MQ Geared Equity Income Fund

Transcription

1 Financial Report For the period from 10 April 2007 (Inception date) to 30 June ARSN The Responsible Entity of MQ Geared Equity Income Fund is MQ Portfolio Management Limited (ACN ) The Responsible Entity s registered office is: No.1 Martin Place Sydney NSW 2000

2 MQ Portfolio Management Limited ACN (Responsible Entity of MQ Geared Equity Income Fund ( the Fund ) ARSN ) is a wholly owned subsidiary of Macquarie Bank Limited ACN which in turn is a wholly owned subsidiary of Macquarie Group Limited ACN Other than Macquarie Bank Limited ABN ("MBL"), any Macquarie Group entity noted on this page is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia). That entity's obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise. This report is not an offer or invitation for subscription or purchase, or a recommendation of securities. It does not take into account the investment objectives, financial situation and particular needs of the investor. Before making an investment in MQ Geared Equity Income Fund, the investor or prospective investor should consider whether such an investment is appropriate to their particular investment needs, objectives and financial circumstances and consult an investment adviser if necessary. MQ Portfolio Management Limited, as Responsible Entity of the Fund, is entitled to fees for so acting. Macquarie Bank Limited and its related corporations, together with their officers and Directors, may hold units in MQ Geared Equity Income Fund from time to time.

3 CONTENTS Financial ReportFinancial Statements Director's report 1 Auditor's independence declaration 4 Income statement 5 Balance sheet 6 Statement of changes in equity 7 Cash flow statement 8 9 Director's declaration 28 Independent auditor's report to the unitholders 29 Page

4 Director's report In respect of the period ended 30 June, the Directors of MQ Portfolio Management Limited ( Responsible Entity ) submit the following report on the financial report of MQ Geared Equity Income Fund ( Fund ) made out in accordance with a resolution of the Directors. Directors The following persons held office as Directors of MQ Portfolio Management Limited during the period or since the end of the period and up to the date of this report: Names Ottmar Weiss Gregory John Mackay Bruce Neil Terry Appointed/resigned James Kimberly Burke Resigned 25 September 2007 Gervaise Robert John Heddle Appointed 1 November 2007 Units held by Directors or their director related entities are disclosed in the relevant note to the financial report. Principal activities The principal activity of the Fund is to buy a portfolio of Australian shares and sell options over some or all of those shares, or options over a share price index or share price index futures, to enhance income and manage risk. At a later stage the unitholders may also gain exposure to other Underlying Strategies. The unitholders in the Fund are provided capital protection with Macquarie Bank Limited. The Fund did not have any employees during the year. There were no significant changes in the nature of the Fund's activities during the year. Significant changes in state of affairs In the opinion of the Directors, there were no significant changes in the state of affairs of the Fund that occurred during the financial period which are not otherwise disclosed in this report. Events subsequent to balance sheet date As at the date of this report the Directors are not aware of any matters or circumstances which have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the Fund, the results of those operations or the state of affairs of the Fund in future financial years subsequent to 30 June which are not otherwise disclosed in this report. Likely developments and expected results of operations The Fund will continue to be managed in accordance with the investment objectives and guidelines set out in the governing documents of the Fund and in accordance with the provisions of the Fund Constitution. The results of the Fund will be affected by a number of factors, including the performance of investment markets in which the Fund invests. Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. Disclosures of information relating to the likely developments in the operations, and the expected results of those operations in future financial years of the Fund have not been included in this report as the Responsible Entity believes it 1

5 Director's report may result in unreasonable prejudice to the Fund. Environmental regulation The Fund's operations are not regulated by any significant environmental regulation under a Commonwealth, State or Territory law. Indemnifying officers or auditors No insurance premiums are paid for out of the assets of the Fund in regard to insurance cover provided to either the Responsible Entity or the auditors of the Fund. So long as the officers of the Responsible Entity act in accordance with the Fund Constitution and the Corporations Act 2001, the officers remain indemnified out of the assets of the Fund against any losses incurred while acting on behalf of the Fund. The auditors of the Fund are in no way indemnified out of the assets of the Fund. Fees paid to and interests held in the Fund by the responsible entity or its associates Fees paid to the Responsible Entity out of Fund property during the year are disclosed in note 13 to the financial report. No fees were paid out of Fund property to the directors of the Responsible Entity during the year. Interests in the Fund held by the Responsible Entity and its associates during the year are disclosed in note 13 to the financial report. Review and results of operations The financial report for the financial period ended 30 June, and the results herein, are prepared in accordance with Australian Equivalents to International Financial Reporting Standards ( AIFRS ). The operating profit from continuing activities before financing costs attributable to ordinary unitholders, under AIFRS, for the financial period ended 30 June was a profit/(loss) of (12,585,561). Results Total net investment income/(loss) For the period from 10 April 2007 to 30 June (8,169,866) Operating profit/(loss) before finance costs attributable to unitholders (12,585,561) Distributions The Fund did not pay any distributions during the year. 2

6 Director's report Consistent with our statements in the governing documents of the Fund, future performance is not guaranteed. Investors should exercise care in using past performances as a predictor of future performance. Value of assets Net assets for unit pricing purposes 49,990,284 Effect of classification of net assets attributable to unitholders as a liability (49,990,284) Net assets under AIFRS - Interests in the Fund The movement in units on issue in the Fund during the period is disclosed in note 5 of the financial report. The value of the Fund's assets and liabilities is disclosed on the balance sheet and derived using the basis set out in note 1 of the financial report. Auditor's independence declaration A copy of the Auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 4 of the financial report. Signed in accordance with a resolution of the Board of Directors: Director:... Gervaise Robert John Heddle Dated this... day of... 3

7 Auditor's independence declaration I declare that, to the best of my knowledge and belief, during the year ended 30 June there have been: (i) (ii) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. [Enter place of signing] 4

8 Income statement Note 10 April 2007 to 30 June Investment income Interest income from financial assets not held at fair value through profit or loss 965,473 Net gains/(losses) on financial instruments held at fair value through profit or loss 4 (12,776,953) Dividend income 3,618,753 Other operating income 22,861 Total net investment income/(loss) (8,169,866) Expenses Management fees 1,651,946 Interest expense 2,268,964 Dividends paid on short equity positions 145,463 Transaction costs 349,322 Total operating expenses 4,415,695 Operating profit/(loss) (12,585,561) Financing costs attributable to unitholders (Increase)/decrease in net assets attributable to unitholders 5 12,585,561 Profit/(loss) for the period - The above income statement should be read in conjunction with the accompanying notes 5

9 Balance sheet As at 30 June Assets Cash and cash equivalents 7 144,356 Receivables 10 1,546,598 Financial assets held at fair value through profit or loss 8 52,717,346 Total assets 54,408,300 Liabilities Payables ,966 Financial liabilities held at fair value through profit or loss 9 3,690,050 Total liabilities (excluding net assets attributable to unitholders) 4,418,016 Net assets attributable to unitholders - liability 5 49,990,284 Note Represented by Net assets attributable to unitholders - liability 49,990,284 The above balance sheet should be read in conjunction with the accompanying notes 6

10 Statement of changes in equity Total equity at the beginning of the financial year - Profit/(loss) for the year Net income/(expense) recognised directly in equity - Total recognised income and expense for the year - Transactions with equity holders in their capacity as equity holders - Total equity at the end of the financial year - Note 10 April 2007 to 30 June - Under AIFRS, net assets attributable to unitholders are classified as a financial liability rather than equity. As a result there was no equity at the start or end of the current period. The above statement of changes in equity should be read in conjunction with the accompanying notes. 7

11 Cash flow statement Note 10 April 2007 to 30 June Cash flows from operating activities Proceeds from sale of financial instruments at fair value through profit or loss 156,397,918 Purchase of financial instruments at fair value through profit or loss (218,202,167) Dividends received 3,329,272 Interest received 944,201 Other income received Interest paid (1,235,845) (2,268,964) GST income received 22,861 Management fees paid Dividends on short sales paid Brokerage and other fees (1,268,720) (120,784) (349,322) Net cash inflow/(outflow) from operating activities 14 (62,751,550) Cash flows from financing activities Payments for redemptions by unitholders (380,095) Proceeds from applications by unitholders 63,276,000 Net cash inflow/(outflow) from financing activities 62,895,905 Net increase/(decrease) in cash and cash equivalents 144,355 Cash and cash equivalents at end of year 7 144,355 The non-cash financing activities of the Fund have been disclosed in note 14(b). The above cash flow statement should be read in conjunction with the accompanying notes 8

12 1 Summary of significant accounting policies General information The financial report covers MQ Geared Equity Income Fund ("Fund") as an individual entity. The Fund was registered as a managed investment scheme on 10 April 2007 and will terminate 80 years (less one day) after the date of establishment, unless terminated earlier by an extraordinary resolution as determined by the Fund's members; the date specified by the Fund's responsible entity in a notice given to the Fund's members or on another date as specified by and in accordance with the Fund's constitution or by law. The Responsible Entity of the Fund is MQ Portfolio Management Limited, a wholly owned subsidiary of Macquarie Bank Limited ( MBL ) which in turn is a wholly owned subsidiary of Macquarie Group Ltd. The registered office of the Responsible Entity is No.1 Martin Place, Sydney, NSW The financial report is presented in the Australian currency. The principal activity of the Fund is to buy a portfolio of Australian shares and sell options over some or all of those shares, or options over a share price index or share price index futures, to enhance income and manage risk. At a later stage, the Unitholders may also gain exposure to other Underlying strategies. The Unitholders in the Fund are provided with capital protection by Macquarie bank Limited. The financial report was authorised for issue by the Directors on 25 September. The Directors of the responsible entity have the power to amend and reissue the financial report. The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations, the Corporations Act 2001 in Australia and the Fund Constitution. The financial report is prepared on the basis of fair value measurement of assets and liabilities except where otherwise stated. Compliance with International Financial reporting Standards Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial report of the Fund, comprising the financial statements and the notes thereto, comply with International Financial Reporting Standards (IFRS). (b) Financial instruments (i) Classification The Fund's investments are classified as at fair value through profit or loss. They comprise: Financial instruments held for trading These include derivative financial instruments including futures and options. The Fund does not designate any derivatives as hedges in a hedging relationship. Financial instruments designated at fair value through profit or loss upon initial recognition These include financial assets that are not held for trading purposes and which may be sold. These are investments in exchange traded debt and equity instruments, unlisted trusts, unlisted equity instruments and commercial paper. 9

13 1 Summary of significant accounting policies continued (b) Financial instruments continued (i) Classification continued Financial assets and financial liabilities designated at fair value through profit or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Fund s documented investment strategy. The Fund s policy is for the responsible entity to evaluate the information about these financial assets on a fair value basis together with other related financial information. The Fund makes short sales in which a borrowed security is sold in anticipation of a decline in the market value of that security, or it may use short sales for various arbitrage transactions. Short sales are classified as financial liabilities at fair value through profit or loss. (ii) Recognition/derecognition The Fund recognises financial assets and financial liabilities on the date it becomes party to the contractual agreement (trade date) and recognises changes in fair value of the financial assets or financial liabilities from this date. Investments are derecognised when the right to receive cash flows from the investments have expired or the Fund has transferred substantially all risks and rewards of ownership. (iii) Measurement Financial assets and liabilities held at fair value through the profit and loss are measured initially at fair value excluding any transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed immediately. Subsequent to initial recognition, all instruments held at fair value through profit or loss are measured at fair value with changes in their fair value recognised in the income statement. Fair value in an active market The fair value of financial assets and liabilities traded in active markets is based on their quoted market prices at the balance sheet date without any deduction for estimated future selling costs. Financial assets are priced at current bid prices, while financial liabilities are priced at current asking prices. Fair value in an inactive or unquoted market The fair value of financial assets and liabilities that are not traded in an active market is determined using valuation techniques. These include the use of recent arm s length market transactions, reference to the current fair value of a substantially similar other instrument, discounted cash flow techniques, option pricing models or any other valuation technique that provides a reliable estimate of prices obtained in actual market transactions. For other pricing models, inputs are based on market data at the balance sheet date. Fair values for unquoted equity investments are estimated, if possible, using applicable price/earnings ratios for similar listed companies adjusted to reflect the specific circumstances of the issuer. (iv) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 10

14 1 Summary of significant accounting policies continued (c) Net assets attributable to unitholders Units are redeemable at the unitholders' option and are therefore classified as financial liabilities. The units can be put back to the Fund at any time for cash based on the redemption price. The fair value of redeemable units is measured at the redemption amount that is payable (based on the redemption unit price) at the balance sheet date if unitholders exercised their right to put the units back to the Fund. (d) Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Payments and receipts relating to the purchase and sale of investment securities are classified as cash flows from operating activities, as movements in the fair value of these securities represent the Fund's main income generating activity. (e) Investment income Investment income represents dividend income, interest income, changes in the fair value of, and realised gains on investments and interest bearing financial instruments. Interest income and expenses are recognised in the income statement for all financial instruments that are not held at fair value through profit or loss on an accruals basis. Interest income on assets held at fair value through the profit or loss is included in the net gains/(losses) on financial instruments. Other changes in fair value for such instruments are recorded in accordance with the policies described in note 1(b). Dividend income is recognised on the ex-dividend date with any related foreign withholding tax recorded as an expense. Dividends declared on securities sold short are recorded as a dividend expense on the ex-dividend date. (f) Expenses All expenses, including Responsible Entity s fees and custodian fees, are recognised in the income statement on an accruals basis. (g) Income tax Under current legislation, the Fund is not subject to income tax provided the taxable income of the Fund is fully distributed either by way of cash or reinvestment (ie unitholders are presently entitled to the income of the Fund). Financial instruments held at fair value may include unrealised capital gains. Should such a gain be realised, that portion of the gain that is subject to capital gains tax will be distributed so that the Fund is not subject to capital gains tax. Realised losses are not distributed to unitholders but are retained in the Fund to be offset against any realised gains. If realised gains exceed realised losses, the excess is distributed to unitholders. The benefit of imputation credits and foreign tax paid are passed on to unitholders. The Fund may incur withholding tax imposed by certain countries on investment income. Such income is recorded gross of withholding tax in the income statement. 11

15 1 Summary of significant accounting policies continued (h) Distributions In accordance with the Fund Constitution, the Fund fully distributes its distributable (taxable) income, and any other amounts determined by the Responsible Entity, to unitholders by cash or reinvestment. The distributions are recognised in the income statement as finance costs attributable to unitholders. (i) Increase/decrease in net assets attributable to unitholders Income not distributed is included in net assets attributable to unitholders. Movements in net assets attributable to unitholders are recognised in the income statement as finance costs. (j) Foreign currency translation Functional and presentation currency Items included in the Fund s financial report are measured using the currency of the primary economic environment in which it operates (the functional currency ). This is the Australian dollar, which reflects the currency of the economy in which the Fund competes for funds and is regulated. The Australian dollar is also the Fund s presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement. The Fund does not isolate that portion of gains or losses on securities and derivative financial instruments that are measured at fair value through profit or loss and which is due to changes in foreign exchange rates from that which is due to changes in the market price of securities. Such fluctuations are included with the net gains or losses on financial instruments at fair value through profit or loss. (k) Due from/to brokers Amounts due from/to brokers represent payables for securities purchased and receivables for securities sold that have been contracted for but not yet delivered by the end of the period. Trades are recorded on trade date, and normally settled within three business days. 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. Indicators that the amount due from brokers is impaired include significant financial difficulties of the broker, probability that the broker will enter bankruptcy or financial reorganisation and default in payments. (l) Receivables Receivables may include amounts for dividends, interest and fund distributions. Dividends and trust distributions are accrued when the right to receive payment is established. Interest is accrued at the reporting date from the time of last payment in accordance with the policy set out in note 1(e) above. Amounts are generally received within 30 days of being recorded as receivables. (m) Payables Payables include liabilities and accrued expenses owing by the Fund which are unpaid as at balance date. 12

16 1 Summary of significant accounting policies continued (m) (n) Payables continued The distribution amount payable to unitholders as at the reporting date is recognised separately on the balance sheet as unitholders are presently entitled to the distributable income under the Fund's Constitution. Applications and redemptions Applications received for units in the Fund are recorded net of any entry fees payable prior to the issue of units in the Fund. Redemptions from the Fund are recorded gross of any exit fees payable after the cancellation of units redeemed. (o) Goods and Services Tax (GST) The amount of GST incurred by the Fund that is not recoverable from the Australian Taxation Office ( ATO ) is recognised as an expense or as part of the cost of acquisition of an asset. The Fund qualifies for Reduced Input Tax Credits at the rate of 75% on various services such as Manager s fees and Trustee s fees. These expenses have been recognised in the Income Statement net of the amount of GST recoverable from the ATO. The net amount of GST recoverable/payable from/to the ATO is included in the balance sheet. Cash flows relating to GST are included in the cash flow statement on a gross basis. (p) Use of estimates The Fund makes estimates and assumptions that effect the reported amounts of assets and liabilities within the next financial year. Estimates are continually evaluated and are based on historical experience and other factors, including reasonable expectations of future events. The Directors believe the estimates used in preparing the financial report are reasonable. Actual results in the future may differ from those reported. For the majority of the Fund's financial instruments, quoted market prices are readily available. However certain financial instruments, for example, over the counter derivatives or unquoted securities are fair valued using valuation techniques. Where valuation techniques (for example pricing models) are used to determine fair values, they are validated and periodically reviewed by experienced personnel of the responsible entity, independent of the area that created them. Models are calibrated by back-testing to actual transactions to ensure that outputs are reliable. Models use observable data, to the extent practicable. However, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments. For certain other financial instruments, including amounts due from/to brokers, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the immediate short-term nature of these financial instruments. (q) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June reporting periods. The Directors assessment of the impact of these new standards (to the extent relevant to the Fund) and interpretations is set below: i) AASB 8 Operating Segments and AASB Amendments to Australian Accounting Standards arising from AASB 8. AASB 8 and AASB are effective for annual reporting periods beginning on or after 1 January The Fund has not adopted these standards early. Application of these standards will not effect any of the amounts recognised in the financial report, but may effect the segment disclosures provided in note 15. ii) Revised AASB 101 Presentation of financial statements and AASB Amendments to Australian 13

17 1 Summary of significant accounting policies continued (q) New accounting standards and interpretations continued Accounting Standards arising from AASB 101. AASB 101 (Revised) is applicable to annual reporting periods beginning on or after 1 January The Fund has not adopted this standard early. It requires the presentation of a statement of comprehensive income and makes changes to the statements of changes in equity but will not effect any of the amounts recognised in the financial report. If the Fund makes a prior period adjustment or re-classifies items in the financial report, it will need to disclose a third balance sheet (statement of financial position), this one being at the beginning of the comparative period. iii) AASB 132 Financial Instruments: Presentation and AASB -2 Amendments to Australian Accounting Standards - Puttable Financial Instruments and Obligations Arising on Liquidation (Revised AASB 132). Revised AASB 132 is applicable for reporting periods beginning on or after 1 January The Fund has not adopted this standard early. Application of this standard will not effect any of the amounts recognised in the financial report as the Fund is obligated to distribute all of its taxable income in accordance with the Fund's Constitution. Accordingly, there will be no change to classification of unitholders' funds as a liability and therefore no impact on profit or loss and equity. (r) Segment reporting A business segment is identified for a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is identified when products or services are provided within a particular economic environment subject to risks and returns that are different from those of segments operating in other economic environments. (s) Margin accounts Margin accounts comprise cash held as collateral for derivative transactions and short sales. The cash is held by the broker and is only available to meet margin calls. 14

18 2 Financial risk management The Fund s activities expose it to a variety of financial risks: market risk (including price risk, foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Fund s overall risk management programme focuses on ensuring compliance with the Fund s Product Disclosure Statement and seeks to maximise the returns derived for the level of risk to which the Fund is exposed. The Fund uses derivative financial instruments to alter certain risk exposures. Financial risk management is carried out by the investment management department under policies approved by the Board of Directors of the Responsible Entity (the Board). The Fund uses different methods to measure different types of risk to which it is exposed. These methods may include sensitivity analysis in the case of foreign exchange and other price risks and ratings analysis for credit risk. The Investment Manager adopted the following investment objectives, policies and processes for managing the Fund s capital: Investment objectives The Fund's investment objective is to generate income from equities above that of the S&P/ASX 200. The Fund seeks to achieve its investment objective by providing Unitholders with exposure to an investment portfolio of Australian shares and selling options over some or all of those shares, and therefore is exposed to foreign exchange risk, credit risk, interest rate risk, other price risk and liquidity risk. The Fund aims to achieve higher levels of returns with moderate to high level of risk by providing exposure to a portfolio of specialist equity strategies and absolute return strategies managed by the investment manager, MQ Specialist Investment Management Limited ("Investment Manager"). Investment policies The primary objective of the fund is to generate income from equities above that of the S&P/ASX 200. As share price volatilities increase with changing global market conditions, the Fund s positions are monitored for both long and short positions as a primary measure. These limits are identified and calculated by the divisional risk management team in conjunction with the Risk Management Division of the investment manager. Further, these limits are monitored on a daily basis and their adequacy is reviewed on an ongoing basis. There are self imposed parameters such as country, section and stock exposure limits currently applying to the Fund as a secondary measure, and these are subject to ongoing review. Derivatives are generally used for hedging purposes but may be used to gain market exposure. Exchange traded and over the counter derivatives, including (but not limited to) futures and options may be used by the Fund. The relatively small margin required to establish a position in these instruments permits a high degree of leverage. As a result, these instruments can be highly volatile. Basis risk (ie the risk that the derivative position will not move in line with the underlying position) is taken into account by the investment managers as part of the investment process. Daily monitoring of the use of derivatives is undertaken by the divisional risk team. Any breaches are reported to compliance and management. Investment processes The Fund aims to achieve its objective by providing exposure to various investment strategies employed by the investment manager. The Fund will apply one of the investment strategies directly to a component of the Fund. Alternatively, the Fund may invest directly in the single strategy funds managed by the investment manager. The investment manager will usually leverage the Fund's exposure to the underlying investment strategies. The level of leverage utilised by the investment manager may be significant. Whilst the use of leverage may increase the potential return on the investment in the Fund, it also increases the level of risk and may also result in substantial losses. The Fund may also trade futures contracts for hedging the overall risk and return profile of the Fund. 15

19 2 Financial risk management continued The Fund may provide exposure to the investment strategies described below. In addition to the investment strategies discussed below, other investment strategies may be used from time to time as determined by the Directors. MQ Buy Write Strategy MQ Special Events Strategy MQ Australian Absolute Return Strategy The risks and the respective risk management policies employed by the Fund are discussed below. Refer to note 12 for further information on derivative financial instruments. (a) Market risk Market price risks comprises of three components; other price risk, foreign exchange risk and interest rate risk. (i) Other price risk Other price risk is the risk that the value of the Fund s investment portfolio will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or foreign currency risk). MQ Geared Equity Income Fund is exposed to other price risk on all of the investments held by the Fund. The Fund s other price risk is monitored by the Investment Manager on an ongoing basis and is managed by adopting the following policies to minimise exposure to other price risk. Overall portfolio exposure - managed by ensuring that the overall exposure of the portfolio is within acceptable limits Stock limits - manage exposure to any single stock and ensure diversification Sector limits - manage exposure to any single sector to ensure diversification Market capitalisation limit - manage exposure to any significant holdings in a single security Foreign exchange hedging policy - ensure impact of of foreign exchange fluctuations are minimised in the portfolio through hedging by the investment manager Country limits - manage exposure to any single country and ensure diversification across allowable countries Short sales made by the Fund involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security, because losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested. The Fund s equity securities held long and short, whether cash positions or through derivative instruments, are substantially all publicly traded. The table below summarises the sensitivity of the Fund's operating profit and net assets attributable to unitholders to market risk. The reasonably possible movements in the risk variables have been determined based on management s best estimate, having regard to a number of factors, including historical levels of changes in interest rates and foreign exchange rates, historical correlation of the Fund s investments with the relevant benchmark and market volatility. However, actual movements in the risk variables may be greater or less than anticipated due to a number of factors, including unusually large market shocks resulting from changes in the performance of the economies, markets and securities in which the Fund invests. As a result, historic variations in risk variables are not a definitive indicator of future variations in the risk variables. Price risk Impact on operating profit/net assets attributable to unitholders +5% -5% 30-Jun-08 1,691,912-1,691,912 16

20 2 Financial risk management continued (ii) Foreign exchange risk The Fund holds both monetary and non-monetary assets denominated in currencies other than the Australian dollar. The foreign exchange risk relating to non-monetary assets and liabilities is a component of price risk. Foreign exchange risk arises as the value of monetary securities denominated in other currencies will fluctuate due to changes in exchange rates. The Fund s foreign currency exchange risk is monitored by the Investment Manager on an ongoing basis and is managed by adopting the following policies to minimise exposure to foreign currency exchange risk. Foreign exchange hedging policy - ensure impact of of foreign exchange fluctuations are minimised in the portfolio through hedging by the investment manager using currency forward exchange contracts Country limits - manage exposure to any single country and ensure diversification across allowable countries As the majority of the foreign exchange risk is hedged by the Investment Manager there will be little to no sensitivities to foreign currency movements. However, for accounting purposes, the Fund does not designate any derivatives as hedges in a hedging relationship, and hence these derivative financial instruments are classified as at fair value through profit or loss. The table below summarises the Fund s exposure to foreign exchange risks as at 30 June. US Dollars 30 June A Cash and cash equivalents - Financial assets held at fair value through profit or loss - Receivables (money due to broker) (15,883) Payables - Financial liabilities held at fair value through profit or loss - (15,883) As the Fund hedges significant foreign exchange risk but has minimal exposures to foreign exchange risk, sensitivity analysis is not presented, as management consider the risk immaterial. For example, a change of 5% on the exchange rate between Australian dollar/us dollar would have no material impact on the net asset of the fund. In accordance with the Fund s policy, an independent risk management function monitors the Fund s currency position on a daily basis. 17

21 2 Financial risk management continued (iii) Interest rate risk The Fund is exposed to interest rate risk on its bank and broker balances and its zero coupon bonds. The Fund holds 30% of the Net Assets attributable to Unitholders in fixed interest securities. Compliance with the Fund's policy is reported to the Board on a monthly basis. Interest income and expense may fluctuate in amount, in particular due to changes in interest rates. The table below summarises the impact of an increase/decrease of interest rates on the Fund's net assets attributable to unitholders through changes in fair value or changes in future cash flows: +50bps -50bps Impact on operating profit/net assets attributable to unitholders 30 June (840,746) 894,431 (b) Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge its obligation and cause the other party to incur a financial loss. The Fund takes on exposure to credit risk, which is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment (including payment of amounts arising from derivative contracts) in full when due, that it has entered into with the Fund. All investment transactions are settled/paid for upon delivery using approved brokers. The risk of default is considered minimal since delivery of securities sold is only made once the broker has received payment. On a purchase, payment is made once the broker has received the securities. If either party fails to meet their obligation, the trade will fail. The Fund is exposed to credit risk on its cash and cash equivalents held and on the derivative contracts held through approved brokers. This risk is monitored on an ongoing basis. Financial assets which potentially subject the Fund to concentrations of credit risk consist principally of bank deposits and balances, assets held with Goldman Sachs International (the Prime Broker ), and derivatives where the Prime Broker is the counterparty. The Prime Broker also provides the clearing and depository operations for the Fund s security transactions. The Prime Broker provides loans and finance to the Fund and, as continuing security for the payment and discharge of all liabilities of the Fund, assets held by the Prime Broker will be charged in favour of the Prime Broker. As at 30 June the net assets of the Fund, which amount to 49,990,284 with the Prime Broker whose credit ratings issued by the Moody's/S&P at the year end were: Goldman Sachs Aa3 Collateral pledged under prime brokerage agreements The Fund has entered into a prime brokerage agreement with Goldman Sachs, the Fund's prime broker. All of the assets of the fund are pledged as cross-collateral for all amounts owed to the prime broker including amounts due to brokers for securities purchased and securities sold short. The Fund limits its exposure to credit risk by transacting the majority of its securities and contractual commitment activities with broker-dealers, banks and regulated exchanges with high credit ratings and that the Fund considers to 18

22 2 Financial risk management continued be well established. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets excluding those assets not subject to credit risk (i.e. equity securities as disclosed in note 8). In accordance with the Fund's policy, the Investment Manager monitors the Fund's credit position on a daily basis. (c) Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with financial liabilities. The Fund is exposed to monthly cash redemptions of redeemable units and as a result it primarily holds investments that are traded in an active market and can be readily disposed. The Fund's listed securities are considered readily realisable. The Fund may invest in derivative contracts traded over the counter, which are not traded in an organised market and may be illiquid. As a result, the Fund may not be able to quickly liquidate its investments in these instruments at an amount close to their fair value to meet its liquidity requirements or to respond to specific events such as deterioration in the creditworthiness of any particular issuer or counterparty. As of 30 June, the Investment Manager believes that all of its positions are in liquid instruments that can be liquidated without any significant market impact. The table below analyses the Fund s financial liabilities, including gross settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the earliest possible contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts, as the impact of discounting is not significant. 30 June Less than 1 month 1-6 months 6-12 months No stated maturity Financial liabilities held at fair value through profit or loss - 54,523-3,635,527 3,690,050 Dividends payable on short positions 19,658 5, ,679 Redemption payable 320, ,061 Other payables - 383, ,226 Net assets attributable to unitholders 4,999,028 44,991, ,990,284 Total financial liabilities 5,338,747 45,434,026-3,635,527 54,408,300 Total In accordance with the Fund s policy, the Investment Manager monitors the Fund s liquidity position on a continual basis to enable them to close out of positions at any point in time. Further, prior to any derivative position being entered into, the relationship between the likely liquidity and the size of the position taken is considered. (d) Fair value of financial assets and financial liabilities The carrying amount of all the Fund's financial assets and liabilities included in the balance sheet are a reasonable estimate of their fair value and of the credit risk of these assets and liabilities. Details on how the fair value of financial instruments is determined are disclosed in note 1(b). 19

23 2 Financial risk management continued The Fund's operations result in exposure to fluctuations in commodity prices. Management monitors commodity prices and initiates instruments to manage exposure to these risks when it deems appropriate. Currently, the Fund has not initiated any such instruments. 3 Remuneration of Auditors During the year the following fees were paid or payable for services provided by the auditor of the Fund: (a) Audit services PricewaterhouseCoopers Australian firm Auditing and review of financial report 11,825 Other audit work under the Corporations Act Total remuneration for audit services 11,825 (b) Non-audit services PricewaterhouseCoopers Australian Firm Tax compliance services 7,678 Other Total remuneration for non-audit services 7,678 The above costs are paid by the Responsible Entity on behalf of the Fund and recouped through the operating expenses of the Fund. 4 Net gains/(losses) on financial instruments held at fair value through profit or loss - Financial assets Net gain/(loss) on financial assets designated as at fair value through profit or loss (17,262,372) Net gain/(loss) on financial assets held for trading (2,727,468) Net gain/(loss) on financial assets held at fair value through profit or loss (19,989,840) Financial liabilities Net gain/(loss) on financial liabilities held for trading 7,212,887 Net gain/(loss) on financial liabilities held at fair value through profit or loss 7,212,887 Total (12,776,953) 20

24 5 Net assets attributable to unitholders Movements in number of units and net assets attributable to unitholders during the year were as follows: Units Applications 63,276,000 63,276,000 Redemptions (800,000) (700,155) Increase/(decrease) in net assets attributable to unitholders - (12,585,561) Closing balance at 30 June 62,476,000 49,990,284 As stipulated within the Fund constitution, each unit represents a right to an individual share in the Fund and does not extend to a right to the underlying assets of the Fund. Capital risk management The Fund manages its net assets attributable to unitholders as capital, notwithstanding net assets attributable to unitholders are classified as a liability. The amount of net assets attributable to unitholders can change significantly on a daily basis as the Fund is subject to daily applications and redemptions at the the discretion of unitholders. The Fund monitors the level of daily applications and redemptions relative to the liquid assets in the Fund. The Fund will generally pay the the redemption proceeds from withdrawal requests within 5 business days after the determination of the unit price. The unit price is generally determined within 15 business days of the first business day of the month following the month in which the withdrawal request was received. The Fund may further extend the period for processing a withdrawal in certain circumstances such as if: the Fund has taken all reasonable steps to realise sufficient assets to satisfy a withdrawal request but is not able to do so; or the Fund believes it is not in the best interests of investors as a whole to realise assets; or the Fund is unable to calculate the redemption price or fairly determine the Net Asset Value due to one or more circumstances outside the Fund's control. If the Fund becomes illiquid (as defined in the Corporations Act 2001), withdrawals will only be allowed if the Fund makes an offer of withdrawal. If the Fund makes an offer of withdrawal, unitholders may only be able to withdraw part of their investment. If the Fund receives withdrawal requests comprising more than 10% of the Units on issue in a Class, the Fund may pro-rata the withdrawal requests and stagger the processing of remaining unsatisfied withdrawal requests. 21

25 5 Net assets attributable to unitholders continued The ratio of liquid assets to net applications/(redemptions) at 30 June were as follows: Average monthly applications/(redemptions) 5,214,654 Liquid assets of the Fund 33,800,790 Net assets attributable to unitholders 49,990,284 Ratio of liquid assets to net assets attributable to unitholders (%) 68 6 Distributions to unitholders There are no distributions paid/payable in the current year 7 Cash and cash equivalents Cash at bank 144, ,356 8 Financial assets held at fair value through profit or loss Held for trading Futures contracts 236,328 Designated at fair value through profit or loss Listed equity securities 37,291,961 Fixed Interest securities 15,189,057 Total 52,717,346 22

26 9 Financial liabilities held at fair value through profit or loss Held for trading Derivatives 54,523 Designated at fair value through profit or loss Listed equity securities sold short 3,635,527 Total 3,690, Receivables Dividend receivable 289,482 Interest receivable 21,272 Other receivables 1,185,842 RITC Credits 50,002 1,546, Payables Management fee payable 383,226 Application monies received in advance 320,061 Dividend payable on short equity positions 24, , Derivative financial instruments In the normal course of business the Fund enters into transactions in various derivative financial instruments with certain risks. A derivative is a financial instrument or other contract which is settled at a future date and whose value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable. Derivative financial instruments require no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. Derivative transactions include a wide assortment of instruments, such as forwards, futures and options. Derivatives are considered to be part of the investment process. The use of derivatives is an essential part of the Fund s portfolio management. Derivatives are not managed in isolation. Consequently, the use of derivatives is multifaceted and includes: hedging to protect an asset or liability of the Fund against a fluctuation in market values or to reduce volatility a substitution for trading of physical securities adjusting asset exposures within the parameters set in the investment strategy, and adjusting the duration of fixed interest portfolios or the weighted average maturity of cash portfolios. 23