G Corporation in July 2014 as the com-pany is expected to benefit from a domesticeconomic recovery. Tobacco tax hikes wouldlead to a higher ASP as well as earningsgrowth going forward. The Fund also addedpositions in the Telecommunications sector inAugust and September 2014 such as SK Tele-com Co., Ltd. and KT Corporation as theFund believes faster average revenue per user
growth and reduced marketing costs underthe government’s strict controls will lead to anearnings turnaround.
The Fund reduced its position in HyundaiMotor Company preferred shares and secondpreferred shares in July and September 2014since it is now concerned about the com-pany’s cash management strategy and cor-porate governance after the announcement ofa major property purchase. Weaker sales mo-mentum in the U.S. market could hurt thecompany’s earnings in the near-term. In July2014, the Fund slightly reduced its position inSK Hynix Inc. on the assumption that thestock price reflects expected solid earnings inthe memory business. The Fund disposed ofits position in Kolao Holdings in September2014 based on concerns that slower than ex-pected shipment momentum in Laos couldlower earnings expectations in this market.
In July 2014, the Fund participated in theinitial public offering (“IPO”) of Cuckoo Elec-tronics Company Ltd. The company gener-ates stable earnings and has a strong marketposition in Korea from its domestic ricecooker business. Earnings contributions fromits China and duty free shop businesses alsosupport long-term growth. The Fund also par-ticipated in the IPO of Devsisters Co., Ltd. inSeptember 2014 since the Fund expects itsmobile phone games to underpin stable earn-ings growth.
Investment StrategyThere is more concern lately about the
pace of global economic growth. The U.S. re-covery still appears to be on track, driven bybuoyant domestic demand and strong manu-
facturing output. However, Europe nowseems to be heading back into a recessionwhile Japanese macroeconomic numbers arealso below forecast. Among the emergingeconomies, the majority are facing either de-clining commodity prices or, in the case ofChina, sharp slowdowns in both domesticconsumption and industrial production. Giventhis environment, the recent market scareabout an imminent rise in official interest ratescould prove premature.
The Fund maintains a cautious view of theKorean equity market but believes furtherdownside could be limited due to improvingfund flows and more measures to stimulatethe property market as well as domestic con-sumption. Expectations of better cash man-agement including higher dividends would bea catalyst. Considering recent foreign capitaloutflows, the Fund also expects the NationalPension Service to invest aggressively in thedomestic market throughout the end of thisyear which would support the overall equitymarket going forward.
The Fund expects to keep its existing ex-posure in the Electronic Appliances and Com-ponents sector throughout the fourth quarterof 2014. The current overweight position inSK Hynix Inc. is expected to remain in place,given stable earnings momentum and improv-ing conditions in the memory market. On theother hand, the Fund expects to maintain thecurrent underweight position in SamsungElectronics Co., Ltd. due to the limited upsidepotential in its smart phone business. TheFund also expects to maintain an overweightposition in NCsoft Corporation given its stableearnings generation and attractive valuation.
The overweight position in the FinancingBusiness sector is expected to remain un-changed. Stable loan growth and possibleearnings improvements for banking stocksare supported by a recovery in the propertymarket and a turnaround in the domesticeconomy.
The Fund remains bearish towards theChemicals sector due to the uncertain de-mand recovery and an oversupply situationbut has taken a slightly more positive view ofstocks in the Iron and Steel sector such asPOSCO, given a possible earnings improve-ment due to lower raw material costs. TheFund expects to maintain an overweight posi-tion in special metal manufacturers such asKorea Zinc Co., Ltd. on earnings growth fromcapacity expansion.
The Transportation Equipment sector re-mains overweight. The Fund reduced its posi-tions in automobile original equipment manu-facturers due to concerns over capitalmanagement while maintaining a positiveview of automobile parts manufacturers dueto stable earnings momentum and attractivevaluations. The Fund increased its position inthe Telecommunications sector consideringthe boost to earnings growth from reducedmarketing competition and industry-wide av-erage rate per unit growth backed by furtherLong Term Evolution penetration.
The Fund appreciates your continuing sup-port.
Sincerely,
Yutaka ItabashiPresident
DISCLOSURESSources: Nomura Asset Management U.S.A. Inc. and Bloomberg L.P. Past performance is not indicative offuture results.
The NAV price is adjusted for reinvestment of income dividends and capital gain distributions. The New YorkStock Exchange’s closing market price is adjusted for reinvestment of income dividends and capital gain dis-tributions. The Fund’s performance does not reflect sales commissions.
This material contains the current opinions of the Fund’s manager, which are subject to change without no-tice. It should not be considered investment advice. Statements concerning financial market trends arebased on current market conditions, which will fluctuate. There is no guarantee that these investment strate-gies will work under all market conditions, and each investor should evaluate their ability to invest for thelong term.
Comparisons between changes in the Fund’s net asset value or market price per share and changes in theFund’s benchmark should be considered in light of the Fund’s investment policy and objective, the charac-teristics and quality of the Fund’s investments, the size of the Fund, and variations in the South KoreanWon/U.S. Dollar exchange rate. This report is for informational purposes only. Investment products offeredare not FDIC insured, may lose value, and are not bank guaranteed.
Indices are unmanaged. You cannot invest directly into an index.
SHAREHOLDERS ACCOUNT INFORMATIONShareholders 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 VOTINGA description of the policies and procedures that the Fund uses to vote proxies relating to portfolio securities is avail-
able (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the website of the Securities andExchange Commission (“SEC”) at http://www.sec.gov. Information about how the Fund voted proxies relating to secu-rities 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 SEC’s web site at http://www.sec.gov.
Additional information about the Fund's Board of Directors is available (1) without charge, upon request, by callingtoll-free 1-800-833-0018; and (2) on the website of the Securities and Exchange Commission ("SEC") athttp://www.sec.gov in the Fund's most recent proxy statement filing.
AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTSThe Fund files a schedule of portfolio holdings with the 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 alsobe reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of thePublic Reference Room may be obtained by calling 1-800-SEC-0330.
FUND CERTIFICATIONIn September 2014, the Fund filed its Chief Executive Officer Certification with the New York Stock Exchange pur-
suant 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 SEC’s web site at http://www.sec.gov.
INTERNET WEBSITENomura Asset Management U.S.A. Inc. has established an Internet website which highlights it history, investment phi-
losophy and process and products, which include the Fund. The Internet web address is www.nomura.com.
*From November 1, 2013 through October 31, 2014†Reflects the percentage change in share price adjusted for reinvestment of income dividends and long-term capital gains distributions
*The Fund holds $1,723,288 of Hyundai Motor Company preferred shares and $1,135,017 of Hyundai Motor Company common shareswhich make up 2.0% and 1.3% of total net assets, respectively.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Korea Equity Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Korea Equity Fund, Inc. (the “Fund”), includingthe schedule of investments, as of October 31, 2014, and the related statements of operations for the year then ended,the statement of changes in net assets for each of the two years in the period then ended, and the financial highlightsfor each of the five years in the period then ended. These financial statements and financial highlights are the responsi-bility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financialhighlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial 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 audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for thepurpose 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 anddisclosures in the financial statements and financial highlights, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statement presentation. Our procedures includedconfirmation of securities owned as of October 31, 2014 by correspondence with the custodian and brokers. We believethat 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 Korea Equity Fund, Inc. at October 31, 2014, 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 ofthe five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
End of year (including accumulated net investment loss of$190,459 and $331,897, respectively) . . . . . . . . . . . . . . . . . . . . . . . . $87,448,010 $99,073,982
See notes to financial statements.
1. Significant Accounting PoliciesKorea Equity Fund, Inc. (the “Fund”) is registered
under the Investment Company Act of 1940 as anon-diversified, closed-end management investmentcompany. The Fund was incorporated in Marylandon September 7, 1993 and investment operationscommenced on December 3, 1993. The Fund’s in-vestment objective is to seek long-term capital ap-preciation through investments primarily in equity se-curities of South Korean companies.
The accompanying financial statements havebeen prepared in accordance with United States(“U.S.”) generally accepted accounting principles(“GAAP”) and are stated in United States dollars. TheFund is an investment company that follows the ac-counting and reporting guidance in accordance withFASB Accounting Standards Codification Topic 946.The following is a summary of the significant ac-counting and reporting policies used in preparing thefinancial statements.
(a) Valuation of Securities—Investments traded onstock exchanges are valued at the last sale price onthe principal market on which such securities aretraded as of the close of business on the day the se-curities are being valued or, lacking any sales, at thelast available bid price. Securities traded in the U.S.over-the-counter market (as opposed to the over-the-counter market for foreign investors in South Ko-rea) are valued at the last reported sales price as ofthe close of business on such day the securities arebeing valued or, if none is available, at the mean ofthe bid and offer price at the close of the day or, ifnone is available, at the last reported sales priceavailable to the Fund. Securities for which marketquotations are not readily available and restricted se-curities are valued in good faith at fair value usingmethods determined by the Board of Directors.Short-term debt securities which mature in 60 daysor less are valued at amortized cost, which approxi-mates fair value, if their original maturity at the dateof purchase was 60 days or less, or by amortizingtheir value on the 61st day prior to maturity if theirterm to maturity at the date of purchase exceeded
60 days.
(b) Foreign Currency Transactions—Transactionsdenominated in South Korean Won (“Won”) arerecorded in the Fund’s records at the prevailing rateat the time of the transaction. Asset and liability ac-counts that are denominated in Won are adjusted toreflect the current exchange rate at the end of theperiod. Transaction gains or losses resulting fromchanges in the exchange rate during the reportingperiod or upon settlement of foreign currency trans-actions are included in the results of operations forthe current period.
The net assets of the Fund are presented at theexchange rates and market values at the end of theFund’s fiscal year. The Fund does isolate that portionof the results of operations arising as a result ofchanges in the foreign exchange rates on invest-ments from the fluctuations arising from changes inthe market prices of securities held at October 31,2014. Net realized gains or losses on investments in-clude gains or losses arising from sales of portfoliosecurities and sales and maturities of short-term se-curities. Net realized gains or losses on foreign cur-rency transactions arise from sales of foreign curren-cies, currency gains or losses realized on securitiestransactions between trade and settlement date, andthe difference between the amounts of dividends, in-terest, and foreign withholding taxes recorded on theFund’s books and the U.S. dollar equivalent of theamounts actually received or paid.
(c) Security Transactions, Investment Income, andDistributions to Shareholders—Security transactionsare accounted for on the trade date. Dividend in-come and distributions are recorded on the ex-divi-dend dates and interest income is recorded on theaccrual basis. Realized gains and losses on the saleof investments are calculated on a first-in, first-outbasis.
Distributions from net investment income and netrealized capital gains are determined in accordancewith Federal income tax regulations, which may dif-fer from GAAP. To the extent these “book/tax” differ-ences are permanent in nature (i.e., that they result
KOREA EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
from other than timing of recognition—“temporary”),such amounts are reclassified within the capital ac-counts based on their Federal tax-basis treatment;temporary differences do not require reclassification.Dividends and distributions which exceed net real-ized capital gains for financial reporting purposes,but not for tax purposes, are reported as distribu-tions in excess of net realized capital gains.
Pursuant to a securities lending agreement withBrown Brothers Harriman & Co., the Fund may lendsecurities to qualified institutions. It is the Fund’spolicy that, at origination, all loans are secured bycollateral of at least 102% of the value of U.S. secu-rities loaned and 105% of the value of foreign secu-rities loaned. It is the Fund’s policy that collateralequivalent to at least 100% of the market value ofsecurities on loan is maintained at all times. Collat-eral is provided in the form of cash, which will be in-vested in certain money market funds. The Fund isentitled to receive all income on securities loaned, inaddition to a portion of the income earned as a resultof the lending transaction. Although each securityloan is fully collateralized, there are certain risks. OnNovember 21, 2008, the Fund suspended its partic-ipation in the securities lending program. The Fundmay resume its participation in the future. During thefiscal year ended October 31, 2014, the Fund did notearn any fees from lending fund portfolio securities,pursuant to the securities lending agreement.
(d)Capital Account Reclassification—For the yearended October 31, 2014, the Fund’s accumulatednet investment loss was decreased by $785,794,paid-in capital was decreased by $722,151, and theaccumulated net realized loss on investments andforeign currency transactions was increased by$63,643. The adjustments were a result of the re-classification of foreign exchange losses and net op-erating loss. These adjustments had no impact onnet assets.
(e) Income Taxes—A provision for United Statesincome taxes has not been made since it is the in-tention of the Fund to continue to qualify as a regu-lated investment company under the Internal Rev-
enue Code and to distribute within the allowabletime limit all taxable income to its shareholders.
Under South Korean tax laws, a withholding tax isimposed on dividends at the rate of 22% and suchwithholding taxes are reflected as a reduction of therelated revenue. There is no withholding tax on real-ized gains.
In accordance with U.S. GAAP requirements re-garding accounting for uncertainties in incometaxes, management has analyzed the Fund’s tax po-sitions taken or expected to be taken on federal andstate income tax returns for all open tax years (thecurrent and the prior three tax years), and has con-cluded that no provision for income tax is required inthe Fund’s financial statements. The Fund recog-nizes interest and penalties, if any, related to uncer-tain tax positions as income tax expense in thestatement of operations. During the current year andfor the prior three tax years, the Fund did not incurany interest or penalties.
(f) Subscription for New Shares—As part of theirannual corporate action matters, certain South Ko-rean companies offer rights to their shareholders tosubscribe to new shares which are eligible for a por-tion of the dividends paid on existing shares in theyear of subscription. The Fund normally subscribesto new share offerings by South Korean companies.
(g) Use of Estimates in Financial Statement Prepa-ration—The preparation of financial statements inaccordance with GAAP requires management tomake estimates and assumptions that affect the re-ported amounts and disclosures in the financialstatements. Actual results could differ from these es-timates.
(h) Concentration of Risk—A significant portion ofthe Fund’s net assets consists of South Korean se-curities which involve certain considerations andrisks not typically associated with investments in theU.S. In addition to the smaller size, less liquidity andgreater volatility, the South Korean securities marketis less developed than the U.S. securities market andthere is often substantially less publicly available in-formation about South Korean issuers than there is
KOREA EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
about U.S. issuers. Future economic and politicaldevelopments in South Korea could adversely affectthe liquidity or value, or both, of securities in whichthe Fund is invested. Further, the Fund may be ex-posed to currency devaluation and other exchangerate fluctuations.
(i) Indemnifications—Under the Fund’s organiza-tional documents, its officers and directors are in-demnified against certain liabilities arising from theperformance of their duties to the Fund. Additionally,in the normal course of business, the Fund entersinto contracts that contain a variety of representationswhich provide general indemnifications. The Fund’s maxi-mum exposure under these agreements is unknown as thiswould involve future claims that may be made against theFund that have not yet occurred. However, based on theFund’s experience, the Fund expects the risk of loss to beremote and as such no additional accruals were recordedon the statement of assets and liabilities.
2. Management Agreement and Transactions With Affiliated PersonsNomura Asset Management U.S.A. Inc. (“NAM-
USA” or the “Manager”) acts as the Manager of theFund pursuant to a management agreement. Underthe agreement, the Manager provides all officespace, facilities and personnel necessary to performits duties. Pursuant to such management agreement,the Manager has retained its parent company, No-mura Asset Management Co., Ltd. (“NAM”), as in-vestment adviser for the Fund, and Nomura AssetManagement Hong Kong Limited (“NAM-HongKong”) and Nomura Asset Management SingaporeLimited (“NAM-Singapore”), as investment sub-ad-visers for the Fund.
As compensation for its services to the Fund, theManager receives a monthly fee computed at the an-nual rate of 0.85% of the Fund’s average weekly netassets. Under the management agreement, the Fundincurred fees to the Manager of $782,745 for the fis-cal year ended October 31, 2014. Under the invest-ment advisory agreement, the Manager informed the
Fund that NAM earned sub-advisory fees of$205,207 from the Manager, not the Fund, for the fis-cal year ended October 31, 2014. In addition, NAM-Hong Kong and NAM-Singapore earned sub-advi-sory fees of $45,602 and $205,207, respectively. AtOctober 31, 2014, the management fee payable tothe Manager by the Fund was $62,375.
Certain officers and/or directors of the Fund are officers and/or directors of the Manager. Affiliates ofNomura Holdings, Inc. (the Manager’s indirect par-ent) did not earn any fees in commissions on the ex-ecution of portfolio security transactions for the yearended October 31, 2014. The Fund pays each Direc-tor not affiliated with the Manager an annual fee of$12,000 plus $1,500 per meeting attended or $1,000per telephone meeting attended, together with suchDirector’s actual expenses related to attendance atmeetings. The Chairman of the Board, presentlyRodney A. Buck, who is not affiliated with the Man-ager, is paid an additional annual fee of $5,000. TheChairman of the Audit Committee, presently David B.Chemidlin, receives an additional annual fee of$1,000. Such fees and expenses for unaffiliated Di-rectors aggregated to $103,602 for the fiscal yearended October 31, 2014.
3. Purchases and Sales of InvestmentsPurchases and sales of investments, exclusive of
investments in foreign currency and short-term se-curities, for the fiscal year ended October 31, 2014were $17,609,748 and $29,153,977, respectively.
4. Federal Income TaxesAs of October 31, 2014, net unrealized apprecia-
tion on investments for Federal income tax purposeswas $18,222,213, consisting of $21,379,246 relatedto appreciated securities and $3,157,033 related todepreciated securities. The aggregate cost of invest-ments, at October 31, 2014, for federal income taxpurposes was $69,157,272.
KOREA EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
At October 31, 2014 the components of accumu-lated earnings on a tax basis were as follows:
Unrealized appreciation on investmentsand foreign currency transactions $18,219,017
Undistributed long term capital gains 677,324Qualified late year loss deferral (190,459)Total accumulated earnings $18,705,882
The Fund paid a long term capital gains distribu-tion of $1.252 per share ($12,195,260) to sharehold-ers of record as of December 30, 2013 on January17, 2014. The ex-dividend date was December 26,2013.
The Fund paid a long term capital gains distribu-tion of $1.053 per share ($10,256,876) to sharehold-ers of record as of December 24, 2012 on January 4,2013. The ex-dividend date was December 20, 2012.
The tax character of distributions paid during thefiscal years ended October 31, 2014 and October31, 2013 were as follows:
October-14 October-13
Ordinary Income $0 $0
Capital Gains $12,195,260 $10,256,876
5. Fair Value MeasurementsIn accordance with GAAP, fair value is defined as
the price that the Fund would receive to sell an assetor pay to transfer a liability in an orderly transactionbetween market participants at the measurementdate. GAAP also establishes a framework for mea-suring fair value, and a three-level hierarchy for fairvalue measurements based upon the transparencyof inputs to the valuation of an asset or liability. In-puts may be observable or unobservable and referbroadly to the assumptions that market participantswould use in pricing the asset or liability. Observableinputs reflect the assumptions market participantswould use in pricing the asset or liability based onmarket data obtained from sources independent of
the Fund. Unobservable inputs reflect the Fund’sown assumptions about the assumptions that mar-ket participants would use in pricing the asset or lia-bility developed based on the best information avail-able in the circumstances. Each investment isassigned a level based upon the observability of theinputs which are significant to the overall valuation.The three-tier hierarchy of inputs is summarized be-low.
• Level 1—quoted prices in active markets foridentical investments
• Level 2—other significant observable inputs (in-cluding quoted prices for similar investments, in-terest rates, prepayment speeds, credit risk, etc.)
• Level 3—significant unobservable inputs (in-cluding the Fund’s own assumptions in deter-mining the fair value of investments)
The following table summarizes the valuation ofthe Fund’s investments by the above fair value hier-archy levels as of October 31, 2014.
*Please refer to the Schedule of Investments for break-down of the valuation by industry type.
During the fiscal year ended October 31, 2014,there were no transfers between Level 1, Level 2, orLevel 3 securities.
As of October 31, 2014, the Fund held a Level 2security. The security was valued at the IPO partici-pation price transacted on October 31, 2014.
During the fiscal year ended October 31, 2014,the Fund did not hold any instrument which usedsignificant unobservable inputs (Level 3) in determin-
KOREA EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
ing fair value.
6. Share Repurchases and DiscountManagement Plan
The Board of Directors of the Fund announced aDiscount Management Plan on June 3, 2010. ThePlan consisted of an open-market share repurchaseprogram and a tender offer component. The Fundcommenced share repurchases on the New YorkStock Exchange on July 1, 2010. Between July 1,2010 and August 13, 2010, the Fund repurchased149,609 shares of its capital stock for an aggregatepurchase price of $1,483,505. The impact of the Planresulted in less than a $0.01 change to the net assetvalue per share.
The Board of Directors announced an enhancedDiscount Management Plan on August 17, 2010 thatprovided for a tender offer of up to 20 percent of theFund’s outstanding shares of capital stock. The en-hanced Plan also contemplates that the Board of Di-rectors will annually evaluate whether, taking into ac-count the Fund’s performance, trading discount fromnet asset value and other relevant factors, the Fundshould make an additional tender offer for between 5and 15 percent of its outstanding shares of capitalstock. On November 17, 2010, the Fund com-menced a tender offer for up to 2,212,479 shares ofits outstanding capital stock at a price equal to 98percent of the net asset value per share on the expi-ration date of the offer (or if the tender offer is ex-tended, on the date to which the tender offer is ex-tended). The tender offer expired on December 17,2010, at which time the offer was oversubscribed.The Fund purchased the maximum number of sharescovered by the offer at a price of $12.79 per share,which represented a price equal to 98 percent of thenet asset value per share as of the close of tradingon the New York Stock Exchange on December 17,2010. As a result of the tender offer, $28,297,607was distributed to the shareholders and there was a$0.06 increase to the net asset value per share.
The Fund’s intention to conduct a second tenderoffer was announced on June 7, 2011. This tenderoffer was for up to 10 percent of the Fund’s out-standing stock during the fourth quarter of 2011 ifthe Fund's stock traded at a specific discount duringthe third quarter of 2011. The stock did trade at thespecific discount. The Fund commenced an offer forup to 1,082,292 shares of its common stock on Jan-uary 31, 2012. The offer expired on March 5, 2012, atwhich time the Fund purchased the maximum num-ber of shares covered by the offer at a price of$10.33, which represented a price equal to 98 per-cent of the net asset value per share as of the closeof trading on the New York Stock Exchange onMarch 5, 2012. As a result of the tender offer,$11,180,076 was distributed to the shareholders andthere was a $0.02 increase to the net asset value pershare.
7. Correction of an Immaterial Error
Subsequent to the issuance of the financial state-ments for the fiscal year ended October 31, 2013,the Fund identified the appropriate price for the rein-vestments of dividends was not used to calculatethe total investment return in accordance with theFund’s dividend reinvestment plan. The Fund re-viewed the impact of this error on the prior period fi-nancial statements and determined that the errorwas not material to the financial statements. How-ever, the Fund has corrected the financial highlightsdisclosure to reflect the correct total investment re-turns. The effect of the correction of this immaterialerror on the financial statements is presented below.
10/31/2013
As Previously Reported As Corrected5.3% 4.9%
10/31/2012
As Previously Reported As Corrected-1.8% 3.6%
KOREA EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
KOREA EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding throughout each fiscal year:
For the Fiscal Year Ended October 31,
2014 2013 2012 2011 2010
Net asset value, beginning of year . . . . . . . . . . . $10.17 $10.64 $13.69 $12.30 $9.76
Net investment loss* . . . . . . . . . . . . . . . . . . . . (0.07) (0.08) (0.10) (0.16) (0.07)Net realized and unrealized gain on
* Based on average shares outstanding.** Increase is due to Tender Offer (See Note 6).*** See Note 7 regarding a correction of an immaterial error.† Based on market value per share, adjusted for reinvestment of income dividends and capital distributions and capital
share transactions.
TAX INFORMATION (UNAUDITED)
We are required by subchapter M of the Internal Revenue Code of 1986, as amended, to advise you within 60 days of theFund’s fiscal year ended October 31, 2014 as to the federal tax status of distributions received by shareholders during suchfiscal year. Accordingly, the Fund designates $194,207 as foreign tax credit with the associated gross income of $931,419.
Shareholders should not use the above information to prepare their tax returns. The information necessary to complete in-come tax returns will be included with your Form 1099 DIV which will be sent to you separately in January 2015.
Owner, Buck Capital Management(private investment managementfirm) since 2005; Chairman of theDartmouth-Hitchcock Health CareInvestment Committee since 2011.
Business Administration Professorat Ross Business School, Universityof Michigan since 1980; Advisor toCEO of Taubman Company since2009; Advisor to CEO of POSCOfrom 2008 to 2009.
Corporate Controller, AdvanceMagazine Publishers, Inc. (d/b/aConde Nast) since 1995.
Partner, Debevoise & Plimpton LLP,1987-2012; Of Counsel, Debevoise &Plimpton LLP since 2013; Trustee,Board of Trustees of Smith Collegesince July 2014; Member of the Ex-ecutive Committee of the Friends ofSmith College Libraries since 2013.
Two registered investmentcompanies consisting oftwo portfolios
Two registered investmentcompanies consisting oftwo portfolios
Two registered investmentcompanies consisting oftwo portfolios
Two registeredinvestmentcompaniesconsisting oftwo portfolios
None
KT Corporation
(formally Korea
Telecom)
None
None
*In addition to the Fund, the “Fund Complex” includes Japan Smaller Capitalization Fund, Inc.
KOREA EQUITY FUND, INC.
SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited)
The 2014 Annual Meeting of the Shareholders of the Fund was held at the offices of Nomura Asset Man-agement U.S.A. Inc. at Worldwide Plaza, 309 West 49th Street, New York, New York on August 14, 2014. Thepurpose of the meeting was (1) to elect one Class II Director, to serve for a term to expire in 2017 and (2) totransact such other business as may properly come before the meeting or any adjournment or postponementthereof.
At the meeting, Yutaka Itabashi was re-elected to serve as director of the Fund for a term expiring in 2017and until his successor is duly elected and qualifies.The results of the voting at the Annual Meeting were as fol-lows:
1. To elect one Class II Director:
Shares VotedFor
%ofOutstanding
Shares
Shares Voted Withhold Authority
%ofOutstanding
Shares
Yutaka Itabashi 4,929,782 50.61% 3,810,376 39.12%
INDEPENDENT DIRECTORS
Biographical and other information relating to the non-interested Directors of the Fund is set out below.
SharesAbstained
-
Broker Non-Vote
-
Name and Age
Position(s)Held with the Fund
Term of Office andLength of
Time Served
Principal Occupation(s)During Past Five Years
Number ofFunds in the Fund Complex*
Overseen bythe Director **
OtherPublic
DirectorshipsHeld by Director
Yutaka Itabashi (49)* Class II Director andPresident
Director andPresidentsince 2013
President of Nomura Asset Man-agement U.S.A. Inc. (“NAM-USA”)and Nomura Global Alpha LLCsince 2013; Managing Director ofNomura Asset Management Co.,Ltd. (“NAM”) from 2004 to 2013;Senior Managing Director of No-mura Funds Research and Tech-nologies Co., Ltd. from 2007 to2012.
Two registeredinvestmentcompaniesconsisting oftwo portfolios
None
KOREA EQUITY FUND, INC.
SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited)
INTERESTED DIRECTOR
Biographical and other information relating to the Director who is an “interested person,” as defined in the In-vestment Company Act of 1940, of the Fund is set out below:
* Mr. Itabashi is an “interested person,” of the Fund based on his position with NAM-USA. Mr. Itabashi is also a direc-
tor of Japan Smaller Capitalization Fund, Inc., for which NAM-USA acts as manager and for which NAM acts as in-vestment adviser.
** In addition to the Fund, the “Fund Complex” includes Japan Smaller Capitalization Fund, Inc.
Committees and Directors’ Meetings. The Board of Directors has a standing Audit Committee, a standingNominating Committee, and a standing Governance and Compliance Committee, each of which consists of theDirectors who are not “interested persons” of the Fund within the meaning of the 1940 Act and are “indepen-dent” as defined in the New York Stock Exchange listing standards. Currently, Rodney A. Buck, David B.Chemidlin, E. Han Kim and Marica L. MacHarg are members of these Committees. The Fund has no standingCompensation Committee.
During the fiscal year ended October 31, 2014, the Board of Directors held seven meetings, the Audit Committee held three meetings and the Nominating Committee held one meeting. Each incumbent Director attended at least 75% of the aggregate number of meetings of the Board of Directors held during the periodfor which they served and, if a member, of the aggregate number of meetings of the Audit and NominatingCommittees held during the period for which they served.
Officers of the Fund. Officers of the Fund are elected and appointed by the Directors and hold office untilthey resign, are removed or are otherwise disqualified to serve. Certain biographical and other information re-lating to the officers of the Fund is set out below:
** The address of each officer listed above is Worldwide Plaza, 309 West 49th Street, New York, New York 10019.** Elected by and serves at the pleasure of the Board of Directors.
Name, Address* and Age of Officers
Yutaka Itabashi (49)
Hiromichi Aoki (55)
Maria R. Premole (52)
Neil Daniele (54)
Amy J. Marose (37)
Jamie Gannalo (28)
Position(s) Held with the Fund
President andClass II Director
Vice President
Vice President
Secretary and Chief Compliance Officer
Treasurer
Assistant Treasurer
Term of Office** and Length of Time Served
President sinceNovember 2013
Vice President since2011
Vice President since October 2013
Secretary since 2002;Chief Compliance Officersince 2005
Treasurer since October2013; Assistant Treasurerfrom November 2011 toOctober 2013
Assistant Treasurer sinceOctober 2013
Principal Occupation(s) orEmployment During Past Five Years
President of Nomura Asset Management U.S.A.Inc. (“NAM-USA”) and Nomura Global Alpha LLC(“NGA”) since November 2013; Managing Directorof Nomura Asset Management Co., Ltd. from 2004to 2007; Senior Managing Director of NomuraFunds Research and Technologies Co., Ltd. from2007 to 2012.
Managing Director of NAM-USA since 2011; Man-aging Director and Head of Merchant Banking atNomura International plc, London since 2006.
Vice President and head of Retail Product Man-agement of NAM-USA since September 2013; As-sociate of NAM-USA from 2008 to 2013.
Chief Compliance Officer of NAM-USA since 2005and Managing Director of NAM-USA since 2007;Chief Compliance Officer of NGA since 2008;Chief Compliance Officer of Nomura CorporateResearch and Asset Management Inc. and No-mura Funds Research and Technologies America,Inc. since 2009; Corporate Secretary of NAM-USAand NGA since November 2013.
Controller and Treasurer of NAM-USA and Trea-surer of NGA since October 2013; Vice Presidentof NAM-USA since 2009; Senior Manager at De-loitte & Touche LLP from 2007.
Associate of NAM-USA since January 2013; Se-nior Associate at Rothstein Kass from 2010 to2012; Associate at Rothstein Kass from 2008 to2010.
KOREA EQUITY FUND, INC.
SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited)
KOREA EQUITY FUND, INC.
REVIEW OF THE FUND’S MARKET PRICE COMPARED TO NET ASSET VALUE (Unaudited)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 atsuch 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 theFund’s shares. The purpose of such review has been to determine whether a discount exists and, if so, whether it wouldbe in shareholders’ overall best interests for the Fund to conduct share repurchases, make an issuer tender offer forshares or consider another means of possibly reducing the discount. During July and August, 2010, in accordance witha Discount Management Plan announced by the Board of Directors of the Fund on June 3, 2010, the Fund conductedopen market share repurchases on the New York Stock Exchange and repurchased 149,609 shares of its common stockfor an aggregate purchase price of $1,483,505.
On December 17, 2010, the Fund completed a tender offer for up to approximately 20 percent of its outstandingshares of common stock. The tender offer was made pursuant to an enhanced Discount Management Plan adopted bythe Board of Directors of the Fund in August 2010. The enhanced Discount Management Plan also contemplates thatthe Board of Directors will annually evaluate whether, taking into account the Fund’s performance, trading discount fromnet asset value and other relevant factors, the Fund should make an additional tender offer between 5 and 15 percentof its outstanding shares.
On March 5, 2012, the Fund completed a tender offer for up to 10 percent of its outstanding shares. The Fundpurchased 1,082,292 shares of common stock, the maximum number of shares covered by the offer, at a price of$10.33, which represented a price equal to 98 percent of the net asset value per share as of the close of trading onthe New York Stock Exchange on March 5, 2012. The total purchase price paid to shareholders was $11,180,076.
The Board of Directors has also considered whether it would be in the best interests of the Fund to convert to anopen-end fund or to an interval fund, which is a form of investment company that makes periodic share repurchases atprices based on NAV. To date, the Board of Directors has not felt that it would be in the best interests of the Fund or itsshareholders to convert to an open-end fund or to have interval fund status. As a “country fund,” the Fund’s NAV is morevolatile than might be the case for a fund with a broader investment focus. The Directors believe that converting the Fundto either an open-end or interval fund would subject the Fund to redemptions or repurchases at times when liquidationof portfolio securities could disadvantage remaining shareholders, and they believe that the recent sometimes extremevolatility of the financial markets in South Korea supports their view. Additionally, since an open-end fund has a limitedability to invest in illiquid securities, such a conversion could hinder the Fund’s ability to pursue its investment objectives.The Directors intend to continue to review, on a quarterly basis, the trading market for the Fund’s shares.
DIVIDEND REINVESTMENT PLANThe 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 distri-butions received on shares owned, unless such shareholder elects to receive all dividends and capital gain distributionsin cash, paid by check and mailed to the shareholder. If a shareholder holds shares in his/her own name, communica-tions regarding the Plan should be addressed to the plan agent, Computershare Trust Company, N.A. (the “Plan Agent”),P.O. Box 43078 Providence, RI 02940-3078. Under the Plan, shareholders appoint the Plan Agent to reinvest dividendsand distributions in shares of the Fund. Such shares will be acquired by the Plan Agent for shareholders either throughopen market purchases if the Fund is trading at a discount or through the issuance of authorized but unissued shares ifthe Fund is trading at net asset value or a premium. If the market price of a share on the payable date of a dividend ordistribution is at or above the Fund’s net asset value per share on such date, the number of shares to be issued by theFund to each shareholder receiving shares in lieu of cash dividends or distributions will be determined by dividing theamount of the cash dividends or distributions to which such shareholder would be entitled by the greater of the net as-set 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 onsuch distribution date is below the net asset value per share, the number of shares to be issued to such shareholderswill 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”) orelsewhere to satisfy dividend and distribution investment requirements under the Plan. Purchases will be suspended onany 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 payabledate, purchases by the Fund are insufficient to satisfy dividend or distribution investments and on the last trading dayimmediately preceding the dividend payable date the closing price or the mean between the closing bid and ask pricesof the shares is lower than or the same as the net asset value per share, the Plan Agent will continue to purchase sharesuntil all investments by shareholders have been completed or the closing price or the mean between the bid and askprices of the shares becomes higher than the net asset value, in which case the Fund will issue the necessary additionalshares 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 shareand if the number of shares previously purchased on the Exchange or elsewhere is insufficient to satisfy dividend in-vestments,the Fund will issue the necessary additional shares from authorized but unissued shares. There will be no bro-kerage charges with respect to shares issued directly by the Fund to satisfy the dividend investment requirements. How-ever, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Fund’s openmarket purchases of shares. In each case, the cost per share of shares purchased for each shareholder’s account willbe the average cost, including brokerage commissions, of any shares purchased in the open market plus the cost of anyshares issued by the Fund. For the fiscal year ended October 31, 2014, the Fund did not issue any new shares for divi-dend reinvestment purposes.
Shareholders who elect to hold their shares in the name of a broker or other nominee should contact such brokeror 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 asrepresenting the total amount registered in the shareholder’s name and held for the account of beneficial owners whoare participating in such Plan. Shareholders that participate in the Plan holding shares in a brokerage account may notbe able to transfer the shares to another broker and continue to participate in the Plan. Shareholders who are partici-pating 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 thePlan may rejoin it at any time. Changes in participation in the Plan should be made by contacting the Plan Agent if theshares are held in the shareholder’s own name and must be in writing and should include the shareholder’s name andaddress as they appear on the account registration. If the shares are held in the name of a broker or other nominee, suchperson should be contacted regarding changes in participation in the Plan. Upon withdrawal from the Plan, the PlanAgent will deliver to the shareholder a certificate or certificates for the appropriate number of full shares and a cash pay-ment for any fractional shares. In lieu of receiving a certificate, the shareholder may request the Plan Agent to sell partor all of the shareholder’s shares at the market price and remit the proceeds to the shareholder, net of any brokeragecommissions. A $2.50 fee will be charged by the Plan Agent upon any cash withdrawal or termination. An election towithdraw from the Plan will, until such election is changed, be deemed to be an election by a shareholder to take all sub-sequent distributions in cash. An election will be effective only for a dividend or distribution if it is received by the PlanAgent not less than 10 days prior to such record date.
The Plan Agent will maintain all shareholder accounts in the Plan, and furnish written confirmation of all transactionsin such account, including information needed by shareholders for tax records. Shares in the account of each Plan par-ticipant may be held by the Plan Agent in non-certificated form in the name of the participant, and each shareholder’sproxy 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 (orrequired to be withheld) on such dividends. Shareholders receiving dividends or distributions in the form of additionalshares pursuant to the Plan should be treated for Federal income tax purposes as receiving a distribution in an amountequal to the amount of money that the shareholders receiving cash dividends or distributions will receive and shouldhave 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 no-tice of the change sent to participants in the Plan at least 90 days before the record date for such dividend. There is noservice charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a servicecharge payable by the participants. All correspondence concerning the Plan, including requests for additional informationabout the Plan, should be directed to the Plan Agent at Computershare Investor Services, P.O. Box 43078, Providence,RI 02940-3078.
KOREA EQUITY FUND, INC.
DIVIDEND REINVESTMENT PLAN-(Continued)
KOREA EQUITY FUND, INC.
Board Review of the Management and Investment Advisory Agreements
The Board of Directors of the Fund (the “Board”) consists of five directors, four of whom are independentor non-interested directors (the “Independent Directors”). The Board considers matters relating to the Fund’smanagement and investment advisory agreements throughout the year. On an annual basis, the Board specif-ically considers whether to approve the continuance of these agreements for an additional one-year period.The specific agreements (the “Agreements”) consist of the Fund’s management agreement with Nomura As-set Management U.S.A. Inc. (the “Manager”), the investment advisory agreement between the Manager andits parent, Nomura Asset Management Co., Ltd. (the “Investment Adviser”), and investment sub-advisoryagreements between the Investment Adviser and two affiliated advisers, Nomura Asset Management HongKong Limited and Nomura Asset Management Singapore Limited (the “Investment Sub-Advisers”).
The Board, including the Independent Directors, most recently approved the continuance of the Agree-ments at a meeting held on August 14, 2014. In connection with their deliberations at that meeting and at aseparate meeting of the Independent Directors held on August 5, 2014, the Independent Directors receivedmaterials that included, among other items, information provided by the Manager regarding (i) the investmentperformance of the Fund, performance of other investment companies and performance of the Fund’s bench-mark, (ii) expenses of the Fund and the management fee paid by the Fund to the Manager, the advisory feepaid by the Manager to the Investment Adviser, and the sub-advisory fees paid by the Investment Adviser tothe Investment Sub-Advisers, (iii) advisory fees charged by the Manager and the Investment Adviser to com-parable accounts and (iv) the profitability of the Agreements to the Manager, the Investment Adviser and theInvestment Sub-Advisers. The Independent Directors sought and received additional information from the In-vestment Adviser. The Independent Directors were advised by, and received materials (including a detailedmemorandum reviewing the applicable legal standards and factors taken into account by the Supreme Courtand other relevant court decisions) from their independent counsel in considering these matters and the con-tinuance of the Agreements.
In considering the continuance of the Agreements at the meeting held on August 14, 2014, the Board, in-cluding the Independent Directors, did not identify any single factor as determinative. Matters considered bythe Directors in connection with their review of the Agreements included the following:
The nature, extent and quality of the services provided to the Fund under the Agreements. The Board con-sidered the nature, extent and quality of the services provided to the Fund by the Manager and the InvestmentAdviser and the resources dedicated by the Manager, the Investment Adviser and the Investment Sub-Advis-ers. These services included both investment advisory services and related services such as the complianceoversight provided by the Manager. Based on its review of all of the services provided by the Manager, the In-vestment Adviser and the Investment Sub-Advisers, the Board, including the Independent Directors, con-cluded 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 re-garding the Fund’s investment performance over a number of time periods, including the one-year, three-yearand five-year periods recently ended. In response to requests by the Independent Directors, the Manager pro-vided information about the performance of the Fund compared to the Fund’s benchmark index, data on theFund’s expense ratio and components thereof, and comparative fee, expense ratio and performance informa-tion for other funds investing primarily in Korean securities.
KOREA EQUITY FUND, INC.
Board Review of the Management and Investment Advisory Agreements (Continued)
The costs of the services to be provided and the profits to be realized by the Manager and its affiliatesfrom their advisory relationships with the Fund. The Board considered the fee payable under the Fund’s man-agement agreement in connection with other information provided for the Directors’ consideration. The Man-ager and its affiliates also act as advisers to additional investment companies registered under the InvestmentCompany Act of 1940 and the Board of Directors of the Fund compared the advisory arrangements and feesfor these companies. The Board also considered information provided by the Manager regarding fees chargedby the Manager and its affiliates to institutional accounts and other investment companies having investmentobjectives similar to the Fund’s investment objective. The Board of Directors of the Fund recognized that thenature of the services provided by the Manager, the Investment Adviser and the Investment Sub-Advisers toother investment vehicles and separate accounts differed from the range of services provided to the Fund.
The Manager also provided the Board with information prepared by the Manager, the Investment Adviserand the Investment Sub-Advisers indicating the profitability of the Agreements to these respective advisers.This presentation included information regarding methodologies used to allocate expenses in considering theprofitability of the Agreements to the Manager, the Investment Adviser and the Investment Sub-Advisers. TheIndependent Directors reviewed this information with the Manager and requested and received certain supple-mental information from the Manager about the expense allocation methodology utilized by the Manager andthe Investment Adviser.
After reviewing the information described above, the Independent Directors concluded that the manage-ment fee proposed to be charged to the Fund was reasonable and the profitability of the Agreements to theManager, the Investment Adviser and the Investment Sub-Advisers support the continuance of the Agreements.
Economies of scale. The Board also considered whether the Manager realizes economies of scale as theFund grows larger and the extent to which the size and U.S. tax constraints impact portfolio management.
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 should be continuedthrough August 31, 2015.
BOARD OF DIRECTORSRodney A. BuckDavid B. ChemidlinYutaka ItabashiE. Han KimMarcia L. MacHargOFFICERSYutaka Itabashi, PresidentHiromichi Aoki, Vice PresidentMaria R. Premole, Vice PresidentNeil A. Daniele, Secretary and Chief Compliance OfficerAmy J. Marose, TreasurerJamie Gannalo, Assistant TreasurerMANAGERNomura Asset Management U.S.A. Inc.Worldwide Plaza309 West 49th StreetNew York, New York 10019-7316Internet Addresswww.nomura.com
INVESTMENT ADVISERNomura Asset Management Co., Ltd.1-12-1 Nihonbashi, Chuo-ku,Tokyo 103-8260, Japan
INVESTMENT SUB-ADVISERSNomura Asset Management Hong Kong Limited30th Floor, Two International Finance Center8 Finance StreetCentral, Hong Kong
Nomura Asset Management Singapore Limited10 Marina BoulevardMarina Bay Financial Centre Tower 2, #33-03Singapore 018983
CUSTODIANBrown Brothers Harriman & Co.50 Post Office SquareBoston, Massachusetts 02110-1548
DIVIDEND PAYING AGENT, TRANSFER AGENTAND REGISTRARComputershare Trust Company, N.A.P. O. Box 43078Providence, Rhode Island 02940-3078
COUNSELSidley Austin LLP787 Seventh AvenueNew York, New York 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMErnst & Young LLP5 Times SquareNew York, New York 10036
KOREA EQUITY FUND, INC.WORLDWIDE PLAZA309 WEST 49TH STREETNEW YORK, NEW YORK 10019-7316This Report, including the Financial Statements, is transmitted to the Share-holders of Korea Equity Fund, Inc. for their information. This is not aprospectus, circular or representation intended for use in the purchase ofshares of the Fund or any securities mentioned in the Report.
