MQ Geared Equity Income Fund ARSN Annual report - 30 June 2009

Transcription

1 ARSN Annual report -

2 MQ Portolio 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 offcers and Directors, may hold units in MQ Geared Equity Income Fund from time to time.

3 ARSN Annual report - Contents Directors' report Auditor's independence declaration Income statement Balance sheet Statement of changes in equity Cash flow statement Directors' declaration Independent auditor's report to the unitholders of MQ Geared Equity Income Fund Page This financial report covers MQ Geared Equity Income Fund as an individual entity. The Responsible Entity of MQ Geared Equity Income Fund is MQ Portfolio Management Limited (ACN ). The Responsible Entity's registered office is Mezzanine Level, NO.1 Martin Place, Sydney, NSW

4 Directors' report Directors' report The directors of MO Portfolio Management Limited (a wholly owned subsidiary of Macquarie Group Limited), the Responsible Entity of MO Geared Equity Income Fund, present their report together with the financial report of MQ Geared Equity Income Fund ("the Fund") for the year ended. Principal activities The principal activity of the Fund in the past has been to achieve long-term absolute returns with low to moderate levels of risk by providing exposure to a portfolio of absolute return strategies and specialist equity strategies The Fund did not have any employees during the year. During the year the fall in the value of this portolio of strategies was sufficient to trigger a full allocation to Fixed Interest Investments in accordance with the capital protection provisions outlined in the Fund's Product Disclosure Statement. Consequently the equity portion of the portolio has been sold and replaced with a fixed interest zero coupon bond which aims to protect the capital value of the portolio so that the value of the Fund on the Capital Protection Date is at least equal to the aggregate capital protected amount (being the total Capital Protected Amount for all Unitholders). This means that the Fund will no longer trade in or provide exposure to absolute return or equity strategies. The principal activity of the Fund will be to hold the fixed interest zero coupon bond until it matures on the Capital Protection Date. Directors The following persons held office as directors of MQ Portfolio Management Limited during the year or since the end of the year and up to the date of this report: o Weiss (resigned 23/06/2009) G J Mackay (resigned 19/09/2008) B N Terry G R J Heddle S Thompson (appointed 03/02/2009) Review and results of operations During the year, the Fund continued to invest funds in accordance with its investment strategy as set out in the governing documents of the Fund and in accordance with the provisions of the Fund Constitution. Results The performance of the Fund, as represented by the results of its operations, was as follows: Year Ended 2009 Period ended 2008 Total net investment income/(loss) Operating profitl(loss) before finance costs attributable to unitholders (451,546) (1,282,797) (8,169,866) (12,585,561 ) Significant changes in state of affairs During the year the threshold management provisions under the Fund's Product Disclosure Statement required the equity portion of the portfolio to be replaced with a fixed interest zero coupon bond. As a result the Fund is required to remain invested in this security until the Capital Protection Date. -2-

5 Directors' report Directors' report Matters subsequent to the end of the financial year No matter or circumstance has arisen since that has significantly affected, or may significantly affect: (i) the operations of the Fund in future financial years, or (ii) the results of those operations in future financial years, or (iii) the state of affairs of the Fund in future financial years. 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's Constitution. The results of the Fund's operations will only be affected by movements in interest rates as the fund is now fully invested in zero coupon bonds. 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. Further information on likely developments in the operations of the Fund and the expected results of those operations have not been included in this report because the Responsible Entity believes it would be likely to result in unreasonable prejudice to the Fund. Indemnification and insurance of offcers and 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 offcers 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 and its associates out of Fund property during the year are disclosed in note 11 on page 22 of the financial statements. No fees were paid out of Fund property to the directors of the Responsible Entity during the year. The number of interests in the Fund held by the Responsible Entity or its associates as at the end of the financial year are disclosed in note 11 on page 22 of the financial statements. Interests in the Fund The movement in units on issue in the Fund during the year is disclosed in note 6 of the financial statements. The value of the Fund's assets and liabilities is disclosed on the balance sheet and derived using the basis set out in note 2 of the financial statements. Environmental regulation The operations of the Fund are not subject to any particular or significant environmental regulations under a Commonwealth, State or Territory law. -3-

6 Directors' report Directors' 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 5. This report is made in accordance with a resolution of the directors. M-.. G R J Heddle Director Sydney 29 September

7 fjcew1erhouseßpers I PricewaterhouseCoopers ABN Darling Park Tower Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone Auditor's Independence Declaration Facsimile ww.pwc.com/au As lead auditor for the audit of MQ Geared Equity Income Fund for the year ended, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of MQ Geared Equity Income Fund. ß- E A Barron Partner PricewaterhouseCoopers Sydney 29 September 2009 Liability limited by a scheme approved under Professional Standards Legislation

8 Income statement For the year ended Income statement Notes 10 April 2007 to 2008 Investment income Interest income from financial assets not held at fair value through profit or loss Dividend income Net gains/(losses) on financial instruments held at fair value through profit or loss Other operating income Total net investment income/(loss) 70, , ,775 3,618,753 5 (1,029,045) 758 (12,371,437) 22,861 (451,546) (8,169,867) Expenses Responsible Entity's fees Interest expense Transaction costs Dividends paid on short equity positions Total operating expenses Operating profit/(ioss) ,262 1,651,945 5,206 2,268,964 7, ,322 4, , ,251 4,415,694 (1,282,797) (12,585,561) Finance costs attributable to unitholders (Increase)/decrease in net assets attributable to unitholders Profit/(Ioss) for the year 6 1,282,797 12,585,561 The above income statement should be read in conjunction with the accompanying notes. -6-

9 Balance sheet As at Balance sheet Notes Assets Cash and cash equivalents 7 Due from brokers - receivable for securities sold Receivables Financial assets held at fair value through profit or loss 8 Total assets Liabilties Unitholder redemption payable Dividend payable Responsible Entity fees payable Financial liabilities held at fair value through profit or loss 9 Total liabilties (excluding net assets attributable to unitholders) Net assets attributable to unitholders - liabilty 6 93, ,356 1,185,842 6, ,756 44,824,234 52,717,346 44,924,123 54A08,300 1,991, ,061 24,679 37, ,226 3,690,050 2,029,056 4A18,016 42,895,067 49,990,284 The above balance sheet should be read in conjunction with the accompanying notes. -7-

10 Statement of changes in equity For the year ended Statement of changes in equity Total equity at the beginning of the financial year Profitl(loss) for the year Net income/(expense) recognised directly in equity Total recognised income and expense for the financial year Transactions with equity holders in their capacity as equity holders Total equity at the end of the financial year Under AIFRS, net assets attributable to unitholders are classified as a liability rather than equity. As a result there was no equity at the start or end of the year. The above statement of changes in equity should be read in conjunction with the accompanying notes. -8-

11 Cash flow statement For the year ended Cash flow statement 10 April 2007 to Notes Cash flows from operating activities Proceeds from sale of financial instruments held at fair value through 81,797, ,397,918 profit or loss Purchase of financial instruments held at fair value through profit or loss (76,251,670) (218,202,167) Dividends received 795,255 3,329,272 Interest received 91, ,201 Other income received 758 (1,235,845) Responsible entity's fees paid (1,160,000) (1,268,720) Interest paid (5,206) (2,268,963) GST income received 44,357 22,861 Dividends paid on short equity positions (28,788) (120,784) Brokerage and other fees (7,674) (349,322) Changes in amounts due fromlto brokers (1,185,842) Net cash inflow/(outflow) from operating activities 12(a) 4,090,179 (62,751,549) Cash flows from financing activities Proceeds from applications by unitholders 63,276,000 Payments for redemptions by unitholders (4,140,912) (380,095) Net cash inflow/(outflow) from financing activities (4,140,912) 62,895,905 Net increase/(decrease) in cash and cash equivalents (50,733) 144,356 Cash and cash equivalents at the beginning of the year 144,356 Effects of foreign currency exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 7 93, ,356 The above cash flow statement should be read in conjunction with the accompanying notes. -9-

12 1 General information The financial report covers MO Geared Equity Income Fund ("the Fund") as an individual entity. The Fund was registered as a managed investment scheme on 10 April The Responsible Entity of the Fund is MQ Portfolio Management Limited (the "Responsible Entity" or "MOPML"). The Responsible Entity's registered office is Mezzanine Level, NO.1 Martin Place, Sydney, NSW The financial report is presented in Australian currency. The principal activity of the Fund since inception had been 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. During the year the fall in the value of this portfolio was suffcient to trigger a full allocation to Fixed Interest Investments in accordance with the capital protection provisions outlined in the Fund's Product Disclosure Statement (PDS). Consequently the Fund is now solely invested in a fixed interest zero coupon bond. The Fund will no longer trade in or provide exposure to any share or option positions. The principal activity of the Fund will be to hold the fixed interest zero coupon bond until it matures on the Capital Protection Date, in accordance with the capital protection provisions outlined in the Fund's PDS. The unitholders in the Fund are provided with capital protection by Macquarie Bank Limited. The financial statements were authorised for issue by the directors on 29 September The directors of the responsible entity have the power to amend and reissue the financial statements. 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated in the following text. (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 and the Corporations Act 2001 in Australia. 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 (IFRS) Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AI FRS). Compliance with AIFRS ensures that the financial report of the Fund, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards. (b) Financial instruments (i) Classification The Fund's investments are categorised as at fair value through profit or loss. They comprise: Financial instruments held for trading These include derivative financial instruments including futures, forward contracts and contracts for difference. 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, such as investments in exchange traded debt and equity instruments, unlisted trusts, unlisted equity instruments and commercial paper. Financial assets and financial liabilities may be designated at fair value through profit or loss at inception if they 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. -10-

13 2 Summary of significant accounting policies (b) Financial instruments 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 cashflows from the investments have expired or the Fund has transferred substantially all risks and rewards of ownership. (iii) Measurement (a) Financial assets and liabilties held at fair value through profit or loss Financial assets and liabilities held at fair value through profit or 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 pricinglearnings ratios for similar listed companies adjusted to reflect the specific circumstances of the issuer. (b) Loans and receivables Loan assets are measured initially at fair value plus transaction costs and subsequently amortised using the effective interest rate method, less impairment losses if any. Such assets are reviewed at each balance sheet date to determine whether there is objective evidence of impairment such as a significant or prolonged decline in the fair value below carrying amount. If any such indication of impairment exists, an impairment calculation is undertaken and any impairment loss is recognised in the income statement as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. If in a subsequent period the amount of an impairment loss recognised on a financial asset carried at amortised cost decreases and the decrease can be linked objectively to an event occurring after the write-down, the writedown is reversed through the income statement. (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. -11-

14 2 Summary of significant accounting policies (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, and bank overdrafts. Bank overdrafts are shown separately 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 Interest income and expenses are recognised in the income statement for all financial instruments that are not held at fair value through profi or loss using the effective interest method. Interest income on assets held at fair value through 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 2(b). The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or a shorter period where appropriate, to the net carrying amount of the financial asset or liability. When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, including transaction costs and all other premiums or discounts. Dividend income is recognised on the ex-dividend date. Dividends declared on securities sold short are recorded as a dividend expense on the ex-dividend date. (f) Expenses Responsible Entity's fees are recognised in the income statement on an accruals basis. All other expenses are recognised when incurred. (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 capital losses are not distributed to unitholders but are retained in the Fund to be offset against any realised capital gains. If realised capital gains exceed realised capital losses, the excess is distributed to unitholders. The benefis of imputation credits and foreign tax paid are passed on to unitholders. The Fund currently incurs withholding tax imposed by certain countries on investment income. Such income is recorded gross of withholding tax in the income statement. -12-

15 2 Summary of significant accounting policies (h) Distributions In accordance with the Fund Constitution, the Fund 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. ü) Foreign currency translation i) Functional and presentation currency Items included in the Fund's financial statements 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. ii) 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 settement of such transactions and from the translations at year 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 profi 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 fromlto brokers Amounts due fromlto 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 year. A provision for impairment of amounts due from brokers is established when there is objective evidence that the Trust will not be able to collect all amounts due from the relevant broker. Significant financial diffculties 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. (i) Receivables Receivables may include amounts for dividends and interest. Dividends 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 2(e) above. Amounts are generally received within 30 days of being recorded as receivables. Receivables include such items as RITC and application monies receivable from unitholders. (m) Payables Payables includes liabilities and accrued expenses owing by the Fund which are unpaid as at balance date. The distribution amount payable to unitholders as at the reporting date is recognised separately on the balance sheet when unitholders are presently entitled to the distributable income under the Fund's Constitution. -13-

16 2 Summary of significant accounting policies (n) 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. (0) Goods and Services Tax (GST) The GST incurred on the costs of various services provided to the Fund by third parties such as audit fees, custodial services and investment management fees have been passed onto the Fund. The Fund qualifies for Reduced Input Tax Credits (RITC) at a rate of 75% hence investment management fees, custodial fees and other expenses have been recognised in the income statement net of the amount of GST recoverable from the Australian Taxation Office (ATO). Accounts payable are inclusive of GST. The net amount of GST recoverable from the ATO is included in receivables 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 affect the reported amounts of assets and liabilities within the next financial year. Estimates are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. For the majority of the Fund's financial instruments, quoted market prices are readily available. However, certain financial instruments, such as, 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. (q) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 2009 reporting periods. The directors' assessment of the impact of these new standards (to the extent relevant to the Fund) and interpretations is set out below: (i) Revised AASB 101 Presentation of Financial Statements and AASB Amendments to Australian Accounting Standards arising from AASB 101 (effective from 1 January 2009) The revised AASB 101 requires the presentation of a statement of comprehensive income and makes changes to the statement of changes in equity, but will not affect any of the amounts recognised in the financial statements. If a Fund has made a prior period adjustment or has reclassified items in the financial statements, it will need to disclose a third balance sheet (statement of financial position), this one being as at the beginning of the comparative period. The Fund will apply the revised standard from 1 July (ii) AASB 132 Financial Standards - Puttable Financial from 1 January 2009) Instruments: Presentation and AASB Amendments to Australian Accounting Instruments and Obligations Arising on Liquidation (Revised AASB 132) (effective 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 affect any of the amounts recognised in the financial statements 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. (iii) AASB Amendments to Australian Accounting Standards - Improving Disclosures about Financial Instruments (effective from 1 January 2009) -14-

17 2 Summary of significant accounting policies (q) New accounting standards and interpretations In April 2009, the AASB published amendments to AASB 7 Financial Instruments: Disclosures to improve the information that entities report about their liquidity risk and the fair value of their financial instruments. The amendments require fair value measurement disclosures to be classified into a new three-level hierarchy and additional disclosures for items whose fair value is determined by valuation techniques rather than observable market values. The AASB also clarified and enhanced the existing requirements for the disclosure of liquidity risk of derivatives. The Fund will apply the amendments from 1 July They will not affect any of the amounts recognised in the financial statements. (r) Early adoption of standards The Trust has early adopted AASB 8 Operating Segments in the year ended. The application of AASB 8 wil not impact the Trust as the Trust is outside the scope of AASB 8 because it does not have debt or equity instruments traded in a public market, or file its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market. Following the early adoption of AASB 8, the Trust has omitted the segment disclosure previously required under AASB 114 Segment Reporting. (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. 3 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 (to the extent permitted by the Fund's Product Disclosure Statement) seeks to maximise the returns derived for the level of risk to which the Fund is exposed. During the year, the Fund uses derivative financial instruments to alter certain risk exposures. The fund is now required under the terms of the Fund's Product Disclosure Statement to remain fully invested in a zero coupon bond until the Capital Protection Date. The Fund is not permitted to maintain or manage any other exposures until that date, and this will be reflected in the Fund's risk management programme going forward. Financial risk management is carried out by the risk management team under policies approved by MQPML's senior managers or 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. MQ Specialist Investment Management Limited ("Investment Manager") adopted the following investment objectives, policies and processes for managing the Fund's capital: -15-

18 3 Financial risk management Investment objectives The Fund's investment objective is capital appreciation. The Fund has previously sought to achieve its investment objective through investing primarily in equity securities, and therefore is has been exposed to foreign exchange risk, credit risk, interest rate risk, other price risk and liquidity risk. The Fund now invests solely in a zero coupon bond, and is therefore primarily exposed to credit risk, interest rate risk and other liquidity risk. The Fund trades in regulated financial markets. The laws and regulations that govern these markets may change in a way that adversely affects the ability of the Fund to meet its investment objective. 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. 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. 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 Fund is now required under the Fund's Product Disclosure Statement to invest in a zero coupon bond, and must remain solely invested in it until it matures on the Capital Protection Date. The risks and the respective risk management policies employed by the Fund are discussed below. Refer to note 13 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 portolio will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or foreign currency risk). -16-

19 3 Financial risk management (a) Market 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. 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 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 operati n9 profit/net assets attributable to unitholders +/-5% 30-Jun Jun-08 1,691,912 (ii) Foreign exchange risk As the Fund hedges significant foreign exchange risk and had 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 dollarlus dollar would have no material impact on the net assets of the Fund. In accordance with the Fund's policy, the risk management department monitors the Fund's currency position on a daily basis. (iii) Interest rate risk The Fund is exposed to interest rate risk on its bank and broker balances and zero coupon bonds. The Fund holds close to 100% of the net assets attributable to unitholders in fixed interest securities. The Compliance Committee of the Responsible Entity reviews any identified exceptions to internal risk policies and procedures on a quarterly 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 financial assets at fair value through profit or loss through changes in fair value or changes in future cash flows: Impact on operating profit/net assets attributable to unitholders +/-50 bps ,025, ,040 (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 with both Macquarie Bank Limited ("MBL"). -17-

20 3 Financial risk management (b) Credit risk The Fund is exposed to the risk that MBL will default on its contractual obligations to deliver the capital protected amount on the capital protection date. The obligations of MBL are not deposit liabilities of MBL and they are not guaranteed by any party. The obligations are unsecured, and will rank behind claims of secured creditors and mandatory creditors under the law. 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 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 9). 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 diffculty 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 can be readily disposed. 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, 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, includes gross setted 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. Less than 1 month 1-6 months No stated maturity Total At Redemption payable Other payables Net assets attributable to unitholders Total financial liabilities 1,991,568 37,488 4,414,986 6,444,042 39J34,878 39,734,878 1,991,568 37,488 44,149,864 46,178,920 At 2008 Financial liabilities at fair value through profit or loss Dividends payable on short positions Redemption payable Other payables Net assets attributable to unitholders Total financial liabilities 19, ,061 4,999,028 5,338,747 54,523 5, ,226 44,991,256 45,434,026 3,635,527 3,690,050 24, , ,226 49,990,284 3,635,527 54,408,300 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. -18-

21 4 Auditor's remuneration During the year the following fees were paid or payable for services provided by the auditor of the Fund: Audit services PricewaterhouseCoopers Australian firm Audit and review of financial reports Other audit work under the Corporations Act 2001 Total remuneration for audit services ,358 1,400 8, April 07 to ,825 11,825 Non-audit services PricewaterhouseCoopers Australian firm Tax compliance services Total remuneration for non-audit services 7,678 7,678 Audit fees are paid out of the Responsible Entity's own resources. 5 Net gains/(iosses) on financial instruments held at fair value through profit or loss Financial assets Net gains/(losses) on financial assets held for trading Net gains/(iosses) on financial assests designated as at fair value through profi or loss Interest income on financial instruments held at fair value through profit or loss Net gains/(losses) on financial assets held at fair value through profit or loss 546,875 (2,727,468) (2,119,127) 27,425 (17,262,373) 405,517 (1,544,827) (19,584,324 ) Financial liabilities Net gains/(losses) on financial liabilities held for trading Net gains/(losses) on financial liabilities held at fair value through profit or loss 524,883 7,212, ,883 7,212, Foreign currency Net gain/(loss) on foreign currency at fair value through profit or loss Total net gains/(iosses) on financial instruments held at fair value through profit or loss (9,101) (1,029,045) (12,371,437) -19-

22 6 Net assets attributable to unitholders Movements in number of units and net assets attributable to unitholders during the year were as follows: 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. There are no separate classes of units and each unit has the same rights attaching to it as all other units of the Fund No. No. Opening balance 62,476,000 49,990,284 Applications 63,276,000 63,276,000 Redemptions Increase/(decrease) in net assets attributable to (7,327,000) (800,000) (5,812,420) (700,155) unitholders (1,282,797) (12,585,561 ) Closing balance 55,149,000 62,476,000 42,895,067 49,990,284 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 discretion of unitholders. The Fund monitors the level of monthly redemptions relative to the liquid assets in the Fund. 7 Cash and cash equivalents 2009 Cash at bank 93,623 93, , ,356 8 Financial assets held at fair value through profit or loss Designated at fair value through profit or loss Listed equity securities Fixed interest securities - Zero coupon bonds Total designated at fair value through profi or loss Held for trading Futures contracts (Note 10) Total held for trading Total financial assets held at fair value through profit or loss Fair value Fair value 37,291,961 44,824,234 15,189,057 44,824,234 52,481, , ,328 44,824,234 52,717,

23 9 Financial liabilties held at fair value through profit or loss Designated at fair value through profit or loss Listed equity securities sold short Total designated at fair value through profit or loss 2009 Fair value 2008 Fair value 3,635,527 3,635,527 Held for trading Options Total held for trading 2009 Fair value 2008 Fair value 54,523 54,523 Total financial liabilities held at fair value through profit or loss 3,690, 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 setted 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. While derivatives are used for trading purposes, they are not used to gear (leverage) a portolio. Gearing a portolio would occur if the level of exposure to the markets exceeds the underlying value of the Fund. The Fund holds the following derivative instruments: (a) Futures Futures are contractual obligations to buy or sell financial instruments on a future date at a specified price established in an organised market. The futures contracts are collateralised by cash or marketable securities. Changes in futures contracts' values are usually settled net daily with the exchange. Interest rate futures are contractual obligations to receive or pay a net amount based on changes in interest rates at a future date at a specified price, established in an organised financial market. -21-