FRANKLIN MALAYSIA SUKUK FUND

Transcription

1 Audited Annual Report 30 September 2018 FRANKLIN MALAYSIA SUKUK FUND

2 AUDITED INTERIM REPORT FOR THE FINANCIAL PERIOD FROM 1 OCTOBER 2017 TO 30 SEPTEMBER 2018 I. GENERAL INFORMATION ABOUT THE FUND II. MANAGER S REPORT III. FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2018

3 I. GENERAL INFORMATION ABOUT THE FUND Launch and Commencement Date The Franklin Malaysia Sukuk Fund (the Fund ) was launched on 18 November 2015 and commenced its operations on 9 December Fund Name, Category, Type Fund Name Franklin Malaysia Sukuk Fund Fund Category Sukuk Fund Type Growth and income Share Classes Class A (MYR) and Class I (MYR) Performance Benchmark Thomson Reuters Bond Pricing Agency Malaysia (BPAM) 3-7 year Sukuk Index Distribution Policy Please note that the risk profile of the Fund may be higher than the risk profile of the benchmark Class A (MYR) Subject to the availability of income, distribution is at least on a yearly basis. However, the Manager currently intends to distribute on a quarterly basis. Class I (MYR) Subject to the availability of income, distribution is at least on a yearly basis. *Distributions (if any) may be paid by cash or reinvested as additional Units of the Fund Investment Objective The Fund is a retail unit trust fund that seeks to maximise total investment return consisting of profit income* and capital gains in the long term through investments primarily in RM-denominated sukuk. Investment Policy and Strategy The Fund seeks to achieve its objective by investing a minimum of 70% of its NAV in RMdenominated sukuk which are issued or guaranteed by governments, quasi-government entities and/or government related entities, or issued by corporate entities which are incorporated or domiciled anywhere in the world. The Fund may also invest up to 20% of its NAV in non RM-denominated Islamic Instruments such as non RM-denominated sukuk, Islamic commercial papers, Islamic negotiable instruments, short term Islamic money market instruments, Islamic deposits and/or any other fixed income investments which comply with the Shariah Principles which are issued or guaranteed by governments, quasi-government entities and/or government related entities, or issued by corporate entities incorporated or domiciled in the Asian region (which includes, without limitation, Singapore, Indonesia, China, Hong Kong, Japan and Brunei). The fund manager may also invest the NAV of the Fund in any other countries worldwide (where the regulatory authority of the countries in which the Fund invests is an ordinary or associate member of the IOSCO) if the fund manager sees a potential in the Islamic fixed income market in those countries. The Fund s maximum exposure to any single country other than Malaysia shall not exceed 15% of the Fund s NAV at the time of purchase. In addition, the Fund s investment in non RM-denominated Islamic Instruments may include non RM-denominated units of Shariah-compliant fixed-income collective investment schemes (including ETFs). The balance of the Fund s NAV not invested in RM-denominated sukuk and non RM-denominated Islamic Instruments will be invested in Other RM-denominated Islamic Instruments such as RMdenominated Islamic commercial papers, RM-denominated Islamic negotiable instruments issued or guaranteed by governments, quasi-government entities and/or government related entities, or issued by corporate entities which are incorporated or domiciled anywhere in the world and RMdenominated Islamic Liquid Assets such as short term Islamic money market instruments, Islamic deposits and/or cash. At least 2% of the Fund s NAV will comprise of RM-denominated Islamic Liquid Assets, for purposes of (including but are not limited to) meeting redemption requests, meeting liquidity needs and/or defraying Fund expenses. The Manager may adopt temporary defensive strategies by lowering the Fund s exposure to RM-denominated sukuk below the stated 1

4 minimum 70% of its NAV and by increasing the Fund s exposure to RM-denominated Islamic Liquid Assets in adverse market conditions or if the fund manager is of the view that investments in RMdenominated Islamic Liquid Assets during such period may offer more attractive investment opportunities compared to investments in sukuk. The fund manager targets to build a portfolio of RM-denominated and non RM-denominated instruments which, at the time of purchase, have a minimum credit rating of BBB3 by RAM or have an equivalent credit rating by MARC or any other recognised credit rating agency. If an instrument is not rated, it may be added to the portfolio of the Fund if, at the time of purchase, the issuer of the instrument has a minimum credit rating of BBB3 by RAM or has an equivalent credit rating by MARC or any other recognised credit rating agency. If an instrument and its issuer are both unrated, the instrument may be added to the portfolio of the Fund if, at the time of purchase, the instrument is assigned an internal rating which in the opinion of the Manager is the equivalent of (or higher than) BBB3 by RAM or an equivalent credit rating by MARC or any other recognised credit rating agency in accordance with its internal guidelines. If an instrument that the Fund invests in falls below the minimum credit rating stated above or goes into default, the Manager may either dispose of the instrument if the Manager is of the opinion that it is in the best interest of Unit Holders, or continue to hold on to the downgraded or defaulted instrument if the Manager is of the opinion that the immediate disposal of the instrument would not be in the best interest of Unit Holders. While foreign exchange is not expected to be a primary source of returns for the Fund, it may potentially generate some returns as the Fund may invest up to 20% of its NAV in non RMdenominated Islamic Instruments. On the other hand, the value of the Fund s investments in non RM-denominated Islamic Instruments may depreciate due to movements in the exchange rate between Ringgit Malaysia and the currency of the foreign countries that the Fund invests in. The performance and the NAV of the Fund may be adversely affected as a result of such currency loss. The Manager may also employ Shariah-compliant hedging instruments to reduce the Fund s exposure to foreign exchange fluctuations and for efficient portfolio management from time to time. The hedging tools that the Manager may utilise include, but are not limited to, Islamic foreign exchange forwards and profit rate swaps. The Manager s investment process uses a mix of bottom up, top down and quantitative approaches. ASSET ALLOCATION A minimum of 70% of its NAV in RM-denominated sukuk; Up to 20% of its NAV in non RM-denominated Islamic Instruments; At least 2% of its NAV in RM-denominated Islamic Liquid Assets; and The balance of its NAV, not invested in RM-denominated sukuk, non RM-denominated Islamic Instruments or RM-denominated Islamic Liquid Assets, in Other RM-denominated Islamic Instruments; where: a. non RM-denominated Islamic Instruments include: i) non RM-denominated sukuk; ii) non RM-denominated Islamic commercial papers; iii) non RM-denominated Islamic negotiable instruments; iv) non RM-denominated short term Islamic money market instruments; v) non RM-denominated Islamic deposits; vi) non RM-denominated units of Shariah-compliant fixed-income collective investment schemes including ETFs); and/or vii) any other non RM-denominated fixed income investments which comply with the Shariah Principles which are issued or guaranteed by governments, quasigovernment entities and/or government related entities, or issued by corporate entities which are incorporated or domiciled in the Asian region (which includes, without limitation, Singapore, Indonesia, China, Hong Kong, Japan and Brunei), or in any other countries worldwide (where the regulatory authority of the countries in 2

5 which the Fund invests is an ordinary or associate member of the IOSCO) if the fund manager sees a potential in the Islamic fixed income market in those countries. b. RM-denominated Islamic Liquid Assets include RM-denominated short term Islamic money market instruments, Islamic deposits and/or cash; and c. Other RM-denominated Islamic Instruments include: i) RM-denominated Islamic commercial papers; ii) iii) RM-denominated Islamic negotiable instruments; and/or any other RM-denominated fixed income investments which comply with the Shariah Principles. Breakdown of Unitholdings by Size as of 30 September 2018 BREAKDOWN OF UNITHOLDINGS BY SIZE CLASS A Size of Unit Holdings (Units) No. of Unit Holders No. of Units Held (in Millions) 5,000 and below 0 0 5,001-10, ,001-50, , , ,001 and above Total BREAKDOWN OF UNITHOLDINGS BY SIZE CLASS I Size of Unit Holdings (Units) No. of Unit Holders No. of Units Held (in Millions) 5,000 and below 0 0 5,001-10, ,001-50, , , ,001 and above Total

6 II. MANAGER S REPORT MARKET REVIEW The Malaysian sovereign bond market has seen higher volatility since the beginning of the Financial Year 2018 (October 2017); affected by upward yield movements in the US Treasury as well as higher uncertainty on the domestic front. Sovereign yields trended lower until January 2018, but increased (3 year MGS increased by 40 basis points (bps), while the 10 year MGS increased by 25bps) in April 2018 ahead of the Malaysian General Elections on 9 May Malaysia made history as a new government took over the incumbent that has been ruling Malaysia since Independence Day (61 years). Subsequently, yields stabilized and declined by 10-20bps with the smooth transfer of power. While yields stabilized and trended lower post-election, sovereign yields still averaged higher than pre-election times as the market priced-in uncertainty and teething issues that come with a change in government. That being said, Malaysian sovereign yields still fared better than the other ASEAN sovereigns like Indonesia and Philippines, which saw an uptick in benchmark yields. As at end September 2018, the MGII yields closed at 3.60% and 4.07% for the 3 year and 10 year respectively. The sovereign curve also trended flatter at 47bps vs 55bps at the beginning of October This was reflective of slower expected GDP growth for 2018 and lower expected inflation rate, especially with the abolition of the Goods and Service Tax (GST). Total sovereign bonds traded (MGS and MGII) for the 12 months ending September 2018 amount to MYR599 billion (bn), 17% lower than the previous year s total traded volume of MYR723bn. Corporate bonds ended 2018 on firmer footing compared to sovereign bonds, as investors leaned towards longer-dated bonds and went down the credit curve in a low yield environment. Corporate bonds continued to trade thinly throughout 2018 on average, and saw about MYR113bn changing hands for the 12 months ending September This was 11% lower as compared to that of the same period last year. Notably, corporate bonds issuance was also lower by 29% Year-on-Year (yo-y), with a notable decline in Government Guaranteed issuances since the new government took over. Government guaranteed debt still make up about 27-30% of total corporate bond issuance for Rating migration for the year were skewed towards negative rating actions with 6 downgrades and no upgrades seen in Overnight Policy Rate (OPR) was at 3.0% at the start of October Bank Negara Malaysia (BNM) subsequently raised OPR by 25 bps in January 2018; the first hike since July BNM was hawkish then, pointing to GDP growth of 5.8% for 2018 and higher inflation at 2%. Postelection, and with the cancellation of multiple large-scale projects meant to drive domestic growth, BNM has turned bearish and kept OPR flat at 3.25% since GDP growth for 2018 was also adjusted lower to 4.8%, and inflation for 2018 (up to 3Q 2018) stood at 1.2%. In the Budget 2019 tabled on 2 November 2018, the new government targets a slower pace of fiscal consolidation at 3.7% for 2018, and 3.4% in Debt-to-GDP ratio is expected to hit 50.7% in 2018, and 51.8% in Foreign holdings of the MGS trended higher in 4Q17, and peaked at 45-46% in 1Q18 before seeing outflows for 2 consecutive quarters to the lowest level at 38% in September This is the lowest foreign holdings in MGS level in 6 years. As at end-september 2018, the net outflow in fixed income instruments stood at MYR22.2bn, with MYR20.3bn outflow in MGII and MGS alone. Currency wise, the MYR strengthened against the USD in 4Q17 and Jan 2018, reaching its strongest level at against the greenback, but weakened from March 2018 onwards. Since March 2018, the MYR has weakened 7.15% and closed the financial year Sep 2018 at REVIEW OF THE FUND PERFORMANCE DURING THE PERIOD For the period under review, the Fund delivered a positive net return for both share classes: 4.07% for the Class I and 3.53% for the Class A, respectively. While the Fund outperformed the benchmark by 48bps in gross terms, both Fund Classes trailed the benchmark, the Thomson Reuters BPAM 3-7 Year Sukuk Index, which returned 4.35%, by 82bps for the Class A and 28bps for the Class I, in net terms. 4

7 MANAGER S REPORT (CONTINUED) Credit security selection continues to be a key contributor to relative performance although yield curve positioning detracted performance because the Fund had underweight in duration compared to the benchmark. The Net Asset Value (NAV) per unit of the Fund as of 30 September 2018 is MYR (Class A) and MYR (Class I) while the NAV at 30 September 2017 was MYR (Class A) and MYR (Class I). During the period under review, the Fund also made four quarterly distributions (MYR and MYR thrice) for the Class A, and one annual distribution of MYR for the Class I (in net terms) and had the effect of reducing the NAV of the Fund after the distribution. Overall, the sukuk market performed well and our strategy to be fully invested in corporate sukuk contributed to the Fund performance as credit spread tightened over the period under review. Fund Performance since inception vs benchmark Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Franklin Malaysia Sukuk Fund (A) Thomson Reuters BPAM 3-7 year Sukuk Index Franklin Malaysia Sukuk Fund (I) The Fund has achieved its objective to maximise total investment return consisting in the long term through investments primarily in RM-denominated sukuk. ASSET ALLOCATION 30 September September September 2016 Fixed Income 97.19% 93.16% 96.68% Cash & Cash Equivalents 2.81% 6.84% 3.32% There were no significant changes in asset allocation of the Fund for the period under review. 5

8 MANAGER S REPORT (CONTINUED) MARKET OUTLOOK The Ministry of Finance (MoF) expects full year GDP growth to accelerate by 4.8% in 2018, a slower range than the 5.9% growth achieved in 2017, as the new government is more focused on consolidating and narrowing the national debt level, while improving the average livelihood of the public. While some of the major projects that were previously driving domestic demand were scaled down or put on hold, the government is confident with a growth of 4.9% in One of the key initiatives announced during the Budget 2019 includes policies enabling a higher rate of home ownership, with mechanisms to help cope with the property overhang situation. Cash subsidies and fuel subsidies are expected to be more targeted, and inflation is expected to be soft going forward. Despite more rate hikes expected from the US in 2019, the market expects a flat OPR, or a 25bps rate cut in 2019 should GDP growth be lower than expected. Looking ahead, MGS and MGII yields are expected to be volatile, but we remain slightly optimistic. The surprise election outcome of GE14 and a subsequent peaceful and orderly transfer of power shows our maturity as a country and it is regarded as a positive market signal. As expected, the wider fiscal deficit as a result of the new government s abolition of the Goods & Services Tax (GST) as well as the reliance on Petronas dividends as a main source of government revenue may not be viewed favourably by the international rating agencies. While the Budget 2019 announcement was not as flashy as previously expected, we will have to see how the new government executes its announced policies and initiatives, and measure those efficiencies against that of the previous administration. Either way, with slower growth and low inflationary expectations, bond yields are expected to remain low, and the yield curve to remain flat. Our strategy is to stay invested in mainly corporate Sukuk and to buy on volatility as the market reacts to any external headlines. PORTFOLIO POSITIONING Looking ahead, MGS and MGII yields are expected to remain volatile but resilient, while there seems to be little room for further yield rally due to inflationary pressures and lack of catalysts in the form of foreign inflows. Our strategy is to remain primarily invested in corporate Sukuk in order to earn higher yield pickup than MGS, as well as to maintain slightly higher duration compared to the benchmark. 6

9 MANAGER S REPORT (CONTINUED) FUND PERFORMANCE DATA As of 30 September 2018 Cumulative Performance Since Inception (8 December 2015) Franklin Malaysia Sukuk Fund Class A (MYR) 11.84% Franklin Malaysia Sukuk Fund Class I (MYR) 13.50% Thomson Reuters BPAM 3-7 year Sukuk Index (MYR) 13.65% Source of Return: Bloomberg Annual Total Return Franklin Malaysia Sukuk Fund Class A (MYR) Franklin Malaysia Sukuk Fund Class I (MYR) Thomson Reuters BPAM 3-7 year Sukuk Index (MYR) Source of Return: Bloomberg Year under review (1 Oct Sep 2018) FY2017 (1 Oct Sep 2017) 3.53% 3.33% 4.07% 3.88% 4.35% 2.44% Average Total Returns Franklin Malaysia Sukuk Fund Class A (MYR) Franklin Malaysia Sukuk Fund Class I (MYR) Thomson Reuters BPAM 3-7 year Sukuk Index (MYR) Year under review (1 Oct Sep 2018) Since Inception (8 December 2015) 3.53% 4.21% 4.07% 4.80% 4.35% 4.85% All performance data shown is in the currency stated, include reinvested dividends and are net of management fees. Sales charges and other commissions, taxes and other relevant costs paid by the investor are not included in the calculations. Average total return is derived by the following formula: Total Return / Number of years in period under review (i.e. since inception). Returns greater than 1 year period are compounded annualized and is only applicable for the Average Total Return table. Past performance is not necessarily indicative of future performance and unit prices and investment returns may go down, as well as up. 7

10 MANAGER S REPORT (CONTINUED) STATEMENT ON SOFT COMMISSION The Manager did not receive any soft commission for the period under review from any broker or Dealer FUND PERFORMANCE DATA FOR THE FINANCIAL PERIOD FROM 1 OCTOBER 2017 TO 30 SEPTEMBER 2018 Portfolio composition of the fund Details of portfolio composition of the Fund are as follows: 30 September September September 2016 RM RM RM Unquoted Sukuk 23,353,640 21,615,548 21,784,562 Cash and other net assets 674,884 1,586, ,048 24,028,524 23,202,000 22,490,610 Total Net Asset Value (NAV) (RM) As at 30 September 2018 As at 30 September 2017 As at 30 September 2016 Class A Class I Class A Class I Class A Class I 22,893,199 1,135,325 22,111,234 1,090,766 21,440,668 1,049,942 NAV per Unit (RM) Units in Circulation 22,241, ,095, ,453, ,034, ,834, ,000, Highest NAV per Unit (RM) Lowest NAV per Unit (RM) Total Return (%) Capital Return (%) Income Return (%) Management Expense Ratio (MER) (%) 30 September September September September September September 2016 Portfolio Turnover Ratio (PTR) (times)

11 MANAGER S REPORT (CONTINUED) FUND PERFORMANCE DATA FOR THE FINANCIAL PERIOD FROM 1 OCTOBER 2017 TO 30 SEPTEMBER 2018 Distribution Record Date Gross / Net Distribution per Unit (RM) - Class A Gross / Net Distribution per Unit (RM) - Class I Cum-date Cum-NAV (RM) - Class A Cum-NAV (RM) Class I Ex-date Ex-NAV (RM) Class A Ex-NAV (RM) Class I 29-Jun Mar Dec Sep Jun Mar Dec Sep Jun Mar Jun Mar Dec Sep Jun Mar Dec Sep Jun Mar Jul 18 2-Apr 18 2-Jan 18 2-Oct 17 3-Jul Apr 17 3-Jan 17 4-Oct 16 1-Jul 16 1-Apr 16 9

12 FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2018

13 FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2018 CONTENTS PAGE(S) STATEMENT BY MANAGER 1 TRUSTEE S REPORT 2 SHARIAH ADVISER'S REPORT 3 INDEPENDENT AUDITORS' REPORT 4-7 STATEMENT OF FINANCIAL POSITION 8 STATEMENT OF COMPREHENSIVE INCOME 9 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS 10 STATEMENT OF CASH FLOWS

14 STATEMENT BY MANAGER TO THE UNIT HOLDERS OF FRANKLIN MALAYSIA SUKUK FUND I, Nor Hanifah Binti Hashim, being the Director of the Manager, Franklin Templeton GSC Asset Management Sdn. Bhd., for Franklin Malaysia Sukuk Fund ( the Fund ) do hereby state that, in the opinion of the Manager, the accompanying financial statements comprising the statement of financial position as at 30 September 2018 of the Fund, and the statements of comprehensive income, changes in net assets attributable to unit holders and cash flows for the financial year then ended, and a summary of significant accounting policies and other explanatory notes: (a) (b) are drawn up in accordance with the provisions of the Deed, Malaysian Financial Reporting Standards ( MFRS ) and the International Financial Reporting Standards ( IFRS ); and give a true and fair view of the financial position of the Fund as at 30 September 2018 and of its financial performance, changes in net assets attributable to unit holders and cash flows for the financial year then ended. For and on behalf of the Manager Franklin Templeton GSC Asset Management Sdn. Bhd. Nor Hanifah Binti Hashim Director Kuala Lumpur 21 November

15 TRUSTEE S REPORT TO THE UNIT HOLDERS OF FRANKLIN MALAYSIA SUKUK FUND We have acted as Trustee for Franklin Malaysia Sukuk Fund (the Fund ) for the financial year ended 30 September To the best of our knowledge, for the financial year under review, Franklin Templeton GSC Asset Management Sdn. Bhd. (the Manager ) has operated and managed the Fund in accordance with the following: (a) (b) (c) limitations imposed on the investment powers of the Manager under the Deed(s), the Securities Commission s Guidelines on Unit Trust Funds, the Capital Markets and Services Act 2007 and other applicable laws; valuation and pricing for the Fund is carried out in accordance with the Deed(s) of the Fund and any regulatory requirements; and creation and cancellation of units for the Fund are carried out in accordance with the Deed(s) of the Fund and any regulatory requirements. We are of the view that the distributions made during the financial year ended 30 September 2018 by the Manager are not inconsistent with the objectives of the Fund. For Deutsche Trustees Malaysia Berhad Soon Lai Ching Senior Manager, Trustee Operations Ng Hon Leong Head, Trustee Operations Kuala Lumpur 21 November

16 SHARIAH ADVISER S REPORT TO THE UNIT HOLDERS OF FRANKLIN MALAYSIA SUKUK FUND We have acted as the Shariah Adviser for Franklin Malaysia Sukuk Fund for the financial year ended 30 September In our opinion, Franklin Templeton GSC Asset Management Sdn. Bhd. has managed and administered Franklin Malaysia Sukuk Fund in accordance with the Shariah Investment Guidelines of the Fund and complied with applicable guidelines, rulings or decisions issued by the Securities Commission Malaysia pertaining to Shariah matters for the financial year ended 30 September In addition, we also confirm that the investment portfolio of Franklin Malaysia Sukuk Fund comprises securities which have been classified as Shariah-compliant by the Shariah Advisory Council of the Securities Commission Malaysia ( SACSC ). For investment other than the abovementioned, we have reviewed the same and are of the opinion that these investments comply with the Shariah Investment Guidelines of the Fund. For and on behalf of Shariah Adviser AMANIE ADVISORS SDN BHD Datuk Dr Mohd Daud Bakar Chief Executive Officer Kuala Lumpur 21 November

17 INDEPENDENT AUDITORS REPORT TO THE UNIT HOLDERS OF FRANKLIN MALAYSIA SUKUK FUND REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Our opinion In our opinion, the financial statements of Franklin Malaysia Sukuk Fund (the Fund ) give a true and fair view of the financial position of the Fund as at 30 September 2018, and of its financial performance and its cash flows for the year then ended in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. What we have audited We have audited the financial statements of the Fund, which comprise the statement of financial position as at 30 September 2018, and the statement of comprehensive income, statement of changes in net assets attributable to unit holders and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, as set out on pages 8 to 37. Basis for opinion We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence and other ethical responsibilities We are independent of the Fund in accordance with the By-Laws (on Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants ( By-Laws ) and the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants ( IESBA Code ), and we have fulfilled our other ethical responsibilities in accordance with the By-Laws and the IESBA Code. PricewaterhouseCoopers PLT (LLP LCA & AF 1146), Chartered Accountants, Level 10, 1 Sentral, Jalan Rakyat, Kuala Lumpur Sentral, P.O. Box 10192, Kuala Lumpur, Malaysia T: +60 (3) , F: +60 (3) , PricewaterhouseCoopers PLT (LLP LCA & AF 1146) was registered on and with effect from that date, PricewaterhouseCoopers (AF 1146), a conventional partnership was converted to a limited liability partnership. 4

18 INDEPENDENT AUDITORS REPORT TO THE UNIT HOLDERS OF FRANKLIN MALAYSIA SUKUK FUND (CONTINUED) REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Information other than the financial statements and auditors report thereon The Manager of the Fund is responsible for the other information. The other information comprises Manager s Report, but does not include the financial statements of the Fund and our auditors report thereon. Our opinion on the financial statements of the Fund does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements of the Fund, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements of the Fund or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Manager for the financial statements The Manager of the Fund is responsible for the preparation of the financial statements of the Fund that give a true and fair view in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. The Manager is also responsible for such internal control as the Manager determines is necessary to enable the preparation of financial statements of the Fund that are free from material misstatement, whether due to fraud or error. In preparing the financial statements of the Fund, the Manager is responsible for assessing the Fund s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Manager either intend to liquidate the Fund or to terminate the Fund, or have no realistic alternative but to do so. 5

19 INDEPENDENT AUDITORS REPORT TO THE UNIT HOLDERS OF FRANKLIN MALAYSIA SUKUK FUND (CONTINUED) REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Auditors responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements of the Fund as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with approved standards on auditing in Malaysia and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: (a) (b) (c) (d) (e) Identify and assess the risks of material misstatement of the financial statements of the Fund, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Manager. Conclude on the appropriateness of the Manager s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements of the Fund or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Fund to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements of the Fund, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 6

20 INDEPENDENT AUDITORS REPORT TO THE UNIT HOLDERS OF FRANKLIN MALAYSIA SUKUK FUND (CONTINUED) REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Auditors responsibilities for the audit of the financial statements (continued) We communicate with the Manager regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. OTHER MATTERS This report is made solely to the unit holders of the Fund and for no other purpose. We do not assume responsibility to any other person for the content of this report. PRICEWATERHOUSECOOPERS PLT LLP LCA & AF 1146 Chartered Accountants Kuala Lumpur 21 November

21 STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER Note RM RM ASSETS Financial assets at fair value through profit or loss 3 23,353,640 21,615,548 Cash and cash equivalents 4 1,464,511 1,628,155 TOTAL ASSETS 24,818,151 23,243,703 LIABILITIES Due to brokers 750,000 - Accrued management fee 5 18,263 18,703 Accrued trustee fee 5 1,480 1,568 Other payables and accruals 19,884 21,432 TOTAL LIABILITIES (EXCLUDING NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS) 789,627 41,703 NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS 24,028,524 23,202,000 REPRESENTED BY: NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS CLASS A 22,893,199 22,111,234 CLASS I 1,135,325 1,090,766 24,028,524 23,202,000 NUMBER OF UNITS IN CIRCULATION CLASS A 6(a) 22,241, ,453, CLASS I 6(b) 1,095, ,034, NET ASSET VALUE PER UNIT CLASS A RM RM CLASS I RM RM The accompanying notes form an integral part of these audited financial statements. 8

22 STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER Oct Oct 2016 to to 30 Sep Sep 2017 Note RM RM INVESTMENT INCOME Profit income 3 1,147,227 1,105,691 Net loss from financial assets at fair value through profit or loss 3 (38,849) (75,276) 1,108,378 1,030,415 EXPENSES Management fee 5 226, ,712 Trustee fee 5 18,720 19,082 Audit fee 9,722 8,925 Professional fee 5,715 2,340 Custodian fee Shariah adviser fee 18,734 19,133 Printing fee , ,608 NET INCOME BEFORE FINANCE COST AND TAXATION 828, ,807 Finance cost 7 (865,246) (710,016) NET (LOSS)/INCOME AFTER FINANCE COST AND BEFORE TAXATION (37,186) 46,791 Taxation (DECREASE)/INCREASE IN NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS (37,186) 46,791 (Decrease)/increase in net assets attributable to unit holders comprises the following: Realised amount 5, ,552 Unrealised amount (43,184) (156,761) (37,186) 46,791 The accompanying notes form an integral part of these audited financial statements. 9

23 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER Oct Oct 2016 to to 30 Sep Sep 2017 RM RM NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS AT THE BEGINNING OF THE FINANCIAL YEAR 23,202,000 22,490,610 Movement due to units created and cancelled during the financial year: Creation of units 2, ,804 Cancellation of units (4,236) (157,221) Reinvestment of distributions 865, , , ,599 (Decrease)/increase in net assets attributable to unit holders during the financial year (37,186) 46,791 NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS AT THE END OF THE FINANCIAL YEAR 24,028,524 23,202,000 The accompanying notes form an integral part of these audited financial statements. 10

24 STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER Oct Oct 2016 to to 30 Sep Sep 2017 Note RM RM CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from sales of financial asset at fair value through profit or loss 3,513,872 5,083,700 Payments for purchase of financial asset at fair value through profit or loss (4,536,372) (5,001,450) Profit income received 1,142,786 1,117,179 Management fee paid (227,419) (223,069) Trustee fee paid (18,808) (19,078) Audit fee paid (9,180) (8,925) Professional fee paid (6,515) (4,672) Custodian fee paid (448) (398) Shariah adviser fee paid (18,858) (19,080) Payment of other expenses (1,166) (314) Net cash (used in)/generated from operating activities (162,108) 923,893 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from creation of units 2, ,804 Payments for cancellation of units (4,236) (157,221) Net cash used in financing activities (1,536) (44,417) NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (163,644) 879,476 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE FINANCIAL YEAR 1,628, ,679 CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL YEAR 4 1,464,511 1,628,155 The accompanying notes form an integral part of these audited financial statements. 11

25 FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER THE FUND, THE MANAGER AND ITS PRINCIPAL ACTIVITIES The Franklin Malaysia Sukuk Fund (the Fund ) was constituted pursuant to a Deed dated 13 February 2015, between Franklin Templeton GSC Asset Management Sdn. Bhd. (the Manager ) and Deutsche Trustees Malaysia Berhad (the Trustee ). The principal objective of the Fund seeks to maximise total investment return consisting of profit income and capital gains in the long term through investments primarily in Malaysian sukuk. The Fund is a multiclass Fund which offers two classes of units. They are Class A, targeted at retail investors and Class I, targeted at institutional investors. Both are denominated in Ringgit Malaysia. All investments will be subjected to the Securities Commission ( SC ) Guidelines on Unit Trust Funds, the Deed and the objective of the Fund. The Fund commenced operations on 9 December 2015 and will continue its operations until terminated as provided under Clause 12 of the Deed. The Manager, a company incorporated in Malaysia, is a wholly owned subsidiary of Franklin Resources Inc., a global investment management organisation. Its principal activities are fund management and investment advisory. The financial statements have been approved for issue by the Manager on 21 November 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 the items which are considered material to the financial statements unless otherwise stated. 2.1 Basis of preparation The financial statements have been prepared in accordance with the provisions of the Malaysian Financial Reporting Standards ( MFRS ) and International Financial Reporting Standards ( IFRS ). The financial statements have been prepared under the historical cost convention, as modified by revaluation of financial assets and liabilities (including derivative instruments) held at fair value through profit or loss. The preparation of financial statements in conformity with MFRS and IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported financial year. It also requires the Manager to exercise their judgement in the process of applying the Fund s accounting policies. Although these estimates and assumptions are based on the Manager s best knowledge of current events and actions, actual results may differ. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note

26 FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2018 (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.1 Basis of preparation (continued) (a) Standards, amendments to published standards and interpretations that are effective and applicable to the Fund: The Fund has applied the following amendments for the first time for the financial year beginning 1 October 2017: Amendments to MFRS 107 Statement of Cash Flows - Disclosure Initiative introduce an additional disclosure on changes in liabilities arising from financing activities. The adoption of these amendments did not have any impact on the current year or any prior year and is not likely to affect future years. (b) The new standards, amendments to published standards and interpretations to existing standards that are applicable to the Fund but not yet effective and have not been early adopted are as follows: Financial year beginning on/after 1 October 2018 MFRS 9 Financial Instruments (effective from 1 January 2018) will replace MFRS 139 Financial Instruments: Recognition and Measurement. MFRS 9 retains but simplifies the mixed measurement model in MFRS 139 and establishes three primary measurement categories for financial assets: amortised cost, fair value through profit or loss and fair value through Other Comprehensive Income ("OCI"). The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments [1] are always measured at fair value through profit or loss with an irrevocable option at inception to present changes in fair value in OCI (provided the instrument is not held for trading). A debt instrument [2] is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and profit [3]. For liabilities, the standard retains most of the MFRS 139 requirements. These include amortised cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in OCI rather than the statement of comprehensive income, unless this creates an accounting mismatch. MFRS 9 introduces an expected credit loss model on impairment that replaces the incurred loss impairment model used in MFRS 139. The expected credit loss model is forward-looking and eliminates the need for a trigger event to have occurred before credit losses are recognised. [1] For the purposes of the investments made by the Fund, equity instruments and derivatives refer to Shariahcompliant equity instruments and Shariah-compliant derivatives. [2] For the purposes of the investments made by the Fund, debt instruments refer to Sukuk. [3] For the purposes of this Fund, profit refers to profits earned from Shariah-compliant investments. 13

27 FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2018 (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.1 Basis of preparation (continued) (b) The new standards, amendments to published standards and interpretations to existing standards that are applicable to the Fund but not yet effective and have not been early adopted are as follows (continued): 2.2 Financial assets and financial liabilities Classification The Fund will apply this standard when effective. This standard is not expected to have a significant impact on the Fund s financial statements. (a) Financial assets and liabilities at fair value through profit or loss A financial asset is designated at fair value through profit or loss when they are managed and their performance evaluated on their fair value basis. The Fund designates its investment in unquoted Sukuk as financial assets at fair value through profit or loss at inception. A financial asset is designated at fair value through profit or loss when they are managed and their performance evaluated on a fair value basis. A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near terms or if on initial recognition is part of a portfolio of identifiable financial investments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking, or if it is a derivative. Investment in derivatives are categorised as held for trading. (b) Financing and receivables Financing and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. If collection amount is expected in one year or less, they are classified as current assets. If not, they are classified as non-current assets. The Fund s financing and receivables comprise Cash and cash equivalents, Due from Manager and Due from brokers in the statement of financial position. (c) Other financial liabilities Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability. The Fund classifies Due to Manager, Due to brokers, Accrued management fee, Accrued trustee fee and Other payables and accruals as other financial liabilities Recognition, de-recognition and measurement Regular purchases and sales of financial assets are recognised on the trade-date, the date on which the Fund commits to purchase or sell the investment. Financial assets and financial liabilities at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the statement of comprehensive income. 14

28 FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2018 (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recognition, de-recognition and measurement (continued) Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Fund has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when it is extinguished, i.e. when the obligation specified in the contract is discharged or cancelled or expired. Subsequent to initial recognition, all financial assets at fair value through profit or loss are measured at fair value. Financing and receivables are carried at amortised cost using the effective profit method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the statement of comprehensive income within net gain/loss on financial assets at fair value through profit or loss in the period in which they arise. Unquoted Sukuk are revalued on a daily basis based on fair value prices quoted by a Bond Pricing Agency ("BPA") registered with SC as per the SC Guidelines on Unit Trust Funds. Shariah-compliant deposits with licensed Islamic financial institutions are stated at cost plus accrued profit calculated on the effective profit method over the period from the date of placement to the date of maturity of the respective deposits. The Fund assesses at each year end date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment loss, if any, will be recognised in the statement of comprehensive income in the year which they arise. 2.3 Income and expenses recognition (a) Profit income Profit income from Shariah-compliant deposits with licensed Islamic financial institutions and unquoted Sukuk are recognised in the statement of comprehensive income on a timeproportion basis using the effective profit rate method on an accrual basis. (b) Realised gain or loss on sale Realised gain or loss on sale of unquoted Sukuk is accounted for as the difference between the net disposal proceeds and the carrying amount of investments, determined on cost adjusted for accretion of discount or amortisation of premium. (c) Expenses Expenses are recognised in the statement of comprehensive income on an accrual basis. 15

29 FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2018 (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.4 Foreign currencies translation (a) Functional and presentation currency Items included in the financial statements of the Fund are measured using the currency of the primary economic environment in which the Fund operates (the functional currency ). The financial statements are presented in Ringgit Malaysia ( RM ), which is the Fund s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. 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 statement of comprehensive income. 2.5 Creation and cancellation of units The Fund issued cancellable units, in two different classes of units, known respectively as the Class A and Class I which are cancellable at the unit holder s option and do not have identical features. In accordance with MFRS 132 (Amendment) Financial Instruments: Presentation", such units, by virtue of not having identical features, are classified as financial liabilities. The cancellable units can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s net asset value ( NAV ) attributable to the respective classes. The outstanding units are carried at the redemption amount that is payable at the statement of financial position if the unit holder exercises the right to put back the unit to the Fund. Units are created and cancelled at the unit holder s option at prices based on the Fund s NAV per unit of respective classes at the close of business on the relevant dealing day. The Fund s NAV per unit of respective classes is calculated by dividing the net assets attributable to unit holders of respective classes with the total number of outstanding units of respective classes. 2.6 Due from and due to Manager Due from Manager and Due to Manager represents receivable from and payable to the Manager for units created and cancelled. Due from Manager is recognised initially at fair value and subsequently measured at amortised cost using the effective profit method, less an allowance for doubtful debts. The allowance is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of receivables. Bad debts are written off when identified. Due to Manager is recognised initially at fair value and subsequently measured at amortised cost using the effective profit method. 16