avatar Japan Smaller Capitalization Fund, Inc. Finance, Insurance, And Real Estate
  • Location: New York 
  • Founded:
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    KOREA EQUITY FUND, INC. December 21, 2016 To Our Shareholders: We present the Annual Report of Korea the KOSPI decreased from 2,016.19 to Equity Fund, Inc. (the “Fund”) for the fiscal 2,008.19, or 0.4% in local currency terms, year ended October 31, 2016. which, including the Won depreciation of 2.8% for the quarter, represented a total de- The net asset value per share (“NAV”) of crease of 3.2% in U.S. dollar terms. The the Fund increased by 2.1% and the closing NAV of the Fund decreased by 2.3% and market price of the Fund (on the New York out performed the KOSPI, in U.S. dollar Stock Exchange) increased by 6.2% after terms, by 0.9%. The Fund’s share price de- giving effect to the reinvestment of income creased by 2.0% during the quarter. dividends, ordinary income distributions, and long-term capital gain distributions for the fiscal year ended October 31, 2016. The South Korean Economy closing market price of the Fund on October The Bank of Korea (“BOK”) left its policy 31, 2016 was $7.89, representing a dis- interest rate at 1.25% for the fifth straight count of 7.7% to the NAV of $8.55. The net month in November 2016. This was based assets of the Fund totaled $83,292,709 on on the uncertainty over the policies of the October 31, 2016. incoming U.S. administration, a weaker do- mestic recovery amid a continued rise in The Korea Composite Stock Price Index jobless numbers, and various global risk (“KOSPI”) decreased from 2,029.47 to factors. The BOK noted growing uncertainty 2,008.19, or 1.1% in local currency terms, regarding the economic growth path due to for the fiscal year ended October 31, 2016. recent changes in domestic and global ex- Including the South Korean Won (“Won”) ternal conditions. In terms of policy direc- depreciation of 0.4% during the fiscal year tion, the BOK identified domestic and ended October 31, 2016, this represented a global external uncertainties and changes in total decrease of 1.5% in United States the U.S. Federal Reserve policy as key risks (“U.S.”) dollar terms. The NAV of the Fund for closer monitoring while focusing less on outperformed the KOSPI, in U.S. dollar the increase in domestic household debt. terms, by 3.6% during the fiscal year ended October 31, 2016. Korean exports decreased by 3.2% year- over-year (“yoy”) in October 2016, com- For the quarter ended October 31, 2016, pared with consensus expectations of a de-


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    crease of 3.1% yoy. Exports to the U.S. and ing expenditures by the Hyundai Motor China decreased by 10.3% and 11.3% yoy, Group. The Fund added Mando Corpora- respectively. Meanwhile, exports to Europe tion in November 2015 based on expecta- and the Southeast Asian Nations countries tions of improved earnings along with the increased by 3.8% yoy and 2.5% yoy, re- high-margin automobile component busi- spectively. ness. The Fund increased its position in Samsung Electronics Co., Ltd. Preferred in January 2016 due to expectations of im- South Korean Stock Market proved earnings from smartphone sales The Electronic Appliances and Compo- and a strengthened component business. In nents sector outperformed due to earnings May 2016, the Fund increased its position in growth expectations from rising new smart- Coway Co., Ltd. because the company’s phone shipments, better corporate gover- long-term competitiveness in the domestic nance, and a better outlook for the memory water purifier rental market. The Fund industry. The Iron and Steel sector also out- added Hyundai Engineering & Co., Ltd. in performed due to earnings growth expecta- August 2016 based on improved new order tions from improvements in steel prices momentum. The Fund added Halla Hold- through market consolidation in China. ings Corporation which owns 30.35% of Mando Corporation. The Fund expects im- On the other hand, the Textile and Ap- proved earnings momentum from Mando parel sector underperformed given con- Corporation to support better earnings cerns over weak new order momentum and growth for Halla Holdings Corporation. poor earnings. The Food sector also under- performed due to concerns that a slow- The Fund sold its position in SK Telecom down in domestic demand would cause Co., Ltd. in December 2015 because the earnings momentum to weaken. The Preci- Fund was concerned that slowing average sion Instruments sector underperformed revenue per use (“ARPU”) growth would due to concerns about weakened earnings hurt the company’s earnings going forward. and demanding valuations. The Fund sold its position in E-Mart Co., Ltd. in January 2016 as domestic discount store business growth has been slowing. Portfolio Management Activity The Fund disposed of positions in automo- The Fund added Korea Electric Power bile original equipment manufacturers Corporation in November 2015 based on (“OEM”), such as Kia Motors Corporation in improving financial stability and an attrac- December 2015 and Hyundai Motor Com- tive dividend policy. The Fund also added pany Preferred in August 2016, due to weak Youngone Corporation because of new or- shipment growth. The Fund disposed of der momentum is expected to improve and Lotte Chemical Corporation in August 2016 its attractive valuations. The Fund added In- in order to take profits amid oil price uncer- nocean Worldwide Inc. because the com- tainty. The Fund also disposed of its posi- pany may be a beneficiary of rising market- tion in Hyundai Green Food Co., Ltd. due to


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    concerns that slowing growth among The Fund intends to maintain its over- Hyundai-related companies would hurt rev- weight exposure in the Electrical Appliances enue growth in the company’s catering and Components sector, including an over- business. The Fund disposed of its position weight position in SK Hynix, Inc., due to in Cuckoo Electronics Co., Inc. due to con- stable cash flow generation from the mem- cerns about weaker sales growth for rice ory chip business and its attractive valua- cookers and a slowdown in its rental busi- tions. The Fund increased its position in ness due to competition. The Fund also dis- Samsung Electronics, Co., Ltd., including posed of its position in Lotte Chilsung Bev- preferred shares, given stable earnings from erage Co., Ltd. given a slowdown in the component business and expectations beverage sales in the domestic market. of an improvement in corporate gover- The Fund participated in several initial nance. The Fund expects to keep an over- public offerings which contributed to the weight position in the Financing Business Fund’s realized gains during the fiscal year sector. Bank valuations are still attractive ended October 31, 2016. while profitability remains stable. Over- weight positions in selected insurance stocks will also be maintained due to their Investment Strategy stable revenue generation as well as an im- The Fund has a positive view on Asian proved regulatory environment. markets in light of continuing economic growth and supportive liquidity from central The Fund plans to maintain its under- bank action. The U.S. presidential elections weight exposure in the Chemicals sector did not produce a hawkish stance from the because of expected earnings volatility due U.S. Federal Reserve. Confidence that to uncertainty in oil prices. The Fund main- western economic policy interest rates were tains a positive view of Korea Zinc Co., Ltd., not increasing in the near term supported in the Iron and Steel sector, given stable Asian equity markets. earnings backed by capacity expansion as well as improving precious metals prices. The Fund maintains a positive view of the The Fund maintains its exposure in the Korean equity market. Although the eco- Transportation Equipment sector. Within the nomic recovery could falter and political un- sector, the Fund prefers automobile parts certainty could be prolonged, the Fund be- manufacturers to automobile OEMs as they lieves many stocks are undervalued and offer relatively stable earnings momentum under-owned which should limit further with margin expansion. Attractive valuations downside to the equity market. More corpo- should also offer some downside protection rate earnings reports have exceeded than to their share prices. missed their forecasts and there are more signs of corporate action amongst South Korean companies. The Fund upholds a positive view of stocks that generate stable cash flows with strong market positions.


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    The Fund expects to keep its underweight The Fund appreciates your continuing exposure in the Telecommunications sector. support. Although regulatory risks and market compe- Sincerely, tition have been improving, there are con- cerns of slowdown in ARPU. The Fund also expects to keep its current exposure in the Utilities sector. The Fund upholds its positive view of the sector given steadily improving Yutaka Itabashi earnings and attractive valuations with higher President dividends. DISCLOSURES Sources: Nomura Asset Management U.S.A. Inc., Nomura Asset Management Singapore Limited, and Bloomberg L.P. Past performance is not indicative of future results. There is a risk of loss. The NAV price is adjusted for reinvestment of income dividends, ordinary income distributions, and long- term capital gain distributions. The New York Stock Exchange’s closing market price is adjusted for reinvest- ment of income dividends, ordinary income distributions, and long-term capital gain distributions. 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. This material should not be considered investment advice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these invest- ment strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long term. Comparisons between changes in the Fund’s net asset value or market price per share and changes in the Korea Composite Stock Price Index should be considered in light of the Fund’s investment policy and ob- jective, the characteristics and quality of the Fund’s investments, the size of the Fund, and variations in the Won/U.S. dollar exchange rate. This report is for informational purposes only. Investment products offered are not FDIC insured, may lose value, and are not bank guaranteed. Indices are unmanaged. An index cannot be directly invested into. Certain information discussed in this report may constitute forward-looking statements within the meaning of the U.S. federal securities laws. The Fund believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions and can give no assurance that the Fund's expectations will be achieved. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected.


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    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 avail- able (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the website of the Securities and Exchange 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 website at http://www.sec.gov. Additional information about the Fund's Board of Directors is available (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the website of the SEC at http://www.sec.gov in the Fund's most recent proxy state- ment filing. AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS The 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 website 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 CERTIFICATIONS In December 2016, the Fund filed its Principal 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 Principal Executive Officer and Principal Financial Officer Certifications pursuant to Section 302 of the Sar- banes-Oxley Act of 2002 were filed with the Fund’s Form N-CSR and are available on the SEC’s website at http://www.sec.gov. SHARE REPURCHASES Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that from time to time the Fund may repurchase shares of its common stock in the open market. INTERNET WEBSITE Nomura 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 http://funds.nomura- asset.com.


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    KOREA EQUITY FUND, INC. FUND HIGHLIGHTS—OCTOBER 31, 2016 (Unaudited) KEY STATISTICS Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83,292,709 Net Asset Value per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.55 Closing NYSE Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.89 Percentage Change in Net Asset Value per Share*† . . . . . . . . . . . . . . . . . . . . . . . . . 2.1% Percentage Change in NYSE Market Price*† . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2% MARKET INDEX Percentage change in market index* WON U.S. $ Korea Composite Stock Price Index* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.1%) (1.5%) *From November 1, 2015 through October 31, 2016. †Reflects the percentage change in share price adjusted for reinvestment of income dividends, ordinary income distributions, and long-term capital gain distributions. INDUSTRY DIVERSIFICATION % of % of Net Assets Net Assets Electronic Appliances and Components . . 31.7 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 Transportation . . . . . . . . . . . . . . . . . . . . . . . 2.8 Transportation Equipment . . . . . . . . . . . . . 9.1 Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Financing Business . . . . . . . . . . . . . . . . . . . 8.9 Construction and Engineering . . . . . . . . . . 2.1 Other Products . . . . . . . . . . . . . . . . . . . . . . 7.9 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Media and Entertainment . . . . . . . . . . . . . . 6.8 Precision Instruments . . . . . . . . . . . . . . . . . 0.9 Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 Telecommunications . . . . . . . . . . . . . . . . . . 0.9 Iron and Steel . . . . . . . . . . . . . . . . . . . . . . . 4.8 Retail Trade . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 TEN LARGEST EQUITY HOLDINGS BY FAIR VALUE Fair % of Issuer Value Net Assets Samsung Electronics Co., Ltd. Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,330,189 13.6 SK Hynix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,987,228 8.4 Dongbu Insurance Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,320,157 6.4 Coway Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,215,837 6.3 Hyundai Mobis Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,098,238 4.9 Shinhan Financial Group Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,937,656 4.7 NCsoft Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,696,851 4.4 Korea Electric Power Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,409,488 4.1 Korea Zinc Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,314,955 4.0 Samsung Life Insurance Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,948,319 3.5


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    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Korea Equity Fund, Inc. We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Ko- rea Equity Fund, Inc. (the “Fund”) as of October 31, 2016, and the related statement of operations for the year then ended and statements of changes in net assets and the financial highlights for each of the two years in the period then ended. These financial statements and financial highlights 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 audits. The financial highlights for the years ended October 31, 2014, 2013 and 2012 were audited by other auditors. Those audi- tors expressed an unqualified opinion on those financial statements and financial highlights in their report dated De- cember 29, 2014. We conducted our audits in accordance with the 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 from material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its 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 the purpose of expressing an opinion on the effectiveness of the Fund’s internal con- trol over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test ba- sis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirma- tion of securities owned as of October 31, 2016, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evalu- ating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opin- ion. 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. as of October 31, 2016, and the results of its operations, the changes in net assets, and the financial highlights for each of the respective periods referred to above in conformity with ac- counting principles generally accepted in the United States of America. /s/ RSM US LLP Boston, Massachusetts December 21, 2016


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    KOREA EQUITY FUND, INC. SCHEDULE OF INVESTMENTS* OCTOBER 31, 2016 % of Fair Net Shares Cost Value Assets SOUTH KOREAN EQUITY SECURITIES Chemicals SK Chemicals Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 $ 408,251 $ 313,213 0.4 Manufactures chemicals SK Materials Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,877 941,369 936,508 1.1 Manufactures special gas Wonik Materials Co., Ltd.† . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,968 920,209 929,012 1.1 Manufactures gas products used in the semiconductor industry Total Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,269,829 2,178,733 2.6 Construction and Engineering Hyundai Engineering & Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . 37,707 1,311,267 1,364,377 1.6 Construction business Jusung Engineering Co., Ltd. † . . . . . . . . . . . . . . . . . . . . . . . . 46,600 310,584 384,826 0.5 Develops semiconductor manufacturing equipment Total Construction and Engineering . . . . . . . . . . . . . . . . . . . . 1,621,851 1,749,203 2.1 Electronic Appliances and Components Coway Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,685 4,028,456 5,215,837 6.3 Manufactures environment-related products Samsung Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 7,919 5,783,870 11,330,189 13.6 Produces consumer electronic products Samsung Electronics Co., Ltd. Preferred . . . . . . . . . . . . . . . . 2,470 2,380,626 2,839,688 3.4 Produces consumer electronic products SK Hynix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,224 5,042,783 6,987,228 8.4 Semiconductor products Total Electronic Appliances and Components . . . . . . . . . . . . 17,235,735 26,372,942 31.7 Financing Business Hana Financial Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,695 1,551,157 1,823,757 2.2 Banking and financial services KB Financial Group Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,925 990,188 1,141,926 1.4 Provides various financial products and services Samsung Securities Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 581,008 512,725 0.6 Provides securities and investment banking services Shinhan Financial Group Co., Ltd. . . . . . . . . . . . . . . . . . . . . . 102,868 3,812,711 3,937,656 4.7 Provides various financial products and services Total Financing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,935,064 7,416,064 8.9 See notes to financial statements.


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    KOREA EQUITY FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) OCTOBER 31, 2016 % of Fair Net Shares Cost Value Assets Insurance Dongbu Insurance Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 85,717 $ 3,907,119 $ 5,320,157 6.4 Non-life insurance Samsung Life Insurance Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . 30,565 3,056,636 2,948,319 3.5 Life insurance Total Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,963,755 8,268,476 9.9 Iron and Steel Korea Zinc Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,346 2,417,708 3,314,955 4.0 Non-ferrous metal products POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,120 554,282 645,492 0.8 Integrated steel producer Total Iron and Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,971,990 3,960,447 4.8 Media and Entertainment Innocean Worldwide Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,664 2,184,451 1,976,016 2.4 Provides marketing and communication services NCsoft Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,011 2,522,385 3,696,851 4.4 Online gaming Total Media and Entertainment . . . . . . . . . . . . . . . . . . . . . . . . 4,706,836 5,672,867 6.8 Other Products Caregen Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,895 395,210 321,652 0.4 Manufactures cosmeceuticals and dermal fillers I Controls Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,194 458,107 428,336 0.5 Provides information technology and products for buildings Interojo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,249 1,283,607 2,629,173 3.2 Manufactures contact lens KT&G Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,178 2,257,993 2,384,991 2.8 Produces cigarettes NDFOS Co., Ltd.† . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 533,103 387,588 0.5 Manufactures double-faced tapes and window films Samsung Biologics Co., Ltd.†^ . . . . . . . . . . . . . . . . . . . . . . . 3,786 453,143 449,477 0.5 Manufactures biological products Total Other Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,381,163 6,601,217 7.9 Precision Instruments i-SENS, Inc.† . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,862 711,528 709,695 0.9 Develops and produces medical devices Total Precision Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . 711,528 709,695 0.9 See notes to financial statements.


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    KOREA EQUITY FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) OCTOBER 31, 2016 % of Fair Net Shares Cost Value Assets Retail Trade GS Retail Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,430 $ 393,461 $ 359,116 0.4 Operates various convenience stores Total Retail Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393,461 359,116 0.4 Services Samsung C&T Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,370 913,065 898,049 1.1 Business support services and resort operation activities Total Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913,065 898,049 1.1 Telecommunications Intellian Technologies, Inc.† . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 863,034 715,816 0.9 Manufactures satellite antenna systems Total Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863,034 715,816 0.9 Transportation CJ Korea Express Corporation† . . . . . . . . . . . . . . . . . . . . . . . 4,500 499,433 789,581 0.9 Transportation of freight and cargo Hyundai Glovis Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,268 1,598,586 1,555,153 1.9 Provides logistic services Total Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,098,019 2,344,734 2.8 Transportation Equipment Halla Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,381 1,183,303 1,089,499 1.3 Manufactures automobile parts Hyundai Mobis Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,134 4,207,166 4,098,238 4.9 Manufactures automotive parts Korea Autoglass Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 21,480 202,312 328,141 0.4 Manufactures automotive glasses Mando Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,037 1,494,297 2,118,148 2.5 Manufactures automobile parts Total Transportation Equipment . . . . . . . . . . . . . . . . . . . . . . . . 7,087,078 7,634,026 9.1 Utilities Korea Electric Power Corporation . . . . . . . . . . . . . . . . . . . . . . 79,304 3,894,563 3,409,488 4.1 Transmission and distribution of electricity Total Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,894,563 3,409,488 4.1 See notes to financial statements.


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    KOREA EQUITY FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) OCTOBER 31, 2016 % of Fair Net Shares Cost Value Assets Wholesale Hansae Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,379 $ 1,011,440 $ 913,878 1.1 Manufactures and distributes apparels Hwaseung Enterprise Co., Ltd.† . . . . . . . . . . . . . . . . . . . . . . . 104,599 1,416,912 1,369,641 1.6 Manufactures athletic shoes Samchuly Bicycle Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,160 406,201 297,375 0.4 Manufactures bicycles Youngone Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,975 3,380,492 2,412,909 2.9 Outdoor sportswear and shoes Total Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,215,045 4,993,803 6.0 TOTAL SOUTH KOREAN EQUITY SECURITIES . . . $70,262,016 $83,284,676 100.0 FOREIGN CURRENCY South Korean Won . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 524,426 $ 522,438 0.6 Non-interest bearing account TOTAL FOREIGN CURRENCY . . . . . . . . . . . . . . . . . . . 524,426 522,438 0.6 TOTAL INVESTMENTS AND FOREIGN CURRENCY $70,786,442 $83,807,114 100.6 LIABILITIES LESS OTHER ASSETS, NET . . . . . . . . . (514,405) (0.6) NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83,292,709 100.0 *The description following each investment is unaudited and not covered by the Report of Independent Registered Public Accounting Firm. †Non-income producing security. ^Security acquired as a result of an IPO participation and classified as a Level 2 security in the fair value hierarchy in Note 5. Portfolio securities and foreign currency holdings were translated at the following exchange rate as of October 31, 2016. South Korean Won KRW 1,145.55 = USD $1.00 See notes to financial statements.


  • Page 12

    KOREA EQUITY FUND, INC. STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2016 ASSETS: Investments in South Korean equity securities, at fair value (cost—$70,262,016) . . . . . . . . . $83,284,676 Foreign currency, at fair value (cost—$524,426) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522,438 Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468,294 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,009 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,632 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,428,049 LIABILITIES: Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880,988 Accrued management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,648 Accrued directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,947 Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,757 Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,135,340 NET ASSETS: Capital stock (9,740,623 shares of capital stock outstanding, 100,000,000 shares authorized, par value $0.10 each) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 974,062 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,768,066 Accumulated net realized gain on investments and foreign currency transactions . . . . . . . . 1,633,454 Net unrealized appreciation on investments and foreign currency transactions . . . . . . . . . . 13,019,919 Accumulated net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (102,792) Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83,292,709 Net asset value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.55 See notes to financial statements.


  • Page 13

    KOREA EQUITY FUND, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2016 INCOME: Dividend income (net of $208,661 of withholding taxes) . . . . . . . . . . . . . . . . . . . . . . . . . $1,055,953 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,056,262 EXPENSES: Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 692,560 Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,816 Directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,662 Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,878 Auditing and tax reporting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,272 Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,060 Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,514,248 INVESTMENT LOSS—NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (457,986) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Realized gain on investments and foreign currency transactions: Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,681,225 Net realized gain on foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,890 Net realized gain on investments and foreign currency transactions . . . . . . . . . . . . . . . 2,735,115 Net change in unrealized depreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . (1,309,696) Net change in unrealized appreciation on foreign currency transactions and translation 649,085 Net realized and unrealized gain on investments and foreign currency transactions and translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,074,504 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,616,518 See notes to financial statements.


  • Page 14

    KOREA EQUITY FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS For the Year Ended October 31, 2016 2015 FROM OPERATIONS: Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (457,986) $ (249,305) Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,681,225 4,053,778 Net realized gain (loss) on foreign currency transactions . . . . . . . . . . . 53,890 (101,080) Net change in unrealized depreciation on investments . . . . . . . . . . . . . (1,309,696) (2,020,587) Net change in unrealized appreciation (depreciation) on foreign currency transactions and translation . . . . . . . . . . . . . . . . . . . . . . . . . . 649,085 (3,641,172) Net Increase (Decrease) in net assets resulting from operations . . . . . 1,616,518 (1,958,366) FROM DISTRIBUTIONS TO SHAREHOLDERS: Ordinary income distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,193,226) — Capital gains distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,754,286) (865,941) Decrease in net assets derived from distributions to shareholders . . . (2,947,512) (865,941) NET ASSETS: Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,623,703 87,448,010 End of year (including accumulated/undistributed net investment income (loss) of ($102,792) and $1,176,981, respectively) . . . . . . . . . . . . . . . . $83,292,709 $84,623,703 See notes to financial statements.


  • Page 15

    KOREA EQUITY FUND, INC. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies term to maturity at the date of purchase exceeded 60 days. However, the Board of Directors of the Fund Korea Equity Fund, Inc. (the “Fund”) is registered may from time to time utilize a valuation method under the Investment Company Act of 1940, as other than amortized cost when appropriate, for ex- amended (the "Investment Company Act"), as a non- ample, when the credit worthiness of the issuer is diversified, closed-end management investment impaired or for other reason. Securities and other as- company. The Fund was incorporated in Maryland sets, including futures contracts and related options, on September 7, 1993 and investment operations are stated at fair value or otherwise at fair value as commenced on December 3, 1993. The Fund’s in- determined in good faith by or under the direction of vestment objective is to seek long-term capital ap- the Board of Directors of the Fund. preciation through investments primarily in equity securities of South Korean companies. (b) Foreign Currency Transactions—Transactions denominated in South Korean Won (“Won”) are The accompanying financial statements have recorded in the Fund’s records at the prevailing rate been prepared in accordance with United States at the time of the transaction. Asset and liability ac- (“U.S.”) generally accepted accounting principles counts that are denominated in Won are adjusted to (“GAAP”) and are stated in United States dollars. The reflect the current exchange rate at the end of the Fund is an investment company that follows the ac- period. Transaction gains or losses resulting from counting and reporting guidance in accordance with changes in the exchange rate during the reporting FASB Accounting Standards Codification Topic 946. period or upon settlement of foreign currency trans- The following is a summary of the significant ac- actions are included in the results of operations for counting and reporting policies used in preparing the the current period. financial statements. The net assets of the Fund are presented at the (a) Valuation of Securities—Investments traded on exchange rates and fair values on October 31, 2016. stock exchanges are valued at the last sale price on The Fund does isolate that portion of the results of the principal market on which such securities are operations arising as a result of changes in the for- traded as of the close of business on the day the se- eign exchange rates on investments from the fluctu- curities are being valued or, lacking any sales, at the ations arising from changes in the market prices of last available bid price. Securities traded in the U.S. securities held at October 31, 2016. Net realized over-the-counter market (as opposed to the over- gains or losses on investments include gains or the-counter market for foreign investors in South Ko- losses arising from sales of portfolio securities and rea) are valued at the last reported sales price as of sales and maturities of short-term securities. Net re- the close of business on such day the securities are alized gains or losses on foreign currency transac- being valued or, if none is available, at the mean of tions arise from sales of foreign currencies, currency the bid and offer price at the close of the day or, if gains or losses realized on securities transactions none is available, at the last reported sales price between trade and settlement date, and the differ- available to the Fund. Securities for which market ence between the amounts of dividends, interest, quotations are not readily available and restricted se- and foreign withholding taxes recorded on the curities are valued in good faith at fair value using Fund’s books and the U.S. dollar equivalent of the methods determined by the Board of Directors. amounts actually received or paid. Short-term debt securities which mature in 60 days or less are valued at amortized cost, which approxi- (c) Security Transactions, Investment Income, and mates fair value, if their original maturity at the date Distributions to Shareholders—Security transactions of purchase was 60 days or less, or by amortizing are accounted for on the trade date. Dividend in- their value on the 61st day prior to maturity if their come and distributions are recorded on the ex-divi- dend dates and interest income is recorded on the


  • Page 16

    KOREA EQUITY FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) accrual basis. Realized gains and losses on the sale investments and foreign currency transactions was of investments are calculated on a first-in, first-out decreased by $371,439. These adjustments were a basis. result of the reclassification of foreign exchange Distributions from net investment income and net losses, disposition of passive foreign investment realized capital gains are determined in accordance companies, and net operating loss. These adjust- with federal income tax regulations, which may differ ments had no impact on net assets. from U.S. GAAP. To the extent these “book/tax” dif- (e) Income Taxes—A provision for U.S. income ferences are permanent in nature (i.e., that they re- taxes has not been made since it is the intention of sult from other than timing of recognition—“tempo- the Fund to continue to qualify as a regulated invest- rary”), such accounts are reclassified within the ment company under the Internal Revenue Code capital accounts of the Fund based on their federal and to distribute within the allowable time limit all tax-basis treatment; temporary differences do not taxable income to its shareholders. require reclassification. Dividends and distributions Under the tax treaty between South Korea and the which exceed net realized capital gains for financial U.S., a withholding tax is imposed on dividends at reporting purposes, but not for tax purposes, are re- the rate of 16.5% and such withholding taxes are re- ported as distributions in excess of net realized cap- flected as a reduction of the related revenue. There ital gains. is no withholding tax on realized gains. Pursuant to a securities lending agreement with In accordance with U.S. GAAP requirements re- Brown Brothers Harriman & Co., the Fund may lend garding accounting for uncertainties in income securities to qualified institutions. It is the Fund’s taxes, management has analyzed the Fund’s tax po- policy that, at origination, all loans shall be secured sitions taken or expected to be taken on federal and by collateral of at least 102% of the value of U.S. se- state income tax returns for all open tax years (the curities loaned and 105% of the value of foreign se- current and the prior three tax years), and has con- curities loaned. It is the Fund’s policy that collateral cluded that no provision for income tax is required in equivalent to at least 100% of the fair value of secu- the Fund’s financial statements. The Fund recog- rities on loan must be maintained at all times (when nizes interest and penalties, if any, related to uncer- applicable). Collateral is provided in the form of tain tax positions as income tax expense in the cash, which would be invested in certain money statement of operations. During the current year and market funds. The Fund is entitled to receive all in- for the prior three tax years, the Fund did not incur come on securities loaned, in addition to a portion of any interest or penalties. the income earned as a result of the lending transac- tion. Although each security loan is fully collateral- (f) Subscription for New Shares—As part of their ized, there are certain risks. On November 21, 2008, annual corporate action matters, certain South Ko- the Fund suspended its participation in the securities rean companies offer rights to their shareholders to lending program. The Fund may resume its partici- subscribe to new shares which are eligible for a por- pation in the future. During the fiscal year ended Oc- tion of the dividends paid on existing shares in the tober 31, 2016, the Fund did not earn any fees from year of subscription. lending fund portfolio securities, pursuant to the se- (g) Use of Estimates in Financial Statement Prepa- curities lending agreement. ration—The preparation of financial statements in (d) Capital Account Reclassification—For the fis- accordance with U.S. GAAP requires management cal year ended October 31, 2016, the Fund’s accu- to make estimates and assumptions that affect the mulated net investment loss was decreased by reported amounts and disclosures in the financial $371,439 and the accumulated net realized gain on statements. Actual results could differ from these es- timates.


  • Page 17

    KOREA EQUITY FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) (h) Concentration of Risk—A significant portion of Limited (“NAM-Singapore”), as investment sub-ad- the Fund’s net assets consists of South Korean se- visers to the Fund. curities which involve certain considerations and risks not typically associated with investments in the As compensation for its services to the Fund, the U.S. In addition to the smaller size, less liquidity and Manager receives a monthly fee computed at the an- greater volatility, the South Korean securities market nual rate of 0.85% of the Fund’s average weekly net is less developed than the U.S. securities market and assets. Under the management agreement, the Fund there is often substantially less publicly available in- incurred fees to the Manager of $692,560 for the fis- formation about South Korean issuers than there is cal year ended October 31, 2016. Under the invest- about U.S. issuers. Future economic and political ment advisory agreement, NAM earned investment developments in South Korea could adversely affect advisory fees of $181,492 from the Manager, not the the liquidity or value, or both, of securities in which Fund, for the fiscal year ended October 31, 2016. the Fund is invested. Further, the Fund may be ex- Under the investment sub-advisory agreements, posed to currency devaluation and other exchange NAM-Hong Kong and NAM-Singapore earned sub- rate fluctuations. advisory fees of $40,331 and $181,492, respectively, from NAM, not the Fund, for the fiscal year ended (i) Indemnifications—Under the Fund’s organiza- October 31, 2016. At October 31, 2016, the manage- tional documents, its officers and directors are in- ment fee payable to the Manager by the Fund was demnified against certain liabilities arising from the $61,648. performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters Certain officers and/or directors of the Fund are into contracts that contain a variety of representa- officers and/or directors of the Manager. Affiliates of tions which provide general indemnifications. The Nomura Holdings, Inc. (the Manager’s indirect par- Fund’s maximum exposure under these agreements ent) did not earn any fees in commissions on the ex- is unknown as this would involve future claims that ecution of portfolio security transactions for the fis- may be made against the Fund that have not yet oc- cal year ended October 31, 2016. The Fund pays curred. However, based on the Fund’s experience, each Director not affiliated with the Manager an an- the Fund expects the risk of loss to be remote and nual fee of $17,000 plus $2,000 per meeting at- as such no additional accruals were recorded on the tended. In addition, the Fund pays each Director not Statement of Assets and Liabilities. affiliated with the Manager $1,000 per telephone meeting attended together with actual expenses re- 2. Management Agreement and lated to attendance at meetings. The Chairman of Transactions With Affiliated Persons the Board, presently Rodney A. Buck, is paid an ad- ditional annual fee of $5,000. The Chairman of the Nomura Asset Management U.S.A. Inc. (“NAM- Audit Committee, presently David B. Chemidlin, is USA” or the “Manager”) acts as the Manager of the paid an additional annual fee of $2,000. Such fees Fund pursuant to a management agreement. Under and expenses for unaffiliated Directors aggregated the agreement, the Manager provides all office $183,662 for the fiscal year ended October 31, 2016. space, facilities and personnel necessary to perform its duties. Pursuant to such management agreement, the Manager has retained its parent company, No- 3. Purchases and Sales of Investments mura Asset Management Co., Ltd. (“NAM”), as in- vestment adviser to the Fund, and Nomura Asset Purchases and sales of investments, exclusive of Management Hong Kong Limited (“NAM-Hong foreign currency and investments in short-term se- Kong”) and Nomura Asset Management Singapore curities, for the fiscal year ended October 31, 2016 were $53,375,132 and $56,061,474, respectively.


  • Page 18

    KOREA EQUITY FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) 4. Federal Income Taxes The tax character of distributions paid during the fiscal years ended October 31, 2016 and October As of October 31, 2016, net unrealized apprecia- 31, 2015 were as follows: tion on investments, exclusive of foreign currency, October-16 October-15 for federal income tax purposes was $12,455,300, of which $15,343,638 related to appreciated securities Ordinary Income $2,288,072 $0 and $2,888,338 related to depreciated securities. Capital Gains $659,440 $865,941 The cost of investments, exclusive of foreign cur- rency of $524,426 at October 31, 2016, for federal income tax purposes was $70,829,376. 5. Fair Value Measurements At October 31, 2016, the components of accumu- In accordance with U.S. GAAP, fair value is de- lated earnings on a tax basis were as follows: fined as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly Unrealized appreciation on investments transaction between market participants at the mea- and foreign currency transactions $12,452,558 (a) surement date. U.S. GAAP also establishes a frame- Undistributed long-term capital gains 1,135,289 work for measuring fair value, and a three-level hier- Undistributed ordinary income 962,734 archy for fair value measurements based upon the Total accumulated earnings $14,550,581 ____________ transparency of inputs to the valuation of an asset or ____________ liability. Inputs may be observable or unobservable (a) The difference between book basis and tax basis and refer broadly to the assumptions that market unrealized appreciation is attributable to the tax de- participants would use in pricing the asset or liability. ferral of losses on wash sales and the tax treatment Observable inputs reflect the assumptions market of passive foreign investment companies. participants would use in pricing the asset or liability The Fund paid an ordinary income distribution of based on market data obtained from sources inde- $2,288,072, which represents $0.2349 per share and pendent of the Fund. Unobservable inputs reflect the a long-term capital gains capital gains distribution of Fund’s own assumptions about the assumptions $659,440, which represents $0.0677 per share to that market participants would use in pricing the as- shareholders of record as of December 21, 2015. set or liability developed based on the best informa- The distribution was paid on December 28, 2015. tion available in the circumstances. Each investment is assigned a level based upon the observability of The Fund paid a long-term capital gains distribu- the inputs which are significant to the overall valua- tion of $865,941, which represents $0.0889 per tion. The three-tier hierarchy of inputs is summarized share to shareholders of record as of December 22, below. 2014. The distribution was paid on December 29, • Level 1—quoted prices in active markets for 2014. identical 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)


  • Page 19

    KOREA EQUITY FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) The following table summarizes the valuation of price equal to 98 percent of the net asset value per the Fund’s investments by the above fair value hier- share as of the close of trading on the New York archy levels as of October 31, 2016. Stock Exchange on March 5, 2012. As a result of the Investments in tender offer, $11,180,076 was distributed to the Level Securities shareholders and there was a $0.02 increase to the Level 1 . . . . . . . . . net asset value per share. Equity Securities* $82,835,199 On December 17, 2015, the Board of Directors of Level 2 . . . . . . . . . the Fund approved an updated Discount Manage- Equity Securities* 449,477 ment Plan. Under the updated plan, the Fund is au- Level 3. . . . . . . . . . . . . . . . -0- thorized to make open-market share repurchases on Total . . . . . . . . . . . $83,284,676 the New York Stock Exchange. Such repurchases may be made from time to time as authorized by the *Please refer to the Schedule of Investments for breakdown of the valuation by industry type. Board of Directors. During the fiscal year ended October 31, 2016, there were no transfers between Level 1, Level 2, or Level 3 securities. 7. Subsequent Events As of October 31, 2016, the Fund held a Level 2 On December 20, 2016, a large shareholder in the security. This security is an IPO that was offered and Fund filed a Schedule 13D with the Securities and purchased prior to October 31, 2016, but did not be- Exchange Commission that included a letter sug- gin trading until after October 31, 2016. As a result, gesting that the Board of Directors take steps to liq- this security was fair valued at the offering price ad- uidate the Fund. The Board of Directors is currently justed for the KOSPI daily movement between the reviewing the letter and has not decided upon any purchase date and October 31, 2016. action at this time. During the fiscal year ended October 31, 2016, the Fund did not hold any instrument which used significant unobservable inputs (Level 3) in determin- ing fair value. 6. Share Repurchases and Discount Management Plan The Fund announced a tender offer on June 7, 2011. This tender offer was for up to 10 percent of the Fund’s outstanding stock during the fourth quar- ter of 2011 if the Fund’s stock traded at a specific discount during the third quarter of 2011. The stock did trade at the specific discount. The Fund com- menced an offer for up to 1,082,292 shares of its common stock on January 31, 2012. The offer ex- pired on March 5, 2012, at which time the Fund pur- chased the maximum number of shares covered by the offer at a price of $10.33, which represented a


  • Page 20

    KOREA EQUITY FUND, INC. FINANCIAL HIGHLIGHTS For a share of common stock outstanding throughout each year: For the Fiscal Year Ended October 31, 2016 2015 2014 2013 2012 Net asset value, beginning of year . . . . . . . . . . . $8.69 $8.98 $10.17 $10.64 $13.69 Investment operations: Net investment loss* . . . . . . . . . . . . . . . . . . . . (0.05) (0.03) (0.07) (0.08) (0.10) Net realized and unrealized gain (loss) on investments and foreign currency . . . . . . . . 0.21 (0.17) 0.13 0.66 0.10 Total from investment operations . . . . . . . . . . . . .. 0.16 (0.20) 0.06 0.58 — Less Distributions: Distributions from capital gains . . . . . . . . . . . . (0.18) (0.09) (1.25) (1.05) (3.07) Distributions from ordinary income . . . . . . . . . (0.12) — — — — Total from distributions . . . . . . . . . . . . . . . . . . . . .. (0.30) (0.09) (1.25) (1.05) (3.07) Fund Share Transactions Effect of Tender Offer** . . . . . . . . . . . . . . . . . . — — — — 0.02 Total Fund share transactions: . . . . . . . . . . . . . . . — — — — 0.02 Net asset value, end of year . . . . . . . . . . . . . . . . $8.55 $8.69 $8.98 $10.17 $10.64 Market value, end of year . . . . . . . . . . . . . . . . . . . $7.89 $7.75 $8.23 $9.09 $9.65 Total investment return*** . . . . . . . . . . . . . . . . . . . 6.2% (4.8%) 4.9% 4.9% 3.6% Ratios/ Supplemental Data: . . . . . . . . . . . . . . . . . Net assets, end of year (000) . . . . . . . . . . . . . . $83,293 $84,624 $87,448 $99,074 $103,615 Ratio of expenses to average net assets . . . . . 1.84% 1.47% 1.49% 1.57% 1.81% Ratio of net loss to average net assets . . . . . . (0.56%) (0.30%) (0.70%) (0.81%) (0.90%) Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . 66% 46% 19% 64% 77% * Based on average shares outstanding. ** Increase is due to Tender Offer (See Note 6). *** Based on market value per share, adjusted for reinvestment of income dividends, ordinary income distributions, long- term capital gain distributions, and capital share transactions. Total return does not reflect sales commissions. See notes to financial statements.


  • Page 21

    KOREA EQUITY FUND, INC. SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited) The 2016 Annual Meeting of the Shareholders of the Fund was held at the offices of NAM-USA at Worldwide Plaza, 309 West 49th Street, New York, New York on October 31, 2016. The purpose of the meeting was (1) to elect two Class I Directors, to serve for a term to expire in 2019, (2) to elect one Class III Director, to serve for a term to expire in 2018 and (3) to transact such other business as may properly come before the meeting or any adjournment or postponement thereof. The meeting was adjourned due to lack of sufficient votes to act upon the election of two Di- rectors to serve as Class I Directors and one Director to serve as a Class III Director. The meeting reconvened on De- cember 1, 2016 to allow the Fund’s shareholders additional time to vote. Each of E. Han Kim, Marcia L. MacHarg and David B. Chemidlin did not receive the vote of a majority of outstand- ing shares that was required for his or her re-election. Under the Fund’s charter and by-laws, each of Mr. Kim, Ms. MacHarg and Mr. Chemidlin will continue to serve as a Director until his or her successor is elected and qualifies. The results of the voting at the Annual Meeting were as follows: 1. To elect two Class I Directors: %of % of Shares Voted Outstanding Shares Voted Outstanding Shares Broker For Shares Withhold Authority Shares Abstained Non-Vote E. Han Kim 4,142,781 42.53% 48.69% - - 4,103,851 42.13% 49.09% - - Marcia L. MacHarg 2. To elect one Class III Director: %of % of Shares Voted Outstanding Shares Voted Outstanding Shares Broker For Shares Withhold Authority Shares Abstained Non-Vote David B. Chemidlin 4,114,155 42.24% 4,770,955 48.98% - - INDEPENDENT DIRECTORS Biographical and other information relating to the non-interested Directors of the Fund is set out below. Term of Position(s) Number of Funds Other Public Office and in the Fund Directorships Held with Length of Principal Occupation(s) Complex Over- Held by Name and Age the Fund Time Served During Past Five Years seen by Director* Director Rodney A. Buck (68) Class III Director Owner, Buck Capital Management Two registered None Director and since 2006; (private investment management investment Chairman of Chairman of firm) since 2005; Chairman of the companies the Board the Board Dartmouth-Hitchcock Health Care consisting of since 2010. Investment Committee since 2011. two portfolios E. Han Kim (70) Class I Director Everett E. Berg Professor of Busi- Two registered None Director since 2010. ness Administration and Director of investment Mitsui Financial Research Center at companies Ross Business School, University consisting of of Michigan since 1980; Advisor to two portfolios CEO of Taubman Company from 2009 to July 2016; Non-executive Chair of the Board of Korea Tele- com (KT) from 2009-2014. David B. Chemidlin (59) Class III Director and Founder of AbidesWorks LLC since Two registered None Director and Chairman of November 2016; Corporate Con- investment Chairman of the Audit troller, Advance Magazine Publish- companies the Audit Committee ers, Inc. (d/b/a Conde Nast) from consisting of Committee since 2006. 1995 to September 2016. two portfolios Marcia L. MacHarg (68) Class I Director Director Partner, Debevoise & Plimpton LLP, Two registered None since 2013. 1987-2012; Of Counsel, Debevoise & investment Plimpton LLP since 2013; Trustee, companies Board of Trustees of Smith College consisting of since 2014 and Chair of Audit Com- two portfolios mittee since July 2016; Member of the Executive Committee of the Friends of Smith College Libraries from 2013 to June 2015. *In addition to the Fund, the “Fund Complex” includes Japan Smaller Capitalization Fund, Inc.


  • Page 22

    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 the Fund is set out below: Number of Funds in Other Term of the Fund Public Position(s) Office and Complex* Directorships Held with Length of Principal Occupation(s) Overseen by Held by Name and Age the Fund Time Served During Past Five Years the Director ** Director Yutaka Itabashi (51)* President President Senior Managing Director of NAM Two registered None and Class II and Director since April 2015; President and investment Director since 2013 Chief Executive Officer of NAM- companies USA and President of Nomura consisting of Global Alpha LLC ("NGA") since two portfolios 2013; Managing Director of NAM from 2012 to 2013; Senior Manag- ing Director of Nomura Funds Re- search and Technologies Co., Ltd. from 2009 to 2012. * Mr. Itabashi is an “interested person” of the Fund based on his positions with NAM-USA and NAM. Mr. Itabashi is also a director of Japan Smaller Capitalization Fund, Inc., for which NAM-USA acts as manager and for which NAM acts as investment 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 standing Nominating Committee, and a standing Governance and Compliance Committee, each of which consists of the Directors who are not “interested persons” of the Fund within the meaning of the Investment Company Act and are “independent” 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 standing Compensation Committee. During the fiscal year ended October 31, 2016, the Board of Directors (or the Independent Directors of the Fund meeting as a group) held twenty-three meetings, the Audit Committee held two meetings and the Nomi- nating Committee held one meeting. The Governance and Compliance Committee met as part of each quar- terly meeting of the Board of Directors. A significant number of the Board and Independent Director meetings related to consideration of the proposed merger announced in July 2016 that did not move forward. Each in- cumbent Director attended at least 75% of the aggregate number of meetings of the Board of Directors held during the period for which they served and, if a member, of the aggregate number of meetings of the Audit and Nominating Committees held during the period for which they served.


  • Page 23

    KOREA EQUITY FUND, INC. SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited) 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 re- lating to the officers of the Fund is set out below: Name, Address* and Position(s) Held Term of Office** and Principal Occupation(s) or Age of Officers with the Fund Length of Time Served Employment During Past Five Years Yutaka Itabashi (51) President and President and Director Senior Managing Director of NAM since April Director since 2013 2015; President and Chief Executive Officer of NAM-USA and President of NGA since 2013; Man- aging Director of NAM from 2012 to 2013; Senior Managing Director of Nomura Funds Research and Technologies Co., Ltd. from 2009 to 2012. Takeshi Toyoshima (50) Vice President Vice President since Chief Administrative Officer of NAM-USA since August 2016 August 2016; Head of Client Services and Market- ing of NAM-USA from April 2015 to August 2016; Senior Portfolio Manager of NAM from 2008 to 2015. Maria R. Premole (54) Vice President Vice President since Vice President and Head of Retail Product Man- 2013 agement of NAM-USA since 2013; Associate of NAM-USA from 2008 to 2013. Neil Daniele (56) Secretary Secretary since 2002; Chief Compliance Officer of NAM-USA since 2005 and Chief Chief Compliance Offi- and Managing Director of NAM-USA since 2007; Compliance cer since 2005 Chief Compliance Officer of NGA since 2008; Officer Chief Compliance Officer of Nomura Corporate Research and Asset Management Inc. and No- mura Funds Research and Technologies America, Inc. since 2009; Corporate Secretary of NAM-USA and NGA since November 2013. Amy J. Marose (39) Treasurer Treasurer since 2013; Executive Director of NAM-USA since April 2015; Assistant Treasurer from Controller and Treasurer of NAM-USA and Trea- 2011 to 2013 surer of NGA since 2013; Vice President of NAM- USA from 2009 to April 2015. Kelly S. Lee (34) Assistant Assistant Treasurer Vice President of NAM-USA since July 2015; Fund Treasurer since August 2015 Controller at JP Morgan Chase & Co. from Novem- ber 2014 to July 2015; Financial Services Senior at Ernst & Young LLP from 2010 to 2014. ** 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.


  • Page 24

    KOREA EQUITY FUND, INC. TAX INFORMATION (Unaudited) The Fund is required by subchapter M of the Internal Revenue Code of 1986, as amended, to advise shareholders within 60 days of the Fund’s fiscal year ended October 31, 2016 as to the federal tax status of distributions received by shareholders during such fiscal year. Accordingly, the Fund designates $208,661 as foreign tax credit with the as- sociated gross income of $1,264,614. Shareholders should not use the above information to prepare their tax returns. The information necessary to com- plete income tax returns will be included with the Form 1099 DIV which will be sent to shareholders separately in January 2017. 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 at such a premium, shares of the Fund also have traded at a discount from NAV. Since the Fund was established, the Board of Directors on a quarterly basis has reviewed the market 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. During July and August, 2010, in accordance with a Discount Management Plan announced by the Board of Directors of the Fund on June 3, 2010, the Fund conducted open market share repurchases on the New York Stock Exchange and repurchased 149,609 shares of its common stock for 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 outstanding shares of common stock. The tender offer was made pursuant to an enhanced Discount Management Plan adopted by the Board of Directors of the Fund in August 2010. The enhanced Discount Management Plan also contemplates that the Board of Directors will annually evaluate whether, taking into account the Fund’s performance, trading discount from net asset value and other relevant factors, the Fund should make an additional tender offer between 5 and 15 percent of its outstanding shares. On March 5, 2012, the Fund completed a tender offer for up to 10 percent of its outstanding shares. The Fund purchased 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 on the New York Stock Exchange on March 5, 2012. The total purchase price paid to shareholders was $11,180,076. On December 17, 2015, the Board of Directors of the Fund approved an updated Discount Management Plan. Under the updated plan, the Fund is authorized to make open-market share repurchases on the New York Stock Ex- change. Such repurchases may be made from time to time as authorized by the Board of Directors. 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 felt that it would be in the best interests of the Fund or its shareholders to convert to an open-end fund or to have interval fund status. As a “country fund,” the Fund’s NAV is more volatile than might be the case for a fund with a broader investment focus. The 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 they believe that the recent sometimes extreme volatility of the financial markets in South Korea 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 Directors intend to continue to review, on a quarterly basis, the trading market for the Fund’s shares. 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 long-term 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. (the “Plan Agent”), P.O. Box 30170 College Station, TX 77842-3170. 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 sharehold- ers 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


  • Page 25

    KOREA EQUITY FUND, INC. DIVIDEND REINVESTMENT PLAN (Continued) 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 share- holders 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 invest- ments,the Fund will issue the necessary additional shares from authorized but unissued shares. There will be no broker- age 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 October 31, 2016, the Fund did not issue any new shares for dividend rein- vestment 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 participat- ing 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 pay- ment 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 sub- sequent 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 shareholder 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 par- ticipant 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 no- tice 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 informa- tion about the Plan, should be directed to the Plan Agent at Computershare Trust Company, N.A. P.O. Box 30170, Col- lege Station, TX 77842-3170.


  • Page 26

    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 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 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 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”), and investment sub-advisory agreements between the Investment Adviser and two affiliated advisers, Nomura Asset Management Hong Kong 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 25, 2016. In connection with their deliberations at that meeting and at a separate meeting of the Independent Directors held on August 16, 2016, 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 bench- mark, (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 the sub-advisory fees paid by the Investment Adviser to the 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 and the Investment Adviser. In- cluded in the materials was a report prepared by Broadridge Board Reporting and Compliance (“Broadridge”) for use by the Independent Directors in their consideration of the continuance of the Agreements (the “Broad- ridge Report”). Broadridge is an independent firm retained by many investment companies to provide data with respect to investment company performance and expenses. The Broadridge Report contained information re- garding the Fund and other closed-end funds not affiliated with the Manager that compared, among other items, the respective funds’ management fees and operating expenses. The Independent Directors sought and received additional information from the Investment Adviser, in- cluding information concerning fees charged to other comparable accounts and funds that are managed by the Manager and its affiliates, management personnel and the Investment Adviser’s business continuity plan and cybersecurity efforts. The Independent Directors were advised by, and received materials (including a de- tailed memorandum reviewing the applicable legal standards and factors taken into account by the Supreme Court and other relevant court decisions) from their independent counsel in considering these matters and the continuance of the Agreements. In considering the continuance of the Agreements at the meeting held on August 25, 2016, the Board, in- cluding the Independent Directors, did not identify any single factor as determinative. Matters considered by the 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 Investment Adviser 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 compliance oversight 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.


  • Page 27

    KOREA EQUITY FUND, INC. Board Review of the Management and Investment Advisory Agreements (Continued) Investment performance. The Board considered performance information provided by Broadridge and 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 Board noted that Broadridge Report ranked the Fund in the top half or quartile for performance for its performance universe for the one, three and five-year periods. In response to requests by the Independent Directors, the Manager provided information about the performance of the Fund compared to the Fund’s benchmark index, data on the Fund’s expense ratio and components thereof, and comparative fee, expense ratio and performance information for other funds investing primarily in Korean securities. The Broadridge Report also provided supplemental information relating to performance, ex- pense ratios, and fees of U.S. investment companies investing in equity securities of Asian and other non-U.S. issuers. Based on their review, 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 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 Board noted that according to the Broadridge Report, the Fund’s contractual management fees were below the me- dian and the Fund’s non-management expenses were above the median for the comparable funds identified by Broadridge. The Board also considered information provided by the Manager regarding fees charged by the Manager and its affiliates to institutional accounts and other investment companies having investment objec- tives similar to the Fund’s investment objective. The Board recognized that the nature of the services provided by the Manager, the Investment Adviser and the Investment Sub-Advisers to other 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 Adviser and 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 the profitability of the Agreements to the Manager, the Investment Adviser and the Investment Sub-Advisers. The Independent Directors reviewed this information with the Manager to understand the expense allocation methodology utilized by the 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 the Manager, the Investment Adviser and the Investment Sub-Advisers supported the continuance of the Agree- ments. Economies of scale. The Board also considered whether the Manager, the Investment Adviser and the In- vestment Sub-Advisers realize economies of scale as the Fund grows larger and the extent to which any eco- nomics of the scale are shared with the Fund and its shareholders. Based on an evaluation of all factors deemed relevant, including the factors described above and taking into account information received throughout the preceding year, the Board, including each of the Independent Directors, concluded that each of the Agreements should be continued through August 31, 2017.


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    BOARD OF DIRECTORS Rodney A. Buck David B. Chemidlin Yutaka Itabashi E. Han Kim Marcia L. MacHarg OFFICERS Yutaka Itabashi, President Takeshi Toyoshima, Vice President Maria R. Premole, Vice President Neil A. Daniele, Secretary and Chief Compliance Officer Amy J. Marose, Treasurer Kelly S. Lee, Assistant Treasurer MANAGER Nomura Asset Management U.S.A. Inc. Worldwide Plaza 309 West 49th Street New York, New York 10019-7316 KOREA Internet Address http://funds.nomura-asset.com INVESTMENT ADVISER Nomura Asset Management Co., Ltd. 1-12-1 Nihonbashi, Chuo-ku, Tokyo 103-8260, Japan INVESTMENT SUB-ADVISERS Equity Nomura Asset Management Hong Kong Limited 30th Floor, Two International Finance Center 8 Finance Street Central, Hong Kong Fund, Inc. Nomura Asset Management Singapore Limited 10 Marina Boulevard Marina Bay Financial Centre Tower 2, #33-03 Singapore 018983 CUSTODIAN Brown Brothers Harriman & Co. 50 Post Office Square Boston, Massachusetts 02110-1548 DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR Computershare Trust Company, N.A. P. O. Box 30170 College Station, Texas 77842-3170 COUNSEL ANNUAL REPORT Sidley Austin LLP 787 Seventh Avenue New York, New York 10019 OCTOBER 31, 2016 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM RSM US LLP 80 City Square Boston, Massachusetts 02129 KOREA EQUITY FUND, INC. WORLDWIDE PLAZA 309 WEST 49TH STREET NEW YORK, NEW YORK 10019-7316 This Report, including the Financial Statements, is transmitted to the Share- holders of Korea Equity 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.


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