Fund Objective

The objective of this Fund is to achieve capital growth through investment in securities of Japanese companies.

View on Past Performance

Against this backdrop, the Legg Mason Japan Equity Fund fell by 17.3 % in the second quarter and its benchmark TOPIX index, which, unlike the fund, is heavily concentrated in larger companies, also fell, but only by 3.1% (both in sterling terms).In terms of stock attribution, the largest positive contributors to performance over the quarter included Don Quijote, the general discount store, which rose 6.9%, Otsuka Corp, the vendor of IT-related products, which rose 3.8%, Nitori, the furniture and interior decoration chain store, which rose 4.9%, and Fidec Corporation, a financial services company involved in account receivables recovery business, which rose 8.7%.The principal negative contributors included Fintech Global, the boutique style investment bank, which fell 35.8%, Re-plus, the real estate company, which fell 24.1%, and Arrk Corp, Japan's top producer of industrial models and prototypes, which fell 21.8%. Fintech had to revise downwards its full year forecast for year ending September 2007 following a fall in loan revenues.Re-plus, meanwhile, experienced a difficult first quarter largely due to delays in the sale of properties and increased staff costs, Arrk Corp endured sluggish performance for the financial year ending 31st March, 2007 from its subsidiary companies in the US and Europe coupled with the increasing cost of materials and the adoption of an accounting standard that pushed down consolidated net profits.In terms of portfolio changes, the manager liquidated several investments in the retail and services sectors, and made one addition in the chemicals sector and another in the telecoms sector. It also liquidated one holding in the other financials sector.

Future Expectations

With annual results for the fiscal year ending March 2007 having been released by most companies, investors are now starting to pay attention to actual results and future projections and making investment decisions based on fundamentals. Indeed, by the end of June share prices for small-cap companies, which were suffering from the detrimental effects of a negative market sentiment, started seeing some rebounds.Also in June, Japan's national pension fund, the world's largest pool of retirement trusts, announced that it planned to diversify its investment scope and put money into small-cap funds. The Fund has about ¥111 trillion in assets (US$902 billion) and plans to allocate as much as ¥100 billion (US$813 million) to small-cap stocks. The manager hopes that sizeable inflows of money into the start-up markets will help boost investors' confidence in these markets and bring them out of the doldrums.

Fund Details