INTERIM REPORT 31 DECEMBER 2010 BOND. Manager: HwangDBS Investment Management Berhad ( T) Trustee: HSBC (Malaysia) Trustee Berhad (1281-T)

Transcription

1 INTERIM REPORT 31 DECEMBER 2010 BOND Manager: HwangDBS Investment Management Berhad ( T) Trustee: HSBC (Malaysia) Trustee Berhad (1281-T)

2 HWANGDBS SELECT BOND FUND Unaudited Interim Report and Financial Statements For the 6 Months Financial Period Ended 31 December 2010 Content Page Manager S Report... 2 Fund Performance Data... 8 Statement Of Comprehensive Income... 9 Statement Of Financial Position Statement Of Changes In Equity Statement Of Cash Flows Summary Of Significant Accounting Policies Notes To The Financial Statements Statement By The Manager Trustee's Report Corporate Directory... 51

3 MANAGER S REPORT (1) MANAGER S VIEW ON PORTFOLIO AND MARKET Fund Type, Category Objective and Distribution Policy HwangDBS Select Bond Fund (the Fund) is an income bond fund that provides investors an affordable access into a diversified investment portfolio of fixed income securities. The objective of the Fund is to provide investors with a steady income stream in the form of distribution through investments primarily in bonds and other fixed income securities. Distribution of income, if any, would be on an annual basis. Benchmark The benchmark used by the Manager in measuring the performance of the Fund is the current Maybank 12- month Fixed Deposit rate (the Benchmark) i.e. if current Maybank 12-month Fixed Deposit rate is 3.2%, the benchmark would be 3.2%. (source: Malayan Banking Berhad; obtainable at Performance of the Fund (1 July 2010 to 31 December 2010) For the period under review, the Fund has registered a return of 3.83% outperforming the benchmark return of 1.43% by 2.40%. The NAV per unit of the Fund on 31 December 2010 was while the NAV per unit on 30 June 2010 was The Fund has declared a gross income distribution of 0.01 per unit for the period. (See Table 1 for performance of the Fund and Figure 1 for movement of the Fund versus the Benchmark respectively). Since commencement, the Fund has gained 47.38% versus the Benchmark of 28.66%, which translates to an outperformance of 18.72%. The Fund has declared a total gross income distribution of per unit to date. Table 1: Performance of the Fund 6 Months (1/7/10 31/12/10) 1 Year (1/1/10 31/12/10) 3 Years (1/1/08-31/12/10) 5 Years (1/1/06-31/12/10) Since Commencement (18/8/03-31/12/10) Fund 3.83% 4.35% 18.68% 32.33% 47.38% Benchmark 1.43% 2.76% 9.34% 17.71% % Outperformance 2.40% 1.59% 9.34% 14.62% 18.72% Source of Benchmark: Maybank Table 2: Average Total Return 1 Year (1/1/10 31/12/10) 3 Years (1/1/08-31/12/10) 5 Years (1/1/06-31/12/10) Since Commencement (18/8/03-31/12/10) Fund 4.35% 5.87% 5.76% 5.40% Benchmark 2.76% 3.02% 3.31% 3.47% Outperformance 1.59% 2.85% 2.45% 1.93% Source of Benchmark: Maybank 2

4 Table 3: Annual Total Return 3 rd Year (1/7/05-30/6/06) 4 th Year (1/7/06-30/6/07) 5 th Year (1/7/07-30/6/08) 6 th Year (1/7/08-30/6/09) 7 th Year (1/7/09-30/6/10) Fund 1.58% 9.83% 0.79% 7.87% 6.27% Benchmark 3.73% 3.77% 3.72% 3.19% 2.59% Outperformance/ (Underperformance) (2.15%) 6.06% (2.93%) 4.68% 3.68% Source of Benchmark: Maybank Figure 1: Movement of the Fund versus the Benchmark Select Bond Fund Benchmark Aug 03 Apr 04 Dec 04 Aug 05 Apr 06 Dec 06 Aug 07 Apr 08 Dec 08 Aug 09 Apr 10 Dec 10 This information is prepared by HwangDBS Investment Management Berhad (HDBSIM) for information purposes only. Past earnings or the Fund s distribution record is not a guarantee or reflection of the Fund s future earnings/future distributions. Investors are advised that unit prices, distributions payable and investment returns may go down as well as up. Source of benchmark is from Bloomberg. Benchmark: Current Maybank 12-month Fixed Deposit rate Strategies Employed (1 July 2010 to 31 December 2010) The Manager continued to build up position in offshore bonds during the period under review. The strategy to deploy money offshore was to achieve diversification and better yield enhancement to the Fund. The portfolio yield was about % during the period. In terms of duration, the Fund kept duration at about 4 years but subsequently reduced it to 3 years towards the end of December 2010 as the Manager reduced the Fund s exposure to longer-dated bonds. Asset Allocation As at 31 December 2010, the asset allocation of the Fund stood at 95.24% in fixed income instruments and the balance of 4.76% in cash. For a snapshot of the Fund s asset mix during the period under review, refer to Figure 2. 3

5 Figure 2: Summary of asset allocation Asset Allocation 31 Dec Dec Dec 2008 Fixed Income Instruments 95.24% 83.06% 80.02% Cash 4.76% 16.94% 19.98% Total % % % The asset allocation of fixed income securities increased to 95% as at December 2010 from 84% in 2009 as the Fund deploy the cash to work. However, the portfolio duration was kept short in view of higher inflation and interest rates outlook. Review of Market (1 July 2010 to 31 December 2010) In the global fixed income space, Europe continued to be in the spotlight as the sovereign debt crisis engulfed the peripheral European countries. Although the markets were momentarily comforted by the huge USD 1 trillion bailout package by the European Central Bank (ECB) announced in May aimed at curbing the contagion effect of the peripheral European debt crisis from spreading to the rest of Europe. However, investors worldwide were not convinced and continued weakness was seen in peripheral European sovereign debt, especially after Greece was downgraded 4 notches to Ba1 by Moody s. Markets today continue to have lingering doubts over the ability of the peripheral European countries to meet their maturing debt obligations. In the US, the Manager saw a reversal of yield curve flattening of the US Treasury (UST) curve from first half of 2010 (1H2010). The yield curve steepened with the 2-year UST ending the year at 0.65% from 0.60% as at June The 10-year UST spiked up 40 basis points (bps) to 3.36% versus 2.96% as at end June This came as a result of better than expected economic data releases in the US and the expectation of higher inflation in Another key event for credit markets was the US Federal Reserve s (Fed) roll out of its Quantitative Easing 2 (QE2) in November Financial asset prices were well supported on the back of expected liquidity flooding the system. Closer to home, the Manager saw the Australian dollar (AUD) making its move above parity against the US Dollar (USD) for the first time since the 1980s, breaching the $1 point in early November. The currency was well supported on the back of the Reserve Bank of Australia s (RBA) rate hikes amounting to 100bps in 2010, bringing the policy Cash Rate up to 4.75%. Elsewhere in Asia, the Manager saw a trend of rating upgrades amongst the Asian sovereign issuers, as Indonesia and Philippines moved to within 2 to 3 notches of investment grade, and Hong Kong moving from Aa2 to Aa1. These rating upgrades buoyed the sentiment of Asian local currency government bond markets, creating an influx of foreign buying, and prompting governments to introduce measures of capital controls to slow the momentum of hot money towards the last quarter of In Malaysia, Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) three times in 2010 to 2.75%. Third quarter of 2010 s (3Q2010) Gross Domestic Product (GDP) came in weaker at 5.3% year on year (yoy) from 8.9% yoy in second quarter of 2010 (2Q2010) due to the high base effect and gradual slowdown in exports. During the quarter, modest increase in inflation was recorded due to higher commodity and food prices. This was driven partly by the reduction of fuel and sugar subsidies. As at end December 2010, Consumer Price Index (CPI) recorded an increase of 2.2% yoy but it was still within BNM s comfortable range. The Malaysian Government Securities (MGS) market performed well in 3Q2010. The yield curve flattened due to support of strong foreign portfolio inflows, on the back of continued appreciation of the Ringgit against the USD and redirection of funds away from G3 (Colombia, Mexico and Venezuela) economies. As at end September 2010, the foreign ownership of MGS stood at an all time high of 26.8% of outstanding issues or 68 billion. However, the Manager saw a pull back in yields in the forth quarter 2010 (4Q2010) after the budget announcement in November The MGS yield curve steepened in November and December with long-dated MGS being sold off. The curve movement was mainly driven by the shift in UST curve and the expectation of higher supply of long-dated MGS in 2011 after the budget announcement. Higher inflation also drove investors to shorten duration towards year-end. Meanwhile, along the Corporate Bond segment, demand for bonds was firm throughout 2010 with the lack of issuances to meet investors demand. However, higher grade AAA papers saw mixed yield movements, and 4

6 this followed from rising government bond yields in 4Q Generally, credit spreads remained tight, driven by demand-supply dynamics especially on the high grade segment. Investment Outlook As 2011 begin, specifically in emerging economies, it is presently plagued by inflationary concerns. High commodity and food prices have been the main drivers of inflation. This presents a challenge to policy makers, to balance the need to raise interest rates, while preventing too much hot money from flowing into the financial markets. The Manager expects central banks in Asia to lead the way with more interest rate hikes in first half of 2011 (1H2011) to keep inflation in check. As BNM started raising interest rates in early 2010, Malaysia is seen to be ahead of the curve and comfortable with the current level of interest rates. The global economy has also showed some signs of relief from the mid-cycle slowdown following positive economic data from the US and China. However, the European debt crisis continues to be played out and this presents a significant risk to global financial markets. Increase borrowing costs has led to continue uncertainties into Nonetheless, broad global economic activity is expected to continue its recovery phase based on the indicators and current surveys that the Manager track, with emerging economies leading the way. The Manager expects GDP growth to ease to 5% in 2011 due to a high base effect. The Manager also expects inflation to accelerate on the back of a narrowing output gap and commodity price rises. However, inflation is expected to be manageable into Heavier MGS supply and newly introduced 15-year MGS are expected in the coming year following the announcement of Budget 2011 in the last quarter. The Manager believes this is due to possible heavy redemptions over the next few years. The heavy fiscal requirement and longer-dated nature of issuances are expected to keep the MGS curve steep. However, the Manager expects foreign inflows to continue into Malaysia on currency appreciation and positive carry against the USD. As for Ringgit Malaysia (MYR) corporate bonds, the supply pipeline will also be heavier with many projects to be financed by the private sector. The Manager see the most risk for government guaranteed and AAA-rated bonds on credit spread widening as supply hits the street. However, ample liquidity should provide some support to prices. The Manager will continue to diversify the investments into various economies and sectors in 2011 in search of better quality credits, and potential higher returns for the Fund. In the near term, the Fund would keep duration short in Asia, in view of rising interest rates. The Manager would also keep most of the offshore exposure in G3 currencies hedged to reduce volatility of the Fund. (2) SOFT COMMISSIONS RECEIVED FROM BROKERS Soft commissions received from brokers/dealers are retained by the management company only if the goods and services provided are of demonstrable benefit to unitholders of the Fund as per requirements of Clause and of the Guidelines on Unit Trust Funds. During the financial year under review, the Manager did not receive any soft commission. 5

7 (3) BREAKDOW OF UNITHOLDERS BY SIZE Size of holdings (units) No. of unitholders No. of units held * ( 000) 5,000 and below ,001 to 10, ,001 to 50, ,423 50,001 to 500, , ,001 and above ,727 Total ,967 * Note: Excluding Manager s Stock 6

8 INCOME DISTRIBUTION HwangDBS Investment Management Berhad has distributed a total of gross distribution of 1.00 sen per unit for investors of the HwangDBS Select Bond Fund over the period under review. The NAV per unit prior and subsequent to the distributions are as follow: Distribution Date Ex-Date Cum- Distribution Distribution per Unit () Ex-distribution 29 Jun June Feb Feb Jun June Jan Jan Jun June Jan Jan Jun June Dec Dec Apr April Jul Jul Dec Dec

9 FUND PERFOANCE DATA Source: HSBC Trustee As At 31 Dec 2010 As At 31 Dec 2009 As At 31 Dec 2008 Total NAV ( million) NAV per unit () Unit in Circulation (million) Highest NAV Lowest NAV Return of the Fund (%) iii Capital Return (%) i Income Return (%) ii Nil Gross Distribution per Unit (sen) Nil Net Distribution per Unit (sen) Nil Management Expenses Ratio (%) Portfolio Turnover Ratio (times) Capital Return i = {NAV per 31/12/10 NAV per 30/06/10* - 1} x 100 = { } x 100 = 2.03% Income ex-date = {Income distribution per unit NAV per unit on ex-date} + 1 = { @ 20/07/10} + 1 = = { /12/10} + 1 = Total Income Return ii = {Income ex-date x Income ex-date} 1 x 100 = { x } 1 x 100 = 1.76% Return of the Fund iii = [{(1 + Capital Return) x (1 + Total Income Return)} 1] x 100 = [{( %) x (1+1.76%)} 1] x 100 = 3.83% *Source: HSBC Trustee Past performance is not necessarily indicative of future performance and that unit prices and investment returns may go down, as well as up. 1 The PTR for Select Bond Fund was lower at 0.52 times in 2010 from 0.69 times in 2009 due to lower trading activities during the year. 8

10 UNAUDITED INTERIM STATEMENT OF COMPREHENSIVE INCOME FOR THE 6 MONTHS FINANCIAL PERIOD ENDED 31 DECEMBER 2010 INVESTMENT INCOME Note 6 months financial period ended months financial period ended Interest income 3 6,982,316 4,097,513 Net realised gains/(losses) on sale of investments 4-845,392 Net accretion of discount on unquoted fixed income securities 5-298,699 Net foreign currency exchange losses 6 (106,457) (556,234) Net fair value losses on forward foreign currency contracts 7 (898,091) (193,782) Net change in fair value reserve on financial assets at fair value through profit or loss 12 4,068,927-10,046,695 4,491,588 EXPENSES Management fee 8 (1,098,164) (739,629) Trustee s fee 9 (76,872) (51,774) Auditors remuneration (3,382) (3,176) Tax agent s fee (1,537) (1,512) Other expenses (41,770) (21,292) (1,221,725) (817,383) NET INCOME BEFORE TAXATION 8,824,970 3,674,205 TAXATION 10 (195,292) (87,328) NET INCOME AFTER TAX AND TOTAL COMPREHENSIVE INCOME 8,629,678 3,586,877 Net income after taxation is made up of the following: Realised amount (2,072,422) 3,767,410 Unrealised amount 10,702,100 (180,533) 8,629,678 3,586,877 The accompanying summary of significant accounting policies and notes to the financial statements form an integral part of these financial statements. 9

11 UNAUDITED INTERIM STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010 Note ASSETS Current assets Financial assets at fair value through profit or loss ,113, Unquoted fixed income securities - local 13(a) - 85,016,600 54,913,800 Unquoted fixed income securities - foreign 13(b) - 106,867, ,528,066 Short term deposits with a licensed financial institution 14 4, ,559,914 5,181,397 Cash and bank balances ,980 1,326,473 19,248,870 Forward foreign currency contract , ,246 Receivables ,995 7,042,252 3,891,395 TOTAL ASSETS 190,468, ,812, ,443,774 LIABILITIES Current Liabilities Forward foreign currency contract ,436 - Amount due to Manager - management fee 168, , ,858 - cancellation of units - - 8,502 Amount due to Trustee 11,783 13,387 14,760 Auditors remuneration 3,382 3,176 6,600 Tax agent fee 4,537 4,512 3,000 Other payables 4,993 3,025 3,200 TOTAL LIABILITIES 193, ,786 4,571,641 EQUITY Unitholders capital ,641, ,687, ,355,249 Retained earnings 11,634,038 5,481,476 3,103,339 Reserve - 2,858,602 3,738,266 TOTAL EQUITY 190,275, ,027, ,196,854 NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS 190,275, ,027, ,196,854 NUMBER OF UNITS IN CIRCULATION ,904, ,173, ,271,000 NET ASSET VALUE PER UNIT () The accompanying summary of significant accounting policies and notes to the financial statements form an integral part of these financial statements. 10

12 UNAUDITED INTERIM STATEMENT OF CHANGES IN EQUITY FOR THE 6 MONTHS FINANCIAL PERIOD ENDED 31 DECEMBER 2010 Unitholders Retained capital earnings Reserve Total Balance as at 1 July 2010 As previously stated Prior year adjustment for adoption Of amendments to FRS ,355,249 3,103,339 3,738, ,196,854 Balance as at 1 July 2010, restated After adoption of amendments to FRS ,355,249 3,103,339 3,738, ,196,854 Prior year adjustment for Adoption of FRS139-3,738,266 (3,738,266) - Balance as at 1 July 2010, restated After adoption of FRS ,355,249 6,841, ,196,854 Net income after taxation - 8,629,678-8,629,678 Movement in unitholders contribution: Creation of units 25,702, ,702,390 Reinvestment of units 3,837, ,837,245 Cancellation of units (91,253,561) - - (91,253,561) Distribution (Note 11) - (3,837,245) - (3,837,245) Balance as at the end of The financial period 178,641,323 11,634, ,275,361 11

13 UNAUDITED INTERIM STATEMENT OF CHANGES IN EQUITY Unitholders Retained capital earnings Reserve Total Balance as at 1 July 2009 as previously stated Prior year adjustment for adoption Of amendments to FRS ,633,910 5,813,849 (437,652) 82,010,107 Balance as at 1 July 2009, restated After adoption of amendments to FRS132 76,633,910 5,813,849 (437,652) 82,010,107 Net income after taxation - 3,586,877-3,586,877 Movement in unitholders contribution: Creation of units 166,318, ,318,787 Reinvestment of units 3,914, ,914,697 Cancellation of units (24,180,380) - - (24,180,380) Distribution (Note 11) - (3,919,250) - (3,919,250) Asset revaluation reserve - - 3,296,254 3,296,254 Balance as at end of The financial period 222,687,014 5,481,476 2,858, ,027,092 12

14 UNAUDITED INTERIM STATEMENT OF CASH FLOWS FOR THE 6 MONTHS FINANCIAL PERIOD ENDED 31 DECEMBER 2010 CASH FLOW FROM OPERATING ACIVITIES 6 months 6 months financial financial period ended period ended Note Proceeds from sale of investments 136,855,799 42,282,754 Purchase of investments (93,075,589) (161,218,574) Interest received 6,787,984 2,457,079 Management fee paid (1,140,697) (614,059) Trustee s fee paid (79,849) (42,984) Payment for other fees and expenses (46,577) (30,567) Net realised (losses)/ gains on forward foreign currency contracts (755,910) 418,654 Net realised foreign currency exchange losses (2,597,006) (699,830) Net cash generated from/(used in) operating activities 45,948,155 (117,447,527) CASH FLOW FROM FINANCING ACTIVITIES Proceeds from creation of units 25,451, ,794,932 Payments for cancellation of units (91,262,063) (24,180,380) Dividends to unitholders - (4,553) Net cash (used in)/ generated from financing activities (65,810,668) 137,609,999 NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (19,862,513) 20,162,472 EFFECTS OF FOREIGN CURRENCY EXCHANGE (2,239) (3,474) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE FINANCIAL PERIOD 24,430,267 12,727,389 CASH AND CASH EQUIVALENTS AT THE END OF THE FINANCIAL PERIOD 14 4,565,515 32,886,387 The accompanying summary of significant accounting policies and notes to the financial statements form an integral part of these financial statements. 13

15 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR THE 6 MONTHS FINANCIAL PERIOD ENDED 31 DECEMBER 2010 The following accounting policies have been used in dealing with items which are considered material in relation to the financial statements. A BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS The financial statements of the Fund have been prepared under the historical cost convention, unless otherwise indicated, and in accordance with the Financial Reporting Standards in Malaysia and the Securities Commission s ( SC ) Guidelines on Unit Trust Funds. The significant accounting policies adopted are consistent with those applied in the unaudited interim financial statements for the period ended 31 December 2009, except for the adoption of new and revised FRSs which are effective for financial year beginning on or after 1 January Except as discussed below, these new and revised FRSs do not give rise to any significant effects on the financial statements of the Fund. FRS 8 "Operating Segments" (effective from 1 July 2009) replaces FRS Segment Reporting. The new standard requires a management approach, under which segment information is reported in a manner that is consistent with the internal reporting provided to the chief operating decisionmaker. The Fund has adopted FRS 8 retrospectively. The improvement to FRS 8 (effective from 1 January 2010) clarifies that entities that do not provide information about segment assets to the chief operating decision-maker will no longer need to report this information. Prior year comparatives must be restated. FRS 7 Financial Instruments: Disclosures (effective for accounting period on or after 1 January 2010). The new standard supersedes the disclosure part of FRS 132 Financial Instruments: Presentation and Disclosures and introduces new disclosures relating to financial instruments. This standard does not have any impact on the classification and valuation of the Fund s financial instruments. The revised FRS 101 Presentation of financial statements (effective from 1 January 2010) prohibits the presentation of items of income and expenses (that is, 'non-owner changes in equity') in the statement of changes in equity. 'Non-owner changes in equity' are to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Fund has elected to present this statement as one single statement. Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The revised FRS 101 was adopted retrospectively by the Fund. FRS 107 Statement of cash flows (effective from 1 January 2010) clarifies that only expenditure resulting in a recognised asset can be categorised as a cash flow from investing activities. 14

16 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED) FRS 110 Events after the balance sheet date (effective from 1 January 2010) reinforces existing guidance that a dividend declared after the reporting date is not a liability of an entity at that date given that there is no obligation at that time. FRS 118 Revenue (effective from 1 January 2010) provides more guidance when determining whether an entity is acting as a principal or as an agent. This standard does not have material impact on the classification and valuation of the Fund's financial statements. The amendments to FRS 132 Financial instruments: Presentation and FRS 101(revised) Presentation of financial statements - Puttable financial instruments and obligations arising on liquidation (effective from 1 January 2010) require entities to classify puttable financial instruments and instruments that impose on the entity an obligation to deliver to another party a prorata share of the net assets of the entity only on liquidation as equity, if they have particular features and meet specific conditions. FRS 139 Financial Instruments: Recognition and Measurement (effective from 1 January 2010) GN3 establishes principles for recognising and measuring financial assets, financial liabilities and some contracts to buy and sell non-financial items. Hedge accounting is permitted under strict circumstances. The amendments to FRS 139 provides further guidance on eligible hedged items. The amendment provides guidance for two situations. On the designation of a one-sided risk in a hedged item, the amendment concludes that a purchased option designated in its entirety as the hedging instrument of a one-sided risk will not be perfectly effective. The designation of inflation as a hedged risk or portion is not permitted unless in particular situations. The improvement to FRS 139 clarifies that the scope exemption in FRS 139 only applies to forward contracts but not options for business combinations that are firmly committed to being completed within a reasonable timeframe. In respect of FRS 7 and FRS 139, the Fund has applied the transitional provision in the respective standards which exempts entities from disclosing the possible impact arising from the initial application of the standard on the financial statements of the Fund. A summary of the impact of the new accounting standards and amendments to published standards on the financial statements of the Fund is set out in Note 22. The new standards, amendments and interpretations to published standards which are relevant to the Fund and have not been early adopted are: Amendments to FRS 7 "Financial instruments: Disclosures" and FRS 1 "First-time adoption of financial reporting standards" (effective from 1 January 2011) require enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. The Fund will apply this standard when effective. IC Interpretation 17 "Distribution of non-cash assets to owners" (effective from 1 July 2010) provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. FRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. 15

17 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES B INCOME RECOGNITION Interest income from short-term deposits, unquoted fixed income securities and unquoted credit linked investment contract are recognised on an accrual basis. For unquoted fixed income securities, realised gains and losses on sale of investments are accounted for as the difference between the net disposal proceeds and the carrying amount of investments, determined on cost adjusted for accretion of discount or amortisation of premium on investments. C DIVIDEND DISTRIBUTION The proposed distributions to unit holders are recognised in the statement of changes in equity upon approval by the Manager. D TAXATION Current tax expense is determined according to the Malaysian tax laws and includes all taxes based upon the taxable profits. Tax on interest income from foreign unquoted investments is based on the tax regime of the respective countries that the Fund is invested. E FUNCTIONAL AND PRESENTATION CURRENCY The financial statements are presented in Ringgit Malaysia, which is the Fund s functional and presentation currency. F FOREIGN CURRENCY TRANSLATION Foreign currency transactions in the Fund are accounted for at exchange rates prevailing at the transaction dates. Foreign currency monetary assets and liabilities are translated at exchange rates prevailing at the date of the statement of financial position. Exchange differences arising from the settlement of foreign currency transactions and from the translation of foreign currency monetary assets and liabilities are included in the statement of comprehensive income. The principal closing rates used in the translation of foreign currency amount are as follows: Foreign currencies Australian Dollar Euro Dollar New Zealand Dollar Polish Zloty Singapore Dollar US Dollar Indonesia Ruppiah Philippine Peso

18 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES G FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (i) Classification The Fund designates its investment in equity securities as financial assets at fair value through profit or loss at inception. Financial assets are designated at fair value through profit or loss when they are managed and their performance evaluated on a fair value basis. (ii) Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade-date the date on which the Fund commits to purchase or sell the asset. Investments are initially recognised at fair value. Transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Fund has transferred substantially all risks and rewards of ownership. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the statement of comprehensive income within net gain/(loss) on financial assets at fair value through profit and loss in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income as part of gross dividend income when the Fund s right to receive payments is established. Quoted investments in Malaysia are valued at the last done market price quoted on Bursa Malaysia at the date of the statement of financial position. Quoted investments outside Malaysia are valued at the market bid prices quoted of the respective foreign stock exchanges as at the date of the statement of financial position. Unquoted fixed income securities denominated in Ringgit Malaysia are revalued on a daily basis based on fair value prices quoted by a bond pricing agency ( BPA ) registered with the SC as per the SC Guidelines on Unit Trust Funds. Where such quotation are not available or where the Manager is of the view that the price quoted by the BPA for a specific unquoted fixed income securities differs from the market price by more than 20 basis points, the Manager may use the market price, provided that the Manager: (i) records its basis for using non-bpa price; (ii) obtains necessary internal approvals to use the non-bpa price; and (iii) keeps an audit trail of all decisions and basis for adopting the market yield. Unquoted fixed income securities denominated in foreign currencies are revalued at least fortnightly by reference to the bid price quoted in Bloomberg. However if such quotations are not available, the fair value shall be determined by reference to the bid and offer prices quoted by three (3) independent and reputable financial institutions of similar standing in the over-the-counter at the close of trading or the use of valuation models. 17

19 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES H AMOUNT DUE FROM/TO BROKERS Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the statement of financial position date respectively. These amounts are recognised initially at fair value and subsequently measured at amortised cost using the effective profit method, less provision for impairment for amounts due from brokers. A provision for impairment of amounts due from brokers is established when there is objective evidence that the Fund will not be able to collect all amounts due from the relevant broker. Significant financial difficulties of the broker, probability that the broker will enter bankruptcy or financial reorganisation, and default in payments are considered indicators that the amount due from brokers is impaired. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, profit income is recognised using the rate of profit used to discount the future cash flows for the purpose of measuring the impairment loss The effective profit method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the profit income or profit expense over the relevant period. The effective profit rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective profit rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective profit rate, transaction costs and all other premiums or discounts I CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash and bank balances, deposits held in highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. J CREATION AND CANCELLATION OF UNITS The Fund issues cancellable units, which are cancelled at the holder s option and are classified as equity. Cancellable units can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s net asset value. The outstanding units are carried at the redemption amount that is payable as at the date of the statement of financial position if the holder exercises the right to put the unit back to the Fund. Units are created and cancelled at the holder s option at prices based on the Fund s net asset value per unit at the time of creation or cancellation. The Fund s net asset value is calculated by dividing the net assets attributable to unitholders with the total number of outstanding units. 18

20 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES K PROCEEDS AND PAYMENTS ON CREATION AND CANCELLATION OF UNITS The net asset value per unit is computed for each dealing day. The price at which units are created or cancelled is calculated by reference to the net asset value per unit as at the close of business on the relevant dealing day. Units in the Fund are classified as equity in the statement of financial position and are stated at fair value representing the price at which unitholders can redeem the units from the Fund. L SEGMENT REPORTING Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the strategic asset allocation committee of the Manager that makes strategic decisions. M DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument is any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. A financial asset is any asset that is cash, a contractual right to receive cash or another financial asset from another enterprise, a contractual right to exchange financial instruments with another enterprise under conditions that are potentially favourable, or an equity instrument of another enterprise. A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset to another enterprise, or to exchange financial instruments with another enterprise under conditions that are potentially unfavourable. The Fund uses derivative financial instruments such as forward currency contracts to hedge its foreign currency exposure arising from the investment in foreign unquoted fixed income securities. It does not trade in derivative financial instruments. This derivative financial instrument is not recognised in the financial statements on inception. It is entered to protect the Fund from movements in exchange rates by establishing the rate at which a foreign currency asset or liability will be settled. Foreign currency exchange gains and losses on contracts are recognised in the statement of comprehensive income when settled at which time they are included in the measurement of the transaction hedged. N FINANCIAL ASSETS AND LIABILITIES Fair value is the amount at which a financial asset could be exchanged or a financial liability settled between knowledgeable and willing parties in an arm s length transaction. The information presented herein represents the estimates of fair values as at the date of statement of financial position. Where available, quoted and observable market prices are used as the measure of fair values. Where such quoted and observable market prices are not available, fair values are estimated based on a range of methodologies and assumptions regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows and other factors. Changes in the uncertainties and assumptions could materially affect these estimates and the resulting fair value estimates. 19

21 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES N FINANCIAL ASSETS AND LIABILITIES (CONTINUED) A range of methodologies and assumptions had been used in deriving the fair values of the Fund s financial instruments as at the date of statement of financial position. The total fair value of each financial instrument is not materially different from the total carrying value. The fair values are based on the following methodologies and assumptions: (a) Short term deposit with a licensed financial institution For deposits and placements with a financial institution with maturities of less than three months, the carrying value is a reasonable estimate of fair value. For deposits and placements with maturities of three months and above, estimated fair value is based on discounted cash flows using prevailing money market interest rates at which similar deposits and placements would be made with a financial institution of similar credit risk and remaining period to maturity. (b) Unquoted fixed income securities - local The fair values of local unquoted fixed income securities have been estimated by reference to fair value prices quoted by the BPA. (c) Unquoted fixed income securities - foreign The fair value of foreign unquoted fixed income securities is based on the average indicative yield quoted by three independent and reputable institutions whenever possible. In the event when the quotations by three independent and reputable institutions are not available, quotation from the Bloomberg broker will be used. (d) Derivative financial instruments The Fund s derivative financial instruments comprise forward currency contracts. Derivative financial instruments that do not qualify for hedge accounting are accounted for at fair value through income statement by using forward rate contracted at the date of statement of assets and liabilities. Changes in the fair values of these derivative financial instruments that do not qualify for hedge accounting are recognised immediately in the statement of comprehensive income. The fair values are based on the following methodologies and assumptions (continued): (e) Other short term financial instruments Other short term financial instruments comprise interest receivables, other receivables, payables and accruals. The carrying values of these assets and liabilities are assumed to approximate their fair values due to short tenure of less than one year. 20

22 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES O CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The preparation of financial statements in conformity with the Financial Reporting Standards in Malaysia and the SC s Guidelines on Unit Trust Funds requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the financial period. Although these estimates are based on the Manager s best knowledge of current events and actions, actual results could differ from those estimates. Estimates and judgements are continually evaluated by the Manager and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. To enhance the information content of the estimates, certain key variables that are anticipated to have material impact to the Fund s results and financial position are tested for sensitivity to changes in the underlying parameters. The Fund makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. To enhance the information content of the estimates, certain key variables that are anticipated to have material impact to the Fund's results and financial position are tested for sensitivity to changes in the underlying parameters. The Fund uses significant judgment in determining whether an investment is impaired. The Fund evaluates, among other factors, the duration and extent to which the fair value of the investment is less than its initial cost of investment, and the financial health and near-term business outlook for the investee, including factors such as industry and sector performance, macroeconomic factors and speculation. In undertaking any of the Fund s investment, the Manager will ensure that all assets of the Fund under management will be valued appropriately, that is at fair value and in compliance with the SC s valuation guidelines. (a) Estimate of fair value of unquoted fixed income securities Local unquoted fixed income securities are valued using fair value prices quoted by the BPA. Where the manager is of the view that the price quoted by BPA for a specific fixed income security differs from the market price by more than 20 basis points, the manager may use the market price, provided that the manager records its basis for using a non-bpa price, obtains necessary internal approvals to use the non-bpa price, and keeps an audit trail of all decisions and basis for adopting the use of the non-bpa price. This is in accordance with Schedule B of the SC s Guidelines on Unit Trust Funds. Foreign unquoted fixed income securities are valued at average indicative yield quoted by three independent and reputable institutions whenever possible. In the event when the quotations by three independent and reputable institutions are not available, quotation from the Bloomberg will be used. This is in accordance with Schedule B of the SC s Guidelines on Unit Trust Funds. 21

23 NOTES TO THE FINANCIAL STATEMENTS FOR THE 6 MONTHS FINANCIAL PERIOD ENDED 31 DECEMBER INFOATION ON THE FUND The Unit Trust Fund (the Fund ) was constituted under the name HwangDBS Select Bond Fund pursuant to the execution of a Deed dated 1 July 2003, First Supplemental Deed dated 29 December 2005, Second Supplemental Deed dated 18 June 2007 and Third Supplemental Deed dated 15 October 2008 (the Deeds ) between HwangDBS Investment Management Berhad (the Manager ) and HSBC (Malaysia) Trustees Berhad (the Trustee ). The Fund was launched on 28 July 2003 and will continue its operations until terminated by the Trustee as provided under Clause 3.1 of the Deed. The Fund may invest in medium to long-term government bonds, private debt securities, other fixed income securities and any other investments approved by the SC from time to time. There will be no equity investment. All investments will be subjected to the SC s Guidelines on Unit Trust Funds, the Deeds and the objective of the Fund. The main objective of the Fund is to provide investors with a steady income stream in a form of distribution through investments primarily in bonds and other fixed income securities. The Manager is a company incorporated in Malaysia. The principal activities of the Manager are establishment and management of unit trust funds. 2 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Fund is exposed to a variety of risks which include market risk, (including price risk, interest rate risk, credit risk), liquidity risk and currency risk. Loans and Receivables Asset at fair value through profit or loss 31 December 2010 Note Total Financial Assets at fair value through profit or loss ,113, ,113,806 Other receivables 789, ,060 Cash and Cash Equivalents 14 4,565,515-4,565,515 Total 5,354, ,113, ,468,381 Financial risk management is carried out through internal control processes adopted by the Manager and adherence to the investment restrictions as stipulated by the SC s Guidelines on Unit Trust Funds. Market risk (a) Price risk Price risk arises mainly for uncertainty about future prices of investments. It represents the potential loss the Fund might suffer through holding market positions in the face of price movements. The Manager manages the risk of unfavourable changes in prices by continuous monitoring of the performance and risk profile of the investment portfolio. 22

24 NOTES TO THE FINANCIAL STATEMENTS 2 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Market risk (continued) (b) Interest rate risk The Fund's exposure to interest rate risk is limited to investment in bonds and short-term placements with financial institution. This risk can largely be mitigated by holding the unquoted fixed income securities until their maturity, thus locking in the price and yields except where redemptions by unitholders compel the Manager to redeem some portion of the unquoted fixed income securities. The effective weighted average interest rate of deposits placement with a licensed financial institution and unquoted fixed income securities per annum as at the date of the statement of financial position are as follows: % % Short term deposits with a licensed financial institution Unquoted fixed income securities The deposits have an average maturity of less than 1 year. The unquoted fixed income securities have an average maturity of less than 5 years. (c) Credit risk Credit risk refers to the ability of an issuer or counterparty to make timely payments of interest, principals and proceeds from realisation of investment. The Manager manages the credit risk by undertaking credit evaluation to minimise such risk. Credit risk arising from placements on deposits in licensed financial institutions is managed by ensuring that the Fund will only place deposits in reputable licensed financial institutions. The settlement terms of the proceeds from the creation of units' receivable from the Manager and redemption of units payable to the Manager are governed by the Securities Commission's Guidelines on Unit Trust Funds Credit risk is a concern for unquoted fixed income securities. The risk arises when an issuer is unable to service any profit or repay the principal amount upon redemption. In such cases, investors may suffer significant losses with respect to their capital invested and income foregone. Management of the credit risk is largely accounted for by the Fund s management of issue-specific risk. This refers to the emphasis on credit analysis conducted to determine issuers or guarantors ability to service promised payments. 23

25 NOTES TO THE FINANCIAL STATEMENTS 2 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) (c) Credit risk (continued) The following table sets out the credit risk concentration of the Fund: As at 31 December 2010 Unquoted fixed income securitieslocal Unquoted fixed income securitiesforeign Cash balance and deposits Other assets Total Finance ,885-4,564,885 Private debt securities - AAA - 22,390, ,390,782 AA2 2,033, ,033,200 Aa2-1,426, ,426,477 Aa3-3,187, ,187,358 AA 1,043, ,043,800 AA- 6,949, ,949,400 A1 6,572,100 10,053, ,625,984 A2 3,050, ,050,000 A2e - 3,117, ,117,300 A3 1,689,000 12,971, ,660,443 A+ 1,020, ,020,500 B1-3,445, ,445,140 Ba1/*- - 17,562, ,562,712 Ba2-2,369, ,369,820 Ba2/*- - 3,891, ,891,951 Ba3-18,452, ,452,354 Baa1-7,517, ,517,399 Baa2-16,569, ,569,237 Baa3-16,210, ,210,878 BBB - 5,834, ,834,027 24