Harding Loevner Emerging Markets Equity Fund ARSN Financial Statements for the reporting period ended 30 June 2016

Transcription

1 Harding Loevner Emerging Markets Equity Fund ARSN Financial Statements for the reporting period ended 30 June 2016

2 Harding Loevner Emerging Markets Equity Fund ARSN Financial Statements for the reporting period ended 30 June 2016 Contents Page Directors' report 2 Auditor s independence declaration 5 Statement of profit or loss and other comprehensive income 6 Statement of financial position 7 Statement of changes in equity 8 Statement of cash flows 9 Notes to the financial statements 10 Directors' declaration 24 Independent auditor's report to the unit holders of Harding Loevner Emerging Markets Equity Fund 25 Emerging Markets Equity Fund Audited Financial Statements 30 June These financial statements cover Harding Loevner Emerging Markets Equity Fund as an individual entity. The Responsible Entity of Harding Loevner Emerging Markets Equity Fund is The Trust Company (RE Services) Limited (ABN ) (AFSL ). The Responsible Entity s registered office is: Level 18, Angel Place, 123 Pitt Street Sydney, NSW

3 Harding Loevner Emerging Markets Equity Fund Directors' report For the reporting period ended 30 June 2016 Directors report The directors of The Trust Company (RE Services) Limited, the Responsible Entity of Harding Loevner Emerging Markets Equity Fund, present their report together with the financial statements of the Harding Loevner Emerging Markets Equity Fund (the "Scheme") for the period 12 February 2015 to 30 June 2016 ("the reporting period"). Scheme information The Scheme is an Australian Registered Scheme. The Trust Company (RE Services) Limited, the Responsible Entity of the Scheme, is incorporated in New South Wales and is domiciled in Australia. The registered office of the Responsible Entity is located at Level 18, Angel Place, 123 Pitt Street Sydney, NSW Directors The following persons held office as directors of the Responsible Entity during the reporting period or since the end of the reporting period and up to the date of this report: Christopher Green Michael Vainauskas (appointed 2 March, 2015) Glenn Stephen Foster (appointed 27 July, 2015) Andrew Cannane (appointed 28 August, 2015) Gillian Larkins (resigned 27 July, 2015) Anna O'Sullivan (resigned 7 December, 2015) Rodney Garth Ellwood (appointed 7 December, 2015) Principal activities The Scheme invests in unit trusts in accordance with the provisions of the Scheme's Product Disclosure Statement ("PDS"). During the reporting period, the Scheme was and continues to be, substantially invested in AUD denominated Class F shares of The Harding Loevner Emerging Markets Equity Fund ("Underlying Sub-Fund"), a specific portfolio within the, which is an open-ended investment vehicle authorised in Ireland as an Undertaking for Collective Investments in Transferable Securities pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations. The Scheme's investment objective is to achieve long term capital appreciation by obtaining exposure to equities of companies based in emerging markets. The Scheme achieves the investment objective through an indirect exposure to equities of companies based in emerging markets, via its holding in the Underlying Sub-Fund. The 30 June 2016 audited financial statements of the Underlying Sub-Fund are affixed at the end of the Scheme's financial statements. Refer to the financial statements of the Underlying Sub-Fund for details on the companies in which the Underlying Sub-Fund invests, significant accounting policies of the Underlying Sub-Fund and risks. The Scheme did not have any employees during the reporting period. There were no significant changes in the nature of the Scheme's activities during the reporting period. 2

4 Harding Loevner Emerging Markets Equity Fund Directors' report For the reporting period ended 30 June 2016 (continued) Directors report (continued) Review and results of operations The Scheme continued to invest funds in accordance with target asset allocations as set out in the governing documents of the Scheme and in accordance with the provisions of the Scheme s PDS. The performance of the Scheme, as represented by the results of its operations, was as follows: Period ended 30 June 2016 Profit/(loss) before finance costs attributable to unit holders ($ 000) 658 Distributions paid and payable ($ 000) - Distributions (cents per unit) - Significant changes in state of affairs In the opinion of the directors, there were no significant changes in the state of affairs of the Scheme that occurred during the reporting period. Likely developments and expected results of operations The Scheme will continue to be managed in accordance with the investment objectives and guidelines as set out in the governing documents of the Scheme and in accordance with the provisions of the Scheme s PDS. The results of the Scheme s operations will be affected by a number of factors, including the performance of the Underlying Sub-Fund in which the Scheme invests. Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. Further information on likely developments in the operations of the Scheme 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 Scheme. Indemnification and insurance of officers and auditors No insurance premiums were paid for out of the assets of the Scheme in regards to insurance cover provided to either the officers of the Responsible Entity or the auditors of the Scheme. So long as the officers of the Responsible Entity act in accordance with the Scheme s PDS and the Corporations Act 2001, the officers remain indemnified out of the assets of the Scheme against losses incurred while acting on behalf of the Scheme. The auditors of the Scheme are in no way indemnified out of the assets of the Scheme. Fees paid to and interests held in the Scheme by the Responsible Entity and its associates Fees paid to the Responsible Entity and its associates out of Scheme property during the reporting period are disclosed in note 11 of the financial statements. No fees were paid out of Scheme property to the directors of the Responsible Entity during the reporting period. The number of interests in the Scheme held by the Responsible Entity or its associates as at the end of the reporting period are disclosed in note 11 of the financial statements. Interests in the Scheme The movement in units on issue in the Scheme during the reporting period are disclosed in note 5 to the financial statements. The value of the Scheme s assets and liabilities is disclosed on the statement of financial position and derived using the basis set out in Note 2 of the financial statements. 3

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6 Deloitte Touche Tohmatsu A.B.N Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) Fax: +61 (0) The Board of Directors The Trust Company (RE Services) Limited As the Responsible Entity of Harding Loevner Emerging Markets Equity Fund Level 18, 123 Pitt Street Sydney, NSW September 2016 Dear Board Members Harding Loevner Emerging Markets Equity Fund In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of the Harding Loevner Emerging Markets Equity Fund. As lead audit partner for the audit of the financial statements of Harding Loevner Emerging Markets Equity Fund for the financial period 12 February 2015 to 30 June 2016, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Declan O Callaghan Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited. 5

7 Harding Loevner Emerging Markets Equity Fund Statement of profit or loss and other comprehensive income for the reporting period ended 30 June 2016 Statement of profit or loss and other comprehensive income For the reporting Period ended 30 June 2016 Note $'000 Investment income Net gains on financial instruments held at fair value through profit or loss Total net investment income/(loss) 745 Expenses Management fees Other expenses 18 Total expenses 87 Net profit for the reporting period 658 Finance costs attributable to unit holders (Increase) in net assets attributable to unit holders 5 (658) Profit/(loss) for the reporting period attributable to unit holders - Other comprehensive income for the reporting period attributable to unit holders - Total comprehensive income for the reporting period attributable to unit holders - The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 6

8 Harding Loevner Emerging Markets Equity Fund Statement of financial position As at 30 June 2016 Statement of financial position As at 30 June 2016 Note $'000 Assets Cash and cash equivalents 6 - Receivables 8 93 Financial assets held at fair value through profit or loss 7 15,664 Total assets 15,757 Liabilities Payables 9 98 Total liabilities (excluding net assets attributable to unit holders) 98 Net assets attributable to unit holders - liability 5 15,659 The above statement of financial position should be read in conjunction with the accompanying notes. 7

9 Harding Loevner Emerging Markets Equity Fund Statement of changes in equity for the reporting period ended 30 June 2016 Statement of changes in equity The Scheme's net assets attributable to unit holders are classified as a liability under AASB 132 Financial Instruments: Presentation. As such, the Scheme has no equity and no items of change in equity have been presented for the current period. 8

10 Harding Loevner Emerging Markets Equity Fund Statement of cash flows for the reporting period ended 30 June 2016 Statement of cash flows For the reporting Period ended 30 June 2016 Note $'000 Cash flows from operating activities Proceeds from sale of financial instruments held at fair value through profit or loss 86 Purchase of financial instruments held at fair value through profit or loss (15,006) Management fees paid (15) Responsible entity fees paid (3) Other expenses paid (63) Net cash (outflow) from operating activities 13(a) (15,001) Cash flows from financing activities Proceeds from applications by unit holders 15,001 Net cash inflow from financing activities 15,001 Net increase/(decrease) in cash and cash equivalents - Cash and cash equivalents at the beginning of the reporting period - Cash and cash equivalents at the end of the reporting period 6 - The above statement of cash flows should be read in conjunction with the accompanying notes. 9

11 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 Notes to the financial statements Contents 1 General information 2 Summary of significant accounting policies 3 Net gains on financial instruments held at fair value through profit or loss 4 Auditor's remuneration 5 Net assets attributable to unit holders 6 Cash and cash equivalents 7 Financial assets held at fair value through profit or loss 8 Receivables 9 Payables 10 Financial risk management 11 Related party transactions 12 Structured entities 13 Reconciliation of profit/(loss) to net cash (outflow) from operating activities 14 Events occurring after the reporting period 15 Contingent assets and liabilities and commitments 10

12 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 1 General information These financial statements cover Harding Loevner Emerging Markets Equity Fund (the "Scheme") as an individual entity. The Scheme is an Australian registered managed investment scheme under the Corporations Act The Scheme is substantially invested in AUD denominated Class F shares of the Harding Loevner Emerging Markets Equity Fund ("Underlying Sub-Fund"), a specific portfolio within the, which is an open-ended investment vehicle authorised in Ireland as an Undertaking for Collective Investments in Transferable Securities pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations. The Scheme's investment objective is to achieve long term capital appreciation by obtaining exposure to equities of companies based in emerging markets. The Scheme achieves the investment objective through an indirect exposure to equities of companies based in emerging markets, via its holding in the Underlying Sub- Fund. The audited financial statements of the Underlying Sub-Fund are attached to these financial statements. Refer to the financial statements of the Underlying Sub-Fund for details on the companies in which the Underlying Sub-Fund invests, significant accounting policies of the Underlying Sub-Fund, and risks. The Responsible Entity of the Scheme is The Trust Company (RE Services) Limited, (the Responsible Entity ). The Responsible Entity's registered office is Level 18, Angel Place, 123 Pitt Street Sydney, NSW The investment manager of the Scheme is Harding Loevner LP (the Investment Manager). The financial statements are presented in Australian dollars. The Scheme was Constituted on February 12, The financial statements are for the period from 12 February 2015 to 30 June The financial statements were authorised for issue by the directors on 27 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 reporting periods presented, unless otherwise stated in the following text. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoratative pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act The Scheme is a for-profit entity for the purpose of preparing these financial statements. The financial statements are prepared on the basis of fair value measurement of assets and liabilities except where otherwise stated. The statement of financial position is presented on a liquidity basis. Assets and liabilities are presented in decreasing order of liquidity and do not distinguish between current and non-current. All balances are expected to be recovered or settled within 12 months, except for investments in financial assets and liabilities and net assets attributable to unit holders. 11

13 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 2 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) The Scheme manages financial assets at fair value through profit or loss based on the economic circumstances at any given point in time, as well as to meet any liquidity requirements. As such, it is expected that a portion of the portfolio will be realised within twelve months, except for investments in financial assets and net assets attributable to unitholders, where the amount expected to be recovered or settled within twelve months after the end of the reporting period cannot be reliably determined. Compliance with International Financial Reporting Standards (IFRS) These financial statements of the Scheme comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. Use of estimates and judgement The Scheme makes estimates and assumptions that affect the reported amounts of assets and liabilities within the current and next financial period. Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (b) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2016 reporting period and have not been early adopted by the Scheme. The directors assessment of the impact of these new standards (to the extent relevant to the Scheme) and interpretations is set out below: (i) AASB 9 Financial Instruments (and applicable amendments), (effective from 1 January 2018) AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities. It has now also introduced revised rules around hedge accounting and impairment. The standard is not applicable until 1 January 2018 but is available for early adoption. The Scheme does not expect this to have a significant impact on the recognition and measurement of the Scheme's financial instruments as they are carried at fair value through profit or loss. The derecognition rules have not changed from the previous requirements, and the Scheme does not apply hedge accounting. AASB 9 introduces a new impairment model. However, as the Scheme's investments are all held at fair value through profit or loss, the change in impairment rules will not impact the Scheme. The Scheme has not yet decided when to adopt AASB 9. (ii) AASB 15 Revenue from Contracts with Customers, (effective from 1 January 2018) AASB 15 will replace AASB 118 Revenue which covers contracts for goods and services and AASB 111 Construction Contracts which covers construction contracts. AASB 15 is based on the principle that revenue is recognised when control of a good or service transfers to a customer - so the notion of control replaces the existing notion of risks and rewards. The Scheme's main sources of income include trust distributions and gains on financial instruments held at fair value. All of these are outside the scope of the new revenue standard. Consequently, the Scheme does not expect the adoption of AASB 15 to have a significant impact on the Scheme's accounting policies or the amounts recognised in the financial statements. The Scheme has not yet decided when to adopt AASB 15. (c) (i) Financial instruments Classification The Scheme's investments are classified as at fair value through profit or loss. They comprise: Financial Instruments designated at fair value through profit or loss upon initial recognition The Scheme invests substantially all of its assets in the Underlying Sub-Fund. 12

14 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 2 Summary of significant accounting policies (continued) (c) Financial instruments (continued) Financial assets and liabilities designated at fair value through profit or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Scheme s documented investment strategy. (ii) Recognition and derecognition The Scheme 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 and financial liabilities from this date. A financial asset is derecognised on the date the Scheme becomes party to the sale contractual agreement. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. (iii) Measurement Financial instruments held at fair value through profit or loss At initial recognition, the Scheme measures a financial instrument at fair value. Transaction costs are expensed as incurred. Subsequently, all financial assets and liabilities designated as at fair value through profit or loss are measured at fair value without any deduction for estimated future selling cost. Gains and losses arising from changes in the fair value measurement are presented in the statement of profit or loss and other comprehensive income. Fair value of the investment in the Underlying Sub-Fund is its published daily net asset value. (iv) Offsetting financial instruments Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when the Scheme has 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. (d) Net assets attributable to unit holders Units are redeemable at the unit holders option and are classified as financial liabilities. The units can be put back to the Scheme 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 price) at the statement of financial position date if unit holders exercised their right to redeem units. (e) Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. 13

15 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 2 Summary of significant accounting policies (continued) (f) Investment Income Changes in fair value of financial instruments are recorded in accordance with the policies described in Note 2(c) to the financial statements. Trust distributions are recognised on an entitlement basis. Interest income is recognised on an accruals basis. Net unrealised gains/(losses) on financial assets and liabilities held at fair value through profit or loss arising on a change in fair value are calculated as the difference between fair value at the end of the reporting period and the fair value at the previous valuation point. Realised gains/(losses) on financial assets and liabilities held at fair value through profit or loss are calculated as the difference between proceeds received on the sale (net of transaction costs) and their original costs. Net gains/(losses) do not include distribution income. Realised and unrealised gains/(losses) are shown in the notes to the financial statements. (g) Expenses All expenses are recognised in the statement of proft or loss and other comprehensive income on an accruals basis. (h) Income tax Under current legislation, the Scheme is not subject to income tax as unit holders are presently entitled to the income of the Scheme, provided the taxable income of the Scheme is fully distributed either by way of cash or reinvestment. Realised net capital losses cannot be distributed to unit holders but are carried forward by the Scheme to be offset against any realised capital gains in future years. The benefits of any foreign tax credits are passed on to unit holders, providing certain conditions are met. (i) Distributions In accordance with the Scheme s PDS, the Scheme distributes its distributable income to unit holders by cash or reinvestment. The distributions are recognised in the statement of profit or loss and other comprehensive income as finance costs attributable to unit holders. (j) Increase/decrease in net assets attributable to unit holders Income not distributed is included in net assets attributable to unit holders. Movements in net assets attributable to unit holders are recognised in the statement of profit or loss and other comprehensive income within finance costs attributable to unitholders. (k) Receivables Receivables include items such as Reduced Input Tax Credits (RITC) and prepaid expenses. Trust distributions are accrued when the right to receive payment is established. Amounts due for securities sold represent receivables for securities sold that have been contracted for but not yet delivered by the reporting period end. Trades are recorded on trade date, and normally settled within three business days. A provision for impairment of amounts due from the counterparty is established when there is objective evidence that the Scheme will not be able to collect all amounts due from the counterparty. Indicators that the amount due from the counterparty is impaired include significant financial difficulties of the counterparty, and the probability that the counterparty will enter into bankruptcy or financial reorganisation and default in payments. 14

16 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 2 Summary of significant accounting policies (continued) (l) Payables Payables include liabilities and accrued expenses owed by the Scheme which are unpaid as at the end of the reporting period. Trades are recorded on trade date, and normally settled within three business days. (m) Applications and redemptions Applications received for units in the Scheme are recorded net of any entry fees payable prior to the issue of units in the Scheme. Redemptions from the Scheme are recorded gross of any exit fees payable after the cancellation of units redeemed. Unit application and redemption prices are determined by reference to the net asset value of the Scheme divided by the number of units on issue as at the date of application or redemption. (n) Goods and services tax (GST) The GST incurred on the costs of various services provided to the Scheme by third parties such as management, administration and custodian services, have been passed on to the Scheme. The Scheme qualifies for Reduced Input Tax Credits (RITC) at a rate of 75% or 55%. Hence fees for these services and any other expenses have been recognised in the statement of proft or loss and other comprehensive income net of the amount of GST recoverable from the Australian Tax Office (ATO). Amounts payable are inclusive of GST. The net amount of GST recoverable from the ATO is included in receivables in the statement of financial position. Cash flows relating to GST are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from financing activities which is recoverable from, or payable to, the ATO is classified within operating cash flows. (o) Rounding of amounts The Scheme is an entity of a kind referred to in ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191 issued by the Australian Securities and Investments Commission (ASIC) relating to the rounding off of amounts in the financial statements. Amounts in the financial statements have been rounded to the nearest thousand dollars in accordance with that ASIC Corporations Instrument, unless otherwise indicated. (p) Comparatives For the current reporting period, the amounts presented are for the period 12 February 2015 to 30 June 2016, being the Scheme's first accounting period. Hence there are no comparative figures provided. 15

17 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 3 Net gains on financial instruments held at fair value through profit or loss For the reporting Period ended 30 June 2016 $'000 Net unrealised gains on financial instruments designated as at fair value through profit or loss 746 Net realised (losses) on financial instruments designated as at fair value through profit or loss (1) Net gains on financial instruments designated as at fair value through profit or loss Auditor's remuneration During the reporting period the following fees were paid or payable by the Responsible Entity: For the reporting Period ended 30 June 2016 $ (a) Audit and other assurance services Audit of financial statements 9,579 Audit of compliance plan 2,625 Total remuneration for audit and other assurance services 12,204 (b) Taxation services Taxation compliance services 2,985 Total remuneration for taxation services 2,985 Total remuneration 15,189 The auditor of the Scheme is Deloitte Touche Tohmatsu. 5 Net assets attributable to unit holders As stipulated within the Scheme s PDS, each unit represents a right to an individual share in the Scheme and does not extend to a right in the underlying assets of the Scheme There are two separate classes of units and each unit has the same right attaching to it as all other units in the Scheme. Movements in number of units and net assets attributable to unit holders during the reporting period were as follows: Net assets attributable to unit holders A Class Units B Class Units For the reporting For the reporting Period ended Period ended 30 June 30 June 30 June 30 June No. '000 $'000 No. '000 $'000 Opening balance Applications ,000 15,000 Increase/(decrease) in net assets attributable to unit holders Closing balance ,000 15,658 16

18 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 5 Net assets attributable to unit holders (contined) Capital risk management The Scheme considers its net assets attributable to unit holders as capital, notwithstanding that net assets attributable to unit holders are classified as a financial liability. The amount of net assets attributable to unit holders can change significantly on a daily basis as the Scheme is subject to daily applications and redemptions at the discretion of unit holders. Daily applications and redemptions are reviewed relative to the liquidity of the Scheme s underlying assets by the Responsible Entity. Under the terms of the Scheme s PDS, the Responsible Entity has the discretion to reject an application for units and to defer or adjust redemption of units if the exercise of such discretion is in the best interests of unit holders. 6 Cash and cash equivalents As at 30 June 2016 $'000 Cash at bank - Total cash and cash equivalents - 7 Financial assets held at fair value through profit or loss As at 30 June 2016 $'000 Designated at fair value through profit or loss Investment in Underlying Sub-Fund 15,664 Total financial assets held at fair value through profit or loss 15,664 8 Receivables As at 30 June 2016 $'000 GST receivable 3 Prepaid expenses 90 Total receivables 93 GST receivable is generally receipted within three months of being recognised. Prepaid expenses are amortised over five years. 9 Payables As at 30 June 2016 $'000 Accrued expenses 98 Total payables 98 Accrued expenses are generally disbursed within three months of being recognised. 17

19 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 10 Financial risk management The Scheme s investing activities expose it to a variety of financial risks. These risks include market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The management of these risks is conducted by the Scheme's Investment Manager who manages the Scheme's assets in accordance with its investment objectives. The Investment Manager of the Scheme is aware of the risks associated with the business of investment management. A risk management framework has been established by the Investment Manager of the Scheme who conducts regular assessment processes in order to ensure that procedures and controls are adequately managing the risks arising from the Scheme's investment activities. The investment activities of the Scheme are managed in accordance with the investment strategy specifically tailored for the Scheme's objectives. The strategy must comply with any authorized investments and management restrictions specified in the Scheme's PDS. This note presents information about the Scheme's exposure to each of the above risks. The Scheme uses different methods to measure different types of risks to which it is exposed. These methods include sensitivity analysis in the case of currency risk, interest rate risk and price risk; and credit ratings analysis for credit risk. Refer also to the risks of the Underlying Sub-Fund included in the footnotes of the attached financial statements. (a) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices such as foreign exchange rates, interest rates, equity prices and credit spreads. Market risk is managed by the Investment Manager by ensuring the Underlying Sub-Fund's portfolio remains diversified across economic sectors, industries, geography and currencies. Also, limits are imposed on the number of holdings, maximum position in a single security, single sector/industry, single country etc. (i) Currency risk A Scheme that invests in financial instruments denominated in currencies other than the Australian dollar is exposed to currency risk. Currency risk arises as the income and value of monetary securities denominated in other currencies will fluctuate due to changes in exchange rates. There were no non-aud denominated financial instruments held as at 30 June (ii) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial instruments with fixed interest rates expose the Scheme to fair value interest rate risk. The Scheme is exposed to cash flow interest rate risk on financial instruments with floating interest rates. The Scheme's exposure to interest rate risk is limited to its cash and cash equivalents, which earn a floating rate of interest. (iii) Price risk The Scheme is exposed to market price risk. The risk arises from investments held by the Scheme for which prices in the future are uncertain (other than from currency risk or interest rate risk). The Scheme aims to reduce the impact of market risk through the use of investment guidelines to mitigate the risk of excessive exposure to any particular sector, industry, geographic region, currency, type of security or issuer. 18

20 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 10 Financial risk management (continued) (a) Market risk (continued) Sensitivity analysis The sensitivity analysis estimates the sensitivity of the Scheme's operating profit and net assets attributable to unit holders to market price risk. The sensitivity rate is based on management s best estimate of a reasonably possible movement in the market price, having regard to historical correlation of the Scheme's investment with the relevant benchmark and market volatility. An increase of 15% at the reporting date of market prices would have increased the Scheme's operating profit and net assets attributable to unit holders by $2,350,000. This analysis assumes that all other variables remain constant. A decrease of 15% would have an equal, but the opposite effect to the amount shown above, on the basis that all other variables remain constant. (b) Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts when they fall due. The Scheme is not directly exposed to credit risk as its assets are invested in the Underlying Sub-Fund. However the Scheme is indirectly exposed to credit risk since the Underlying Sub-Fund has direct and indirect investments in assets which have an exposure to credit risk. The Scheme s assets are held by The Northern Trust Company. The Scheme monitors credit ratings and capital adequacy of its custodian on an annual basis, and also reviews the findings documented in the custodian s reports on its internal controls. (c) Liquidity risk Liquidity risk is the risk that the Scheme may not be able to meet its financial obligations as they fall due. The Scheme is exposed to daily cash redemptions of redeemable units. The Scheme's investment in the Underlying Sub-Fund exposes the Scheme to the risk that the manager of the Underlying Sub-Fund may be unwilling or unable to fulfill the redemption requests within the time frame requested by the Scheme. However these investments are considered readily realisable unless the Underlying Sub-Fund is declared illiquid. The following table shows the contractual maturities of financial liabilities: Less than 1 1 to 6 6 to 12 Over 12 month months months months Total As at 30 June 2016 $ 000 $ 000 $ 000 $ 000 $ 000 Payables Net assets attributable to unit holders 15, ,659 Total financial liabilities (d) Fair value measurement 15, ,757 The Scheme discloses fair value measurements by level of the following fair value hierarchy: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). 19

21 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 10 Financial risk management (continued) (d) Fair value measurement (continued) (i) Fair value in an active market (level 1) The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and listed equity securities) is based on last traded prices at the end of the reporting period without any deduction for estimated future selling costs. For the majority of financial assets and liabilities, information provided by the quoted market independent pricing services is relied upon for valuation. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm s length basis. An active market is a market in which transactions for the financial asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Listed securities and exchange traded derivatives are valued at the last traded price. (ii) Fair value in an inactive or unquoted market (level 2 and level 3) The fair value of financial assets and liabilities that are not traded in an active market is determined by using valuation techniques. These include the use of 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. Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market rate at the end of the reporting period applicable for an instrument with similar terms and conditions. For other pricing models, inputs are based on market data at the end of the reporting period. Some of the inputs to these models may not be market observable and are therefore estimated based on assumptions. The output of a model is always an estimate or approximation of a value that cannot be determined with certainty, and valuation techniques employed may not fully reflect all factors relevant to the positions held. Investments in the Underlying Sub-Fund are recorded at its published daily net asset value as reported by the investment manager. The Scheme did not hold any financial instruments with fair value measurements using significant unobservable inputs during the reporting period ended 30 June The table below sets out the Scheme's financial assets and liabilities (by class) measured at fair value according to the fair value hierarchy at 30 June As at 30 June 2016 Level 1 Level 2 Level 3 Total $ 000 $ 000 $ 000 $ 000 Financial assets Financial assets designated at fair value through profit or loss: Pooled investment vehicles - 15,664-15,664 Total financial assets - 15,664-15,664 Transfer between levels For the reporting period ended 30 June 2016, there have been no transfers between levels. 20

22 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 11 Related party transactions The Responsible Entity of the Scheme is The Trust Company (RE Services) Limited (ABN ) (AFSL ). Key management personnel (a) Directors Key management personnel include persons who were directors of the Responsible Entity at any time during the reporting period and up to the date of this report as follows: Christopher Green Michael Vainauskas (appointed 2 March, 2015) Glenn Stephen Foster (appointed 27 July, 2015) Andrew Cannane (appointed 28 August, 2015) Gillian Larkins (resigned 27 July, 2015) Anna O'Sullivan (resigned 7 December, 2015) Rodney Garth Ellwood (appointed 7 December, 2015) (b) Other key management personnel There were no other key management personnel with responsibility for planning, directing and controlling activities of the Scheme, directly or indirectly during the reporting period. Other transactions within the Scheme There were no transactions with key management personnel during the reporting period. Responsible Entity and Investment Manager s fees and other transactions Under the terms of the Scheme s PDS, the Responsible Entity is entitled to receive management fees and is able to recover from the Scheme's assets a broad range of expenses associated with its duties in relation to the Scheme. To the extent any of these expenses are incurred by the Investment Manager, the Investment Manager is entitled to be reimbursed for these expenses by the Responsible Entity. The Responsible Entity will in turn be entitled to be reimbursed for this amount from the Scheme. The total management costs of the Scheme are capped 1.40% per annum as a percentage of the net asset value of the fund in accordance with the Scheme's PDS. The transactions during the reporting period and any amounts payable as at the end of the reporting period, between the Scheme and Responsible Entity were as follows: For the reporting Period ended 30 June 2016 $ Management fees for the reporting period incurred by the Scheme 39,476 Responsible fees for the reporting period incurred by the Scheme 29,704 Management fees payable at reporting period end 24,000 Responsible entity fees payable at reporting period end 26,268 Related party unit holdings No parties related to the Scheme (including the Responsible Entity, its related parties and other schemes managed by the Responsible Enitiy) and the investment Manager, hold units in the Scheme. 21

23 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 11 Related party transactions (continued) Investments The Scheme held investments in the following fund which is managed by the Investment Manager: 30 June 2016 Harding Loevner Funds plc Number of shares held Fair value of investment Interest held Number of shares acquired Number of shares disposed Distributions received/ receivable by the Scheme $'000 % '000 '000 $'000 Emerging Markets Equity Fund: AUD Class F 12 Structured entities 14,918 15, , A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, and the relevent activities are directed by means of contractual arrangements. The Scheme considers all investments in pooled investment vehicles to be structured entities. The Scheme invests in pooled investment vehicles for the purpose of capital appreciation and earning investment income. The Scheme's exposure to investments in structured entities at fair value is disclosed in the following table: Fair value as at 30 June 2016 Exposure 30 June 2016 Maximum exposure to loss 30 June 2016 '000 % $'000 Structured entities Pooled investment vehicles 15, ,664 Total 15, , Reconciliation of net profit/(loss) to net cash (outflow) from operating activities For the reporting Period ended 30 June 2016 $'000 (a) Reconciliation of profit/(loss) to net cash (outflow) from operating activities Profit/(loss) for the reporting period - Increase in net assets attributable to unit holders 658 Proceeds from sale of financial instruments held at fair value through profit or loss 86 Purchase of financial instruments held at fair value through profit or loss (15,006) Net (gains) on financial instruments held at fair value through profit or loss (745) Other 1 Net change in receivables (93) Net change in payables 98 Net cash (outflow) from operating activities (15,001) 22

24 Harding Loevner Emerging Markets Equity Fund Notes to the financial statements for the reporting period ended 30 June 2016 (continued) 13 Reconciliation of net profit/(loss) to net cash (outflow) from operating activities (continued) 30 June 2016 $'000 (b) Components of cash and cash equivalents Cash as at the end of the reporting period as shown in the statement of cash flows is reconciled to the statement of financial position as follows: Cash and cash equivalents - Total Cash and cash equivalents - 14 Events occurring after the reporting period No significant events have occurred since the end of the reporting period which would impact on the financial position of the Scheme as disclosed in the statement of financial position as at 30 June 2016 or on the results and cash flows of the Scheme for the reporting period ended on that date. 15 Contingent assets and liabilities and commitments There are no outstanding contingent assets, liabilities or commitments as at 30 June

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26 Deloitte Touche Tohmatsu A.B.N Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1217 Australia DX 10307SSE Tel: +61 (0) Fax: +61 (0) Independent Auditor s Report to the unitholders of Harding Loevner Emerging Markets Equity Fund We have audited the accompanying financial statements of Harding Loevner Emerging Markets Equity Fund (the Scheme ), which comprises the statement of financial position as at 30 June 2016, the statement of profit or loss and other comprehensive income, the statement of cash flows and the statement of changes in equity for the period 12 February 2015 to 30 June 2016, notes comprising a summary of significant accounting policies and other explanatory information, and the Directors declaration as set out on pages 6 to 24 of the financial statements. Directors Responsibility for the Financial Statements The Directors of Perpetual Trust Services Limited (the Responsible Entity ) are responsible for the preparation of the financial statements that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial statements that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 2(a) to the financial statements, the Directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor s Responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial statements is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the entity s preparation of the financial statements that gives a true and fair view, 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 entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited. 25

27 Auditor s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the Directors of the Responsible Entity, would be in the same terms if given to the Directors as at the time of this auditor s report. Opinion In our opinion: (a) the financial statements of Harding Loevner Emerging Markets Equity Fund are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Scheme s financial position as at 30 June 2016 and of its performance for the period from 12 February 2015 to 30 June 2016; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the financial statements also comply with International Financial Reporting Standards as disclosed in Note 2(a) to the financial statements. DELOITTE TOUCHE TOHMATSU Declan O Callaghan Partner Chartered Accountants Sydney, 27 September

28 HARDING LOEVNER FUNDS PLC Audited Financial Statements Global Equity Fund International Equity Fund Emerging Markets Equity Fund Frontier Markets Equity Fund 30 June 2016 Fundamental. Thinking. Worldwide.

29 Table of Contents Directors and Other Information... 1 Directors Responsibilities Statement... 2 Background to the Company and Directors Report... 3 Investment Manager s Report... 9 Custodian s Report Depositary s Report Independent Auditors Report Schedule of Investments The Harding Loevner Global Equity Fund The Harding Loevner International Equity Fund The Harding Loevner Emerging Markets Equity Fund The Harding Loevner Frontier Markets Equity Fund Significant Purchases and Sales (Unaudited) Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Net Assets Attributable to Holders of Redeemable Participating Shares Statement of Cash Flows Notes to the Financial Statements Financial Information (Unaudited)....94

30 Directors and Other Information For the year ended 30 June 2016 DIRECTORS David Loevner (US resident) (Non-executive) Lori Renzulli (US resident) (Non-executive) Mike Kirby (Irish resident) (Non-executive) Jim Cleary (Irish resident) (Independent, Non-executive) REGISTERED OFFICE INVESTMENT MANAGER DEPOSITARY/CUSTODIAN ADMINISTRATOR COMPANY SECRETARY Beaux Lane House Mercer Street Lower Dublin 2 Ireland Harding Loevner LP 400 Crossing Boulevard 4th Floor Bridgewater New Jersey USA Northern Trust Fiduciary Services (Ireland) Limited Georges Court Townsend Street Dublin 2 Ireland Northern Trust International Fund Administration Services (Ireland) Limited Georges Court Townsend Street Dublin 2 Ireland MFD Secretaries Limited Beaux Lane House Mercer Street Lower Dublin 2 Ireland INDEPENDENT AUDITORS IRISH LEGAL ADVISERS Deloitte Chartered Accountants and Statutory Audit Firm Deloitte & Touche House Earlsfort Terrace Dublin 2 Ireland Maples and Calder 75 St. Stephen s Green Dublin 2 Ireland 1

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32 Background to the Company and Directors Report For the year ended 30 June 2016 (continued) The Directors submit their report together with the audited financial statements for the year ended 30 June Date of incorporation (the Company ) was incorporated on 29 March 2007 and commenced operations on 1 June Background to the Company The Company is an umbrella type open-ended investment Company with variable capital and segregated liability between sub-funds governed by the laws of Ireland and authorised by the Central Bank of Ireland (the Central Bank ) under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended by the European Union (Undertakings for Collective Investment in Transferable Securities) (Amendment) Regulation 2016 as may be amended, consolidated or substituted from time to time ( the UCITS Regulations )and the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (the "Central Bank UCITS Regulations"). Shares representing interests in different sub-funds may be issued from time to time by the Directors. Shares of more than one class may be issued in relation to a sub-fund. A separate portfolio of assets will be maintained for each sub-fund (and accordingly not for each class of shares) and will be invested in accordance with the investment objective and policies applicable to such sub-fund. There are four sub-funds (the sub-funds ) of the Company currently in existence, namely: The Harding Loevner Global Equity Fund The Company created the Harding Loevner Global Equity Fund (the Global Equity Fund ) on 31 May 2007 and commenced its operations on 1 June The investment objective of the Global Equity Fund is to achieve long-term capital appreciation by investing primarily in global equities. As at 30 June 2016 the following classes of shares were authorised to be issued in the Global Equity Fund: US Dollar Euro Sterling Australian Dollar Singapore Dollar Class A Class A Class A Class A Class A Class B Class B Class B Class B Class B Class I Class I Class F Class M Class M Class M Class M Swiss Franc Class A Class B As at 30 June 2016 the following share classes were in issue in the Global Equity Fund: US Dollar Euro Sterling Australian Dollar Singapore Dollar Class A Class A Class A Class M Class A Class I Class M Class M The Harding Loevner International Equity Fund The Company created the Harding Loevner International Equity Fund (the International Equity Fund ) on 31 May 2007 and commenced its operations on 3 April The investment objective of the International Equity Fund is to achieve long-term capital appreciation by investing primarily in equities of companies based in global markets other than the United States of America. As at 30 June 2016 the following classes of shares were authorised to be issued in the International Equity Fund: US Dollar Euro Sterling Class A Class A Class A Class B Class I Class I Class I Class M 3

33 Background to the Company and Directors Report For the year ended 30 June 2016 (continued) The Harding Loevner International Equity Fund (continued) As at 30 June 2016 the following share classes were in issue in the International Equity Fund: US Dollar Class A Class B Class M Sterling Class A The Harding Loevner Emerging Markets Equity Fund The Company created the Harding Loevner Emerging Markets Equity Fund (the Emerging Markets Equity Fund ) on 31 May 2007 and commenced its operations on 25 September The investment objective of the Emerging Markets Equity Fund is to achieve long-term capital appreciation by investing primarily in emerging markets equities. As at 30 June 2016 the following classes of shares were authorised to be issued in the Emerging Markets Equity Fund: US Dollar Euro Sterling Australian Dollar Canadian Dollar Class A Class A Class A Class A Class A Class B Class B Class B Class B Class B Class I Class I Class I Class I Class I Class M Class M Class F Class M As at 30 June 2016 the following share classes were in issue in the Emerging Markets Equity Fund: US Dollar Euro Australian Dollar Canadian Dollar Class A Class M Class F Class I Class B Class M Class M The Harding Loevner Frontier Markets Equity Fund The Company created the Harding Loevner Frontier Markets Equity Fund (the Frontier Markets Equity Fund ) on 31 May 2007 and commenced its operations on 25 September The investment objective of the Frontier Markets Equity Fund is to achieve long-term capital appreciation by investing primarily in frontier markets equities. As at 30 June 2016 the following classes of shares were authorised to be issued in the Frontier Markets Equity Fund: US Dollar Euro Sterling Australian Dollar Class A Class A Class A Class A As at 30 June 2016 the following share classes were in issue in the Frontier Markets Equity Fund: US Dollar Euro Australian Dollar Class A Class A Class A Connected persons The Central Bank UCITS Regulations requires that any transaction carried out with a UCITS by a management company or depositary to the UCITS, the delegates or sub-delegates of the management company or depositary, and any associated or group of such a management company, depositary, delegate or sub-delegate ( connected persons ) must be carried out as if negotiated at arm s length and must be in the best interests of the shareholders. The Directors are satisfied that there are arrangements (evidenced by written procedures) in place, to ensure that the obligations set out in Regulation 41(1) of the Central Bank UCITS Regulations are applied to all transactions with connected persons, and are satisfied that transactions with connected persons entered into during the period complied with the obligations set out in Regulation 41(1) of the Central Bank UCITS Regulations. 4

34 Background to the Company and Directors Report For the year ended 30 June 2016 (continued) Directors Remuneration In line with the requirements of the UCITS Regulations Harding Loevner Funds Plc ( the Company ) is required to adopt remuneration policies which are consistent with the principles outlined in the UCITS V Directive. The remuneration policies are designed to ensure that any relevant conflicts of interest can be managed appropriately at all times and that the remuneration of its senior staff is in line with the risk policies and objectives of the Funds it manages. As this report is made before the completion of the first full calendar year after the requirements became effective, the Company does not consider that the quantitative remuneration data available to it is sufficiently relevant or that it provides a proper basis for comparison and it has therefore elected not to make any quantitative disclosures in accordance with the UCITS V Directive. Significant events during the year During the year ended 30 June 2016, the Global Equity Fund distributed the following net income: A distribution of GBP per share on the Sterling Class A GBP shares, with a total value of GBP 878,683, for the six months ended 30 June This distribution was declared on 14 October 2015 with a record date of 14 October 2015, an ex-date of 15 October 2015 and a pay date of 19 October A distribution of GBP per share on the Sterling Class A GBP shares, with a total value of GBP 15,314, for the six months ended 31 December This distribution was declared on 14 April 2016 with a record date of 14 April 2016, an ex-date of 15 April 2016 and a pay date of 19 April A distribution of GBP per share on the Sterling Class I GBP shares, with a total value of GBP 64,304, for the six months ended 31 December This distribution was declared on 14 April 2016 with a record date of 14 April 2016, an ex-date of 15 April 2016 and a pay date of 19 April During the year ended 30 June 2016, the International Equity Fund distributed the following net income: A distribution of GBP per share on the Sterling Class A GBP shares, with a total value of GBP 20,188, for the six months ended 30 June This distribution was declared on 14 October 2015 with a record date of 14 October 2015, an ex-date of 15 October 2015 and a pay date of 19 October A distribution of GBP per share on the Sterling Class A GBP shares, with a total value of GBP 834, for the six months ended 31 December This distribution was declared on 14 April 2016 with a record date of 14 April 2016, an ex-date of 15 April 2016 and a pay date of 19 April On 29 July 2015 the GBP Class I shares for the Global Equity Fund were first issued. On 21 September 2015 the SGD Class M shares for the Global Equity Fund were first issued. On 30 October 2015 the AUD Class M shares for the Global Equity Fund were first issued. On 17 November 2015 an updated supplement to the Prospectus was issued for the Global Equity Fund. On 30 October 2015 the AUD Class A shares for the Global Equity Fund were fully redeemed. On 24 November 2015 the GBP Class M shares for the Global Equity Fund were first issued. On 25 November 2015 an updated supplement to the Prospectus was issued for the International Equity Fund. On 6 December 2015 the AUD Class F shares for the Emerging Markets Equity Fund were first issued. On 23 December 2015 the USD Class M shares for the Emerging Markets Equity Fund were first issued. On 2 February 2016 the USD Class M shares for the International Equity Fund were first issued. On 2 February 2016 the USD Class I shares for the International Equity Fund were fully redeemed. A new Prospectus and supplements to the Prospectus were issued for the sub-funds on 2 June On 18 March 2016, Northern Trust Fiduciary Services (Ireland) Limited, previously Custodian of the Company for the period 1 July 2015 to 17 March 2016, was appointed Depositary of the Company, in compliance with the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2016 that came into force on the same date. 5

35 Background to the Company and Directors Report For the year ended 30 June 2016 (continued) Review of the business and future developments The movement in Dealing Net Asset Value ( NAV ) per share for the Global Equity Fund, International Equity Fund, Emerging Markets Equity Fund and Frontier Markets Equity Fund during the year was as follows: The Harding Loevner Global Equity Fund Class 30 June June 2015 USD Class A USD USD EUR Class A EUR EUR GBP Class A GBP GBP SGD Class A SGD SGD AUD Class A - AUD GBP Class I GBP GBP Class M GBP SGD Class M SGD AUD Class M AUD The Harding Loevner International Equity Fund Class 30 June June 2015 USD Class A USD USD GBP Class A GBP GBP USD Class B USD USD USD Class I - USD USD Class M USD The Harding Loevner Emerging Markets Equity Fund Class 30 June June 2015 USD Class A USD USD USD Class B USD USD CAD Class I CAD CAD USD Class M USD CAD Class M CAD CAD AUD Class F AUD EUR Class M EUR EUR The Harding Loevner Frontier Markets Equity Fund Class 30 June June 2015 USD Class A USD USD EUR Class A EUR EUR AUD Class A AUD AUD The Investment Manager s report on pages 9 to 32 contains a review of the factors which contributed to the performance for the year. The Investment Manager s report covers the year to 30 June The NAV per share differs from the dealing NAV due to the treatment of preliminary expenses. The Directors do not anticipate any change in the structure or investment objective of the Company. Risk management objectives and policies The main risks arising from the Company s financial instruments are market, price, foreign currency, interest rate, credit, concentration, liquidity and non-developed markets risk. The Investment Manager may use derivative instruments for investment purposes, efficient portfolio management and to attempt to manage the risk of the Company s investments. For further information on risk management objectives and policies, please see note 13 on pages 71 to 86. 6

36 Background to the Company and Directors Report For the year ended 30 June 2016 (continued) Results and dividends The results and dividends for the year are set out in the Statement of Comprehensive Income on pages 54 to 55. The Directors intend to declare a dividend in respect of the Sterling Class A Shares such that substantially all of the net investment income relating to such Class shall be distributed on a semi-annual basis. A distribution was made in October 2015 (for the period ending 30 June 2015) and in April 2016 (for the period ending 31 December 2015) for the Global Equity Fund and the International Equity Fund. UK Reporting Fund Status The United Kingdom HM Revenue and Customs ( HMRC ) has confirmed that the Global Equity Fund Sterling Class A Shares is in the UK Reporting Fund Regime from 1 July 2010 onwards (and was previously certified as a distributing fund). All required submissions for Reporting Status for the year ended 30 June 2016 will be made within the required timeframe. Events after the reporting date There have been no material events to report subsequent to the year ended 30 June Directors The names of the persons who were Directors of the Company at any time during the year ended 30 June 2016 are set out below. All Directors served for the entire year. David Loevner Lori Renzulli Mike Kirby Jim Cleary (US resident) (US resident) (Irish resident) (Irish resident) Company Secretary MFD Secretaries Limited held the office of Company Secretary throughout the year. Directors and Secretary s interests in shares and contracts David Loevner and Lori Renzulli, Directors of the Company, each owned one share in the share capital of the Company at 30 June David Loevner and Lori Renzulli have a beneficial ownership in Frontier Markets Equity Fund through a limited partnership interest in Harding Loevner LP as disclosed in note 12. None of the other Directors nor the Secretary or their families had any other beneficial interests in the share capital of the Company at 30 June David Loevner and Lori Renzulli are limited partners of the Investment Manager. Mike Kirby is the Managing Principal of KB Associates, who provide consulting services to the Company. No other Directors had, at any time during the year or at the end of the year, a material interest in any contract of significance, in relation to the business of the Company. Accounting records The measures taken by the Directors to secure compliance with the Company s obligation to keep adequate accounting records are the use of appropriate systems and procedures and employment of competent persons. The accounting records of the Company are kept at Northern Trust International Fund Administration Services (Ireland) Limited, Georges Court, Townsend Street, Dublin 2, Ireland. Independent auditors The independent auditors, Deloitte, Chartered Accountants and Statutory Audit Firm, have declared their willingness to continue in office in accordance with the Companies Act Statement of corporate governance The European Communities (Directive 2006/461EC) Regulations (S.I. 450 of 2009 and S.I. 83 of 2010) (the Regulations ) require the inclusion of a corporate governance statement in the Directors Report. Although there is no specific statutory corporate governance code applicable to Irish collective investment schemes, the Company is subject to corporate governance practices imposed by: (i) (ii) (iii) The Irish Companies Act 2014, which are available for inspection at the registered office of the Company; and may also be obtained at The Articles of Association of the Company, which are available for inspection at the registered office of the Company at 75 St Stephen s Green, Dublin 2 and at the Companies Registration Office in Ireland; and The Central Bank of Ireland ( Central Bank ) in their UCITS regulations, which can be obtained from the Central Bank s. website at: and are available for inspection at the registered office of the Company The Board of Directors voluntarily complies with the Corporate Governance Code for Collective Investment Schemes and Management Companies as published by Irish Funds (the IF Code ) as the Company s corporate governance code. The Board of Directors has assessed the measures included in the IF Code as being consistent with its corporate governance practices and procedures for the financial year. 7

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38 Investment Manager s Report For the year ended 30 June 2016 The Harding Loevner Global Equity Fund Performance Summary The Global Equity Fund USD Class A shares decreased 0.47% (at dealing prices) for the fiscal year ended 30 June 2016, net of fees, in US dollar terms 1, exceeding its benchmark, the MSCI All Country World Index, which declined 3.73%. Please refer to the chart immediately following this commentary for returns related to the sub-fund s other share classes. Market Review Global markets declined in the fiscal year ending 30 June These 12 months encompassed two significant corrections, each followed by sharp recoveries. Stock markets first tumbled from August to September of 2015 as investors fled emerging markets (EMs), fearful that the large debts these countries have incurred over the past several years for stimulus-led capital investment are becoming more difficult to repay in a world of declining economic growth. But markets staged a torrid rebound in October, as the worst fears about China s economy and its exchange rate policy subsided, at least temporarily. Subsequently, on the first day of 2016, data suggesting a slowing economy in China caused such extreme trading that a circuit breaker was tripped, halting trading on the Shanghai stock exchange, and triggering a steep decline in equity markets across the world. Anemic growth data around the world, not only in China, also affected commodity prices. These concerns peaked in February, after which stock and commodity prices recovered to close the fiscal year with a modest net loss. Investors spent much of 2016 obsessing about the health of the world s largest economies, adapting to widening negative interest rate policies, and divining US Federal Reserve intentions with respect to interest rates as employment growth slowed and corporate investment remained sluggish. Merger and acquisition (M&A) activity resumed, as did IPOs, as markets stabilized after a volatile start to However, volatility returned at the end of June, triggered by the shocking result of the British referendum on leaving the European Union (EU), resulting in the resignation of Prime Minister David Cameron, who had campaigned strongly to stay. Currency markets experienced the biggest aftershock of the historic Brexit vote. The British pound sterling fell 8% the first day, and then fell further to reach a 30-year low in anticipation of a UK recession and property collapse amidst Brexit confusion. Bank shares fell heavily as well. Fears spread immediately to the rest of the EU, which remains mired in economic stagnation and disinflation and will not be helped by renewed questions over the integrity of the single currency and the interlocking banking systems. Further from the madding crowd, 2 the Japanese yen appreciated sharply, causing consternation at the Bank of Japan (BoJ), whose prior efforts to weaken the currency were undone. Prospects for higher interest rates in the US had already faded due to tepid economic growth, but the uncertainty surrounding global trade and investment unleashed by the Brexit vote dashed any that remained. Despite this, the US stock market managed to lead all major markets in the fiscal year with a gain of more than 3%, aided by a recovery in Health Care shares toward the end of the period and increasing signs that excess supply is being reduced in the oil patch. Meanwhile, Europe and Japan continued to struggle to break the icy grip of deflation. Bond purchases by the BoJ and European Central Bank (ECB) in the service of quantitative easing and by investors flocking to safety after the Brexit vote drove bond yields to record lows across the globe. That said, commodity and energy prices rose after February, especially in local (European) currency terms, so input prices received a positive jolt. European stock markets were weak, due not only to worries over the trade implications of the UK referendum, but also to the potential for other disgruntled EU members to follow in the decision to leave the EU. Germany and France, key trading partners of the UK, declined over expected harm to exports. Spain and Italy fell even more as investors focused on the rising strength of their anti-europe populist parties, and the dependence of their teetering banks on continued access to eurozone financing. EMs declined the most in the period. Utilities, Consumer Staples, and Telecom Services were the strongest performing as investors sought out non-cyclical sectors, with the uncertainty surrounding a potential Brexit only adding to investor concerns about global growth prospects. Financials were weak due to profitability worries as negative interest rates (and potentially deflation) spread into more economies. Banks suffered as lower interest rates and flatter yield curves globally pressured net interest margins. Energy and Materials also declined, though the sectors saw some recovery along with oil and commodity prices at the end of the period. 1 All returns and attribution figures are in US dollar terms unless otherwise stated. The USD Class A shares launched 18 July 2011; US dollar returns prior to this time are derived from EUR Class A returns. 2 Thomas Hardy took the title of his 1874 novel from a line of Thomas Gray's 1751 poem Elegy Written in a Country Churchyard: Far from the madding crowd's ignoble strife Their sober wishes never learn'd to stray; Along the cool sequester'd vale of life They kept the noiseless tenor of their way. Dare we equate the ignoble strife with Brexit? 9

39 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Global Equity Fund (continued) Perspectives and Outlook We live in unusual times is a truism, but consider this chart: Source: BofA Merrill Lynch Global Research; Using the BofAML global fixed income GFIM. Used with permission. Nearly a third of outstanding bonds globally now have negative yields, including US$12 trillion worth of government bonds and US$1 trillion of corporate bonds. 3 An economist might turn to their mathematical models and say that the zero point on nominal interest rates is irrelevant, insofar as real yields (those that are adjusted for inflation) are what matter, and it is commonplace to experience negative real yields from time to time. In the real world, though, apparently strange behaviors begin to appear when nominal interest rates turn negative. Among the related stories of recent months that caught our interest are one about homeowners in Denmark being paid interest by the bank holding their mortgage, while policy makers there fret over the creation of a housing bubble; another of a German bank building new vaults to store massive amounts of currency to avoid charges from the Bundesbank for holding its cash reserves there; and a drumbeat of worrisome accounts of how ultra-low interest rates necessarily arithmetically balloon the calculated obligations of pension funds, just at a time when the expected returns on their investments are also ultra low. We asked three of our analysts to describe what they believe are some of the implications of sustained zero or negative interest rates. Bryan Lloyd, CFA covers companies in the Financials sector, Anix Vyas, CFA covers Industrials and Materials companies, and Yoko Sakai, CFA looks at companies in all sectors in Japan where slow rates of economic growth, and very low rates of interest, have been the norm for approaching 30 years. It has long been our view that in the current market environment, quality would, as usual, be a relatively stable feature of our opportunity set, but growth would, in aggregate, be modest, and fast growth would be confined to those few companies able to invent new products or find new markets for old. This environment has helped the stocks of the kinds of companies we seek enjoy fairly steady increases in valuation in the last few years. Recently, we have begun to question whether those increases in valuation mean that returns from such stocks will henceforth be even more modest than the returns to be expected from the market as a whole. 3 Fitch Ratings, Fitch: Negative-Yielding Sovereign Debt Grew to $10.4 Trn in May (June 2016). 10

40 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Global Equity Fund (continued) The Upside Down World of Negative Interest Rates Bryan Lloyd, CFA Over the past several years, we have moved from a low interest rate environment to a zero interest rate environment, and now in some economies to a negative interest rate environment. In the eurozone, the intended consequence of flooding the market with cash is for excess liquidity to drive lending and kick-start GDP growth. Many criticize the banks for hoarding cash and refusing to lend, but the problem has been the lack of loan demand. Corporations and retail customers have repaired their balance sheets since the crisis, and many can fund their near-term needs internally. Furthermore, lack of clarity from central banks and endogenous shocks, such as Brexit, do little to spur investment confidence and stimulate animal spirits, which have been dormant for so long. Financial services companies around the world are struggling to cope with the continued downward movement in rates. Quantitative easing pushes rates lower and adds additional liquidity to the system, which in turn is reinvested in bonds through bank and insurance company balance sheets. Bank profits are facing a perfect storm. Low or negative interest rates generally compress net interest rate margins as the decline in asset yields outpaces lower funding costs. The problem is exacerbated with negative interest rates since banks are unlikely to charge their retail customers for deposits the zero bound problem. Banks are struggling to avoid losing money on new deposits. Some have begun turning away deposits from their corporate customers or charging them for deposits deemed excess to operating needs. Banks across the world are swimming in cash and, without loan growth, they have no choice but to buy additional sovereign and corporate debt. Ironically, strong levels of liquidity are bad for capital adequacy, too. Since new regulatory standards apply a capital charge to all assets, inflows of cash require holding more capital. Counterintuitively, the world we now live in is a world where excess liquidity, instead of providing a margin of safety, is a bad thing. Elsewhere, life insurance companies with many policies that guarantee minimum rates of return are struggling to meet their payout requirements as portfolio yields decline. To guard against this, insurers like Allianz have been shifting their investment portfolios toward higher yielding and less liquid (i.e., riskier) alternative assets, including infrastructure, renewable energy, and private equity. However, there is some light at the end of this low-growth tunnel. According to the ECB s April 2016 Bank Lending Survey, demand for corporate loans has increased in eight of the last nine calendar quarters based on eurozone survey data. Demand over the last year has been evenly divided between working capital and fixed investment. 4 These positive indicators for loan demand are not impacting bank balance sheets just yet, as existing loans are still being repaid. Germany appears to be leading the improvement in demand, yet the country s biggest lenders are still posting loan balance declines. Three Arrows: Not a Magic Bullet Yoko Sakai, CFA Abenomics, the economic policy launched by the current Japanese Prime Minister Shinzō Abe, effectively began in late When he officially announced his three arrows in the beginning of 2013, we reviewed them carefully. We could see how the first arrow, the BoJ s monetary policy, could influence the foreign exchange rate to benefit exporters, provided other countries didn t try the same thing in a round of competitive devaluations. We understood that the government was using its fiscal policy, the second arrow, to stimulate the economy. Neither of these two arrows, we thought, however, could create durable growth. After all, Japanese monetary policy had kept interest rates at or near zero for more than a decade without generating sustained growth in the economy, and we had lived through the bridges to nowhere years of fiscal stimulus in the 1990s, also with little effect. We were also very skeptical of the third arrow, the government s growth strategy. We stuck to our philosophy of investing in high-quality companies that can continue to grow regardless of Abenomics. We held onto our investments in the domestically oriented companies in the belief that their competitive advantages would allow them to overcome worsening terms of trade for imports through their stronger bargaining powers against both suppliers and customers. The BoJ s adoption of NIRP (negative interest rate policy) in February came as a surprise, and both we and the BoJ were taken aback when the yen strengthened rather than weakened in response. NIRP may have been an inevitable extension of the BoJ s easing policy, but it led to confusion among Japanese businesses. Banks that, up to that point, had been considering raising wages, shelved the idea. It was clear that, with little growth opportunities for most of the Japanese companies, not even negative interest rates could encourage borrowing. And now, with Brexit, the Japanese yen is even stronger against all currencies. Within Japan, the proportion of bonds trading at negative yields rose to 79% of the JP Morgan Japan Government Bond Index, adding more fuel to what has been a multi-year growth equity rally. 5 In the beginning of Abenomics, we endured the underperformance in Japan as it went through what we considered a junk rally (from late 2012 to mid-2013). Over time, as the paint of Abenomics peeled off, it became evident that businesses were lacking growth beyond the currency exchange boost that helped many exporters when Abe took office. Almost three years later, as the global economy slows down, growth looks even scarcer, and our portfolio of durable-growth companies is enjoying the best outperformance I can recall in Japan. This proves to us that we were right to stick to our philosophy. Today, the market is willing to pay much more for durable-growth companies, and, as a result, we now face a different challenge: what is the appropriate discount rate? 4 European Central Bank, The Euro Area Bank Lending Survey (April 2016). 5 JP Morgan, Negative Yield Index Monitor (June 30, 2016). 11

41 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Global Equity Fund (continued) Zero Rates = Acquisition Fuel Anix Vyas, CFA Successfully rating a company is a balancing act between objectively weighing the fundamentals of the business, comparing our estimate of fair value to the current share price, and subjectively assessing macroeconomic, political, and other risks. One risk that I am increasingly incorporating into my ratings rubric is the impact of low and now negative interest rates on my companies. Low interest rates reduce the hurdle for M&A transactions to be earnings accretive rather than dilutive even though lower rates might worsen returns on invested capital. With no end in sight to such zero interest rate policies, factoring in this risk seems prudent. Air Liquide s recent purchase of Airgas is an example of a company under my coverage leveraging its strong balance sheet and stable cash flows to buy an attractive US business that stands to improve Air Liquide s capacity utilization and US client density. The purchase price was high, but the cost of financing was very low. Monitoring and assessing the pursuit of such inorganic growth is par for the course when covering high-quality growing companies, which tend to generate more cash than needed for internal growth. More surprising, however, is the number of high-quality growth companies we follow that have become takeover targets surprising because, despite their shares normally trading at lofty prices, they are attracting bids that imply even richer valuations than they already sport. Portfolio holdings under my coverage that have disappeared via takeover in the last 24 months include Sigma Aldrich (acquired by Germany s Merck KGaA in 2014), Precision Castparts (acquired by Berkshire Hathaway in 2015), and prospectively Monsanto, which has been approached by German life sciences giant Bayer. Increased M&A activity due to low interest rates is not unique to companies in Materials and Industrials. Several companies we follow in IT have also become targets recently, including LinkedIn, Demandware, and Sandisk. Five companies we follow in Health Care also received takeover bids over the past 24 months, including Allergan, Shire, Baxalta, Pall Corporation, and FEI. The level of M&A activity is surely due to a combination of factors including an unwillingness to expand capacity via new investment because either management teams share investors general pessimism about global growth or they are worried about technological disruption of their businesses. Managements are nonetheless incentivized to grow their companies, or at least improve profitability, and there can be no doubt they are being spurred on by the unprecedented low borrowing costs fostered by central banks. So the risk is really about the extent to which low rates change management behavior, both at companies under our research and at companies we do not follow closely, and what that implies for stock prices. While this increased M&A activity clearly impacts portfolio turnover and complicates judgments I make about the stocks of companies under my coverage, it changes little in our investment process. Analysts will continue to seek to uncover strong and growing companies with few corporate governance blemishes that might thwart receiving or achieving full value. But assessing what is fair, versus what is full or even outrageous value becomes trickier, given shifting probabilities of takeover premiums being paid. 12

42 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Global Equity Fund (continued) Performance (% Total Return) as of 30 June 2016 Class A Since Class A 6 months 1 year 3 years 5 years Inception US Dollar 3 21 June 2007 Global Equity Fund USD A MSCI All Country World Index months 1 year 3 years 5 years Since Inception Euro 21 June 2007 Global Equity Fund EUR A MSCI All Country World Index GBP Sterling 5 March 2008 Global Equity Fund GBP A MSCI All Country World Index Singapore Dollar 5 August 2008 Global Equity Fund SGD A MSCI All Country World Index Class M 6 months 1 year 3 years 5 years US Dollar 4 Since Class M Inception 21 September 2015 Global Equity Fund USD M MSCI All Country World Index Australian Dollar 6 months 1 year 3 years 5 years Since Inception 30 October 2015 Global Equity Fund AUD M MSCI All Country World Index GBP Sterling 24 November 2015 Global Equity Fund GBP M MSCI All Country World Index Singapore Dollar 21 September 2015 Global Equity Fund SGD M MSCI All Country World Index Class I Since Class I 6 months 1 year 3 years 5 years Inception US Dollar 5 29 July 2015 Global Equity Fund USD I MSCI All Country World Index months 1 year 3 years 5 years Since Inception GBP Sterling 29 July 2015 Global Equity Fund GBP I MSCI All Country World Index Net of fees; 2 Net of withholding taxes; 3 USD Class A shares launched on 18 July 2011; returns prior to this are derived from EUR Class A returns; 4 USD Class M shares are not yet launched; returns are derived from SGD Class M returns; 5 USD Class I shares are not yet launched; returns are derived from GBP Class I returns. Returns are annualized for periods greater than one year. 13

43 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Global Equity Fund (continued) Fund Exposure as of 30 June 2016 Sector Fund MSCI AC World Region Fund MSCI AC World Consumer Discretionary Canada Consumer Staples Emerging Markets Energy Europe EMU Financials Europe ex-emu Health Care Frontier Markets Industrials Japan Info Technology Middle East Materials Pacific ex-japan Telecom Services United States Utilities Cash Cash Largest Holdings Sector Country % Assets 7 M3 Health Care Japan 3.8 Alphabet Info Technology United States 3.6 Nike Cons Discretionary United States 3.3 Schlumberger Energy United States 3.2 Roper Industrials United States 2.5 Largest Contributors Sector Country Contribution % Assets 8 M3 Health Care Japan Amazon.com Cons Discretionary United States Alphabet Info Technology United States Yandex Info Technology Russia MonotaRO Industrials Japan Largest Detractors Sector Country Contribution % Assets 8 ICICI Bank Financials India SVB Financial Group Financials United States Lazard Financials United States MTN Group Telecom Services South Africa America Movil Telecom Services Mexico Includes countries with less-developed markets outside the Index; 7 End weight; 8 Average weight. Source: FactSet (Run date 20 July 2016); Global Equity Fund, based on the sub-fund s underlying holdings; MSCI Inc. and S&P. MSCI and S&P do not make any express or implied warranties or representations and shall have no liability whatsoever with respect to any GICS data contained herein. Sector and geographical weightings data is sourced from: FactSet, Harding Loevner Funds, and MSCI Inc. Differences may exist between this source data and similar information reported in the financial statements due to timing differences and/or adjustments required pursuant to International Financial Reporting Standards (IFRS). 14

44 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Global Equity Fund (continued) Performance Attribution as of 30 June 2016 Sector Attribution Trailing 12 Months Total Effect: 4.4 Selection Effect: 4.3 Allocation Effect: 0.1 Region Attribution Trailing 12 Months Total Effect: 4.4 Selection Effect: 4.3 Allocation Effect: 0.1 Source: FactSet; Global Equity Fund, based on the sub-fund s underlying holdings; MSCI and S&P. MSCI and S&P do not make any express or implied warranties or representations and shall have no liability whatsoever with respect to any GICS data contained herein; All data is expressed in US dollar terms. 15

45 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner International Equity Fund Performance Summary The International Equity Fund USD Class A shares decreased 3.40% (at dealing prices) for the fiscal year ended 30 June 2016, net of fees, in US dollar terms 6, exceeding its benchmark, the MSCI All Country World ex-us Index, which declined 10.24%. Please refer to the chart immediately following this commentary for returns related to the sub-fund s other share classes. Market Review Global markets declined in the fiscal year ending 30 June These 12 months encompassed two significant corrections, each followed by sharp recoveries. Stock markets first tumbled from August to September of 2015 as investors fled emerging markets (EMs), fearful that the large debts these countries have incurred over the past several years for stimulus-led capital investment are becoming more difficult to repay in a world of declining economic growth. But markets staged a torrid rebound in October, as the worst fears about China s economy and its exchange rate policy subsided, at least temporarily. Subsequently, on the first day of 2016, data suggesting a slowing economy in China caused such extreme trading that a circuit breaker was tripped, halting trading on the Shanghai stock exchange, and triggering a steep decline in equity markets across the world. Anemic growth data around the world, not only in China, also affected commodity prices. These concerns peaked in February, after which stock and commodity prices recovered to close the fiscal year with a modest net loss. Investors spent much of 2016 obsessing about the health of the world s largest economies, adapting to widening negative interest rate policies, and divining US Federal Reserve intentions with respect to interest rates as employment growth slowed and corporate investment remained sluggish. Merger and acquisition (M&A) activity resumed, as did IPOs, as markets stabilized after a volatile start to However, volatility returned at the end of June, triggered by the shocking result of the British referendum on leaving the European Union (EU), resulting in the resignation of Prime Minister David Cameron, who had campaigned strongly to stay. Currency markets experienced the biggest aftershock of the historic Brexit vote. The British pound sterling fell 8% the first day, and then fell further to reach a 30-year low in anticipation of a UK recession and property collapse amidst Brexit confusion. Bank shares fell heavily as well. Fears spread immediately to the rest of the EU, which remains mired in economic stagnation and disinflation and will not be helped by renewed questions over the integrity of the single currency and the interlocking banking systems. Further from the madding crowd, 7 the Japanese yen appreciated sharply, causing consternation at the Bank of Japan (BoJ), whose prior efforts to weaken the currency were undone. Europe and Japan continued to struggle to break the icy grip of deflation. Bond purchases by the BoJ and European Central Bank (ECB) in the service of quantitative easing and by investors flocking to safety after the Brexit vote drove bond yields to record lows across the globe. That said, commodity and energy prices rose after February, especially in local (European) currency terms, so input prices received a positive jolt. European stock markets were weak, due not only to worries over the trade implications of the UK referendum, but also to the potential for other disgruntled EU members to follow in the decision to leave the EU. Germany and France, key trading partners of the UK, declined over expected harm to exports. Spain and Italy fell even more as investors focused on the rising strength of their anti-europe populist parties, and the dependence of their teetering banks on continued access to eurozone financing. EMs declined the most in the period. Consumer Staples was the only sector to increase, with the uncertainty surrounding a potential Brexit only adding to investor concerns about global growth prospects. Financials was the weakest sector due to profitability worries as negative interest rates (and potentially deflation) spread into more economies. Banks suffered as lower interest rates and flatter yield curves globally pressured net interest margins. Consumer Discretionary saw the next largest decline after Financials. Energy and Materials also declined, though the sectors saw some recovery along with oil and commodity prices at the end of the period. 6 All returns and attribution figures are in US dollar terms unless otherwise stated. 7 Thomas Hardy took the title of his 1874 novel from a line of Thomas Gray's 1751 poem Elegy Written in a Country Churchyard: Far from the madding crowd's ignoble strife Their sober wishes never learn'd to stray; Along the cool sequester'd vale of life They kept the noiseless tenor of their way. Dare we equate the ignoble strife with Brexit? 16

46 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner International Equity Fund (continued) Perspectives and Outlook We live in unusual times is a truism, but consider this chart: Source: BofA Merrill Lynch Global Research; Using the BofAML global fixed income GFIM. Used with permission. Nearly a third of outstanding bonds globally now have negative yields, including US$12 trillion worth of government bonds and US$1 trillion of corporate bonds. 8 An economist might turn to their mathematical models and say that the zero point on nominal interest rates is irrelevant, insofar as real yields (those that are adjusted for inflation) are what matter, and it is commonplace to experience negative real yields from time to time. In the real world, though, apparently strange behaviors begin to appear when nominal interest rates turn negative. Among the related stories of recent months that caught our interest are one about homeowners in Denmark being paid interest by the bank holding their mortgage, while policy makers there fret over the creation of a housing bubble; another of a German bank building new vaults to store massive amounts of currency to avoid charges from the Bundesbank for holding its cash reserves there; and a drumbeat of worrisome accounts of how ultra-low interest rates necessarily arithmetically balloon the calculated obligations of pension funds, just at a time when the expected returns on their investments are also ultra low. We asked three of our analysts to describe what they believe are some of the implications of sustained zero or negative interest rates. Bryan Lloyd, CFA covers companies in the Financials sector, Anix Vyas, CFA covers Industrials and Materials companies, and Yoko Sakai, CFA looks at companies in all sectors in Japan where slow rates of economic growth, and very low rates of interest, have been the norm for approaching 30 years. It has long been our view that in the current market environment, quality would, as usual, be a relatively stable feature of our opportunity set, but growth would, in aggregate, be modest, and fast growth would be confined to those few companies able to invent new products or find new markets for old. This environment has helped the stocks of the kinds of companies we seek enjoy fairly steady increases in valuation in the last few years. Recently, we have begun to question whether those increases in valuation mean that returns from such stocks will henceforth be even more modest than the returns to be expected from the market as a whole. The Upside Down World of Negative Interest Rates Bryan Lloyd, CFA Over the past several years, we have moved from a low interest rate environment to a zero interest rate environment, and now in some economies to a negative interest rate environment. In the eurozone, the intended consequence of flooding the market with cash is for excess liquidity to drive lending and kick-start GDP growth. Many criticize the banks for hoarding cash and refusing to lend, but the problem has been the lack of loan demand. 8 Fitch Ratings, Fitch: Negative-Yielding Sovereign Debt Grew to $10.4 Trn in May (June 2016). 17

47 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner International Equity Fund (continued) The Upside Down World of Negative Interest Rates (continued) Bryan Lloyd, CFA Corporations and retail customers have repaired their balance sheets since the crisis, and many can fund their near-term needs internally. Furthermore, lack of clarity from central banks and endogenous shocks, such as Brexit, do little to spur investment confidence and stimulate animal spirits, which have been dormant for so long. Financial services companies around the world are struggling to cope with the continued downward movement in rates. Quantitative easing pushes rates lower and adds additional liquidity to the system, which in turn is reinvested in bonds through bank and insurance company balance sheets. Bank profits are facing a perfect storm. Low or negative interest rates generally compress net interest rate margins as the decline in asset yields outpaces lower funding costs. The problem is exacerbated with negative interest rates since banks are unlikely to charge their retail customers for deposits the zero bound problem. Banks are struggling to avoid losing money on new deposits. Some have begun turning away deposits from their corporate customers or charging them for deposits deemed excess to operating needs. Banks across the world are swimming in cash and, without loan growth, they have no choice but to buy additional sovereign and corporate debt. Ironically, strong levels of liquidity are bad for capital adequacy, too. Since new regulatory standards apply a capital charge to all assets, inflows of cash require holding more capital. Counterintuitively, the world we now live in is a world where excess liquidity, instead of providing a margin of safety, is a bad thing. Elsewhere, life insurance companies with many policies that guarantee minimum rates of return are struggling to meet their payout requirements as portfolio yields decline. To guard against this, insurers like Allianz have been shifting their investment portfolios toward higher yielding and less liquid (i.e., riskier) alternative assets, including infrastructure, renewable energy, and private equity. However, there is some light at the end of this low-growth tunnel. According to the ECB s April 2016 Bank Lending Survey, demand for corporate loans has increased in eight of the last nine calendar quarters based on eurozone survey data. Demand over the last year has been evenly divided between working capital and fixed investment. 9 These positive indicators for loan demand are not impacting bank balance sheets just yet, as existing loans are still being repaid. Germany appears to be leading the improvement in demand, yet the country s biggest lenders are still posting loan balance declines. Three Arrows: Not a Magic Bullet Yoko Sakai, CFA Abenomics, the economic policy launched by the current Japanese Prime Minister Shinzō Abe, effectively began in late When he officially announced his three arrows in the beginning of 2013, we reviewed them carefully. We could see how the first arrow, the BoJ s monetary policy, could influence the foreign exchange rate to benefit exporters, provided other countries didn t try the same thing in a round of competitive devaluations. We understood that the government was using its fiscal policy, the second arrow, to stimulate the economy. Neither of these two arrows, we thought, however, could create durable growth. After all, Japanese monetary policy had kept interest rates at or near zero for more than a decade without generating sustained growth in the economy, and we had lived through the bridges to nowhere years of fiscal stimulus in the 1990s, also with little effect. We were also very skeptical of the third arrow, the government s growth strategy. We stuck to our philosophy of investing in high-quality companies that can continue to grow regardless of Abenomics. We held onto our investments in the domestically oriented companies in the belief that their competitive advantages would allow them to overcome worsening terms of trade for imports through their stronger bargaining powers against both suppliers and customers. The BoJ s adoption of NIRP (negative interest rate policy) in February came as a surprise, and both we and the BoJ were taken aback when the yen strengthened rather than weakened in response. NIRP may have been an inevitable extension of the BoJ s easing policy, but it led to confusion among Japanese businesses. Banks that, up to that point, had been considering raising wages, shelved the idea. It was clear that, with little growth opportunities for most of the Japanese companies, not even negative interest rates could encourage borrowing. And now, with Brexit, the Japanese yen is even stronger against all currencies. Within Japan, the proportion of bonds trading at negative yields rose to 79% of the JP Morgan Japan Government Bond Index, adding more fuel to what has been a multi-year growth equity rally. 10 In the beginning of Abenomics, we endured the underperformance in Japan as it went through what we considered a junk rally (from late 2012 to early 2013). Over time, as the paint of Abenomics peeled off, it became evident that businesses were lacking growth beyond the currency exchange boost that helped many exporters when Abe took office. Almost three years later, as the global economy slows down, growth looks even scarcer, and our portfolio of durable-growth companies is enjoying the best outperformance I can recall in Japan. This proves to us that we were right to stick to our philosophy. Today, the market is willing to pay much more for durable-growth companies, and, as a result, we now face a different challenge: what is the appropriate discount rate? 9 European Central Bank, The Euro Area Bank Lending Survey (April 2016). 10 JP Morgan, Negative Yield Index Monitor (June 30, 2016). 18

48 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner International Equity Fund (continued) Zero Rates = Acquisition Fuel Anix Vyas, CFA Successfully rating a company is a balancing act between objectively weighing the fundamentals of the business, comparing our estimate of fair value to the current share price, and subjectively assessing macroeconomic, political, and other risks. One risk that I am increasingly incorporating into my ratings rubric is the impact of low and now negative interest rates on my companies. Low interest rates reduce the hurdle for M&A transactions to be earnings accretive rather than dilutive even though lower rates might worsen returns on invested capital. With no end in sight to such zero interest rate policies, factoring in this risk seems prudent. Air Liquide s recent purchase of Airgas is an example of a company under my coverage leveraging its strong balance sheet and stable cash flows to buy an attractive US business that stands to improve Air Liquide s capacity utilization and US client density. The purchase price was high, but the cost of financing was very low. Monitoring and assessing the pursuit of such inorganic growth is par for the course when covering high-quality growing companies, which tend to generate more cash than needed for internal growth. More surprising, however, is the number of high-quality growth companies we follow that have become takeover targets surprising because, despite their shares normally trading at lofty prices, they are attracting bids that imply even richer valuations than they already sport. Portfolio holdings under my coverage that have disappeared via takeover in the last 24 months include Sigma Aldrich (acquired by Germany s Merck KGaA in 2014), Precision Castparts (acquired by Berkshire Hathaway in 2015), and prospectively Monsanto, which has been approached by German life sciences giant Bayer. Increased M&A activity due to low interest rates is not unique to companies in Materials and Industrials. Several companies we follow in IT have also become targets recently, including LinkedIn, Demandware, and Sandisk. Five companies we follow in Health Care also received takeover bids over the past 24 months, including Allergan, Shire, Baxalta, Pall Corporation, and FEI. The level of M&A activity is surely due to a combination of factors including an unwillingness to expand capacity via new investment because either management teams share investors general pessimism about global growth or they are worried about technological disruption of their businesses. Managements are nonetheless incentivized to grow their companies, or at least improve profitability, and there can be no doubt they are being spurred on by the unprecedented low borrowing costs fostered by central banks. So the risk is really about the extent to which low rates change management behavior, both at companies under our research and at companies we do not follow closely, and what that implies for stock prices. While this increased M&A activity clearly impacts portfolio turnover and complicates judgments I make about the stocks of companies under my coverage, it changes little in our investment process. Analysts will continue to seek to uncover strong and growing companies with few corporate governance blemishes that might thwart receiving or achieving full value. But assessing what is fair, versus what is full or even outrageous value becomes trickier, given shifting probabilities of takeover premiums being paid. Performance (% Total Return) as of 30 June 2016 Class A 6 months 1 Year 3 Year Since Class A Inception US Dollar 3 7 June 2013 International Equity Fund USD A MSCI All Country World ex-us Index months 1 Year 3 Year Since Inception GBP Sterling 7 June 2013 International Equity Fund GBP A MSCI All Country World ex-us Index Class B 6 months 1 Year 3 Year Since Class B Inception US Dollar 27 September 2013 International Equity Fund USD B MSCI All Country World ex-us Index Class M 6 months 1 Year 3 Year Since Class M Inception US Dollar 2 February 2016 International Equity Fund USD M MSCI All Country World ex-us Index

49 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner International Equity Fund (continued) Fund Exposure as of 30 June 2016 Sector Fund MSCI ACWI ex-us Region Fund MSCI ACWI ex-us Consumer Discretionary Canada Consumer Staples Emerging Markets Energy Europe EMU Financials Europe ex-emu Health Care Frontier Markets Industrials Japan Info Technology Middle East Materials Pacific ex-japan Telecom Services Other Utilities Cash Cash Net of fees; 2 Net of withholding taxes; 3 USD Class A shares launched on 2 December 2013, returns prior to this are derived from GBP Class A returns; 4 Includes countries with less-developed markets outside the Index; 5 Includes companies classified in countries outside the Index. Returns are annualized for periods greater than one year. Source: FactSet (Run date 20 July 2016); International Equity Fund, based on the underlying holdings; MSCI Inc. and S&P. MSCI and S&P do not make any express or implied warranties or representations and shall have no liability whatsoever with respect to any GICS data contained herein. All data is expressed in US dollar terms. Largest Holdings Sector Country % Assets 5 Nestlé Cons Staples Switzerland 4.0 Dassault Systèmes Info Technology France 3.9 Roche Holding Health Care Switzerland 3.8 Samsung Electronics Info Technology South Korea 3.8 AIA Group Financials Hong Kong 3.8 Largest Contributors Sector Country Contribution % Assets 6 M3 Health Care Japan Royal Dutch Shell Energy United Kingdom Keyence Info Technology Japan Park24 Industrials Japan Samsung Electronics Info Technology South Korea Largest Detractors Sector Country Contribution % Assets 6 ICICI Bank Financials India Bunge Cons Staples United States MTN Group Telecom Services South Africa BMW Cons Discretionary Germany BBVA Financials Spain End weight; 6 Average weight; Sector and geographical weightings data is sourced from: FactSet, Harding Loevner Funds, and MSCI Barra. Differences may exist between this source data and similar information reported in the financial statements due to timing differences and/or adjustments required pursuant to International Financial Reporting Standards (IFRS). 20

50 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner International Equity Fund (continued) Performance Attribution as of 30 June 2016 Sector Attribution Trailing 12 Months Total Effect: 8.0 Selection Effect: 5.6 Allocation Effect: 2.4 Region Attribution Trailing 12 Months Total Effect: 8.0 Selection Effect: 9.4 Allocation Effect: Includes companies classified in countries outside the Index. Source: FactSet; International Equity Fund, based on the sub-fund s underlying holdings; MSCI and S&P. MSCI and S&P do not make any express or implied warranties or representations and shall have no liability whatsoever with respect to any GICS data contained herein; All data is expressed in US dollar terms. 21

51 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Emerging Markets Equity Fund The Emerging Markets Equity strategy is generally closed to new investors. Performance Summary The Emerging Markets Equity Fund USD Class A shares fell 6.35% (at dealing prices) in the 12 months ended 30 June 2016, net of fees, in US dollar terms, ahead of the benchmark, the MSCI Emerging Markets Index, which lost 12.06%. 11 Please refer to the chart immediately following this commentary for returns related to the sub-fund s other share classes. Market Review The sell-off in emerging markets (EMs) that had started in April 2015 continued through the first half of the fiscal year, but markets took a positive turn beginning in late January. As a result, while EMs significantly underperformed developed markets for the trailing 12 months with the representative MSCI World Index falling only 3% in the second half of this period, the EM Index rose 6% and outperformed the World Index by nearly six percentage points. Investors fears regarding EM equities for much of the year were stoked by a number of issues: growing concern over the true extent of China s economic weakness and uncertainty regarding currency policy and potential devaluation, the fall in commodity prices (impacted by China s slowing growth), the decline in oil prices, the continuing political dysfunction and Petrobras corruption scandal in Brazil, and currency weakness in many EM countries. The Brent crude oil price benchmark fell nearly 60% from July to early January before recovering somewhat to end up with a 20% decline for the trailing twelve months. The shifting expectations around US Federal Reserve interest rate policy hurt, then helped, EMs over this period. In mid-december, the Fed announced a long-anticipated 25-basis-point increase in the federal funds rate, marking the end of a seven-year period of near-zero interest rates. Concerns about the impact of the increase contributed to the acute EM weakness at the start of However, as the calendar year progressed, growing concerns around a weak US jobs market, the impact of a strong dollar on corporate profitability, and elevated risks across EMs pushed prospects for the next rate increase further into the future, which provided support to EM equities through the second half of the fiscal year. The end of the fiscal year was also marked by the British public s surprise vote to leave the 28-state European Union (EU), causing immediate but short-lived pandemonium among global markets. Victory for the Leave campaign has wide-ranging implications mostly negative for Europe and has launched a protracted period of uncertainty for the UK and Europe given the unprecedented nature of this breakup and the years-long negotiations required to finalize its terms. However, apart from its depressive effect on global trade, the outcome is likely to have only minimal direct impact on the economies of EMs, outside of Central Europe and perhaps Turkey, whose potential accession into the EU was a central topic of debate in the UK. The UK is the destination on average for only about 3% of exports from MSCI EM countries (representing approximately 1% of EMs GDP). 12 China s slowing economy often dominated the financial headlines this period, with anxiety about the country s prospects reaching a fever pitch in August, when the People s Bank of China made a surprise announcement that it was adjusting the pricing mechanism for the yuan to allow the market to have greater (albeit still limited) influence over the currency. The yuan fell a little more than 6% in the 12-month period although investors initial anxiety about prospects for yuan depreciation have eased as capital outflows have appeared to fall and stabilize in recent months. Currency weakness across the EM universe accounted for about one-third of the Index s poor performance in US dollar terms. Currency movements reflected the challenges that different countries faced, with many commodity currencies the weakest in the period. (However, many of these also rallied starting in mid-january.) Turkey s lira has been under pressure from the country s high external debt levels and growing political uncertainty. In May, President Recep Tayyip Erdoğan replaced Prime Minister Ahmet Davutoğlu with a close ally, Binali Yildirim, the former Minister of Transportation, to strengthen his presidential control over the country. Countries in Asia also suffered currency depreciation (partly in response to the yuan news), reflecting a potential weakening in their competitiveness. The following chart summarizes the currency story over the past 12 months, including the reversal that occurred for many currencies in the second half of the fiscal year. 11 All returns and attribution figures are in US dollar terms unless otherwise stated. 12 Based on 2014 trade data sourced from The Observatory of Economic Complexity, 22

52 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Emerging Markets Equity Fund (continued) EM Currency Returns Source: Bloomberg. Latin America was the best-performing major region this period, with Peru up 8% supported by strengthening metals prices and excitement over the victory of market-preferred candidate Pedro Pablo Kuczynski in June s presidential elections. Brazil also staged a late-period resurgence as investors anticipated, then cheered, the Senate vote to impeach President Dilma Rousseff. Vice-president Michel Temer, who has assumed the presidency for the duration of the impeachment trial, assembled a cabinet conducive to implementing much-needed reforms. Brazil s current account swung back into surplus for April, enabling further appreciation in the real, which ended the fiscal year almost 30% higher than its January lows. Mexico was surprisingly weak and political forces were at play there, too: the ruling Institutional Revolutionary Party suffered surprise losses in local elections in June and the anti-immigration and protectionist rhetoric of US presidential candidate Donald Trump has loomed over Mexico s longer-term outlook. In Asia, China was the largest detractor (down 23%). Indonesia (up 7%) outperformed as investors applauded improvements in the country s current account deficit aided by lower oil prices. Emerging Europe was mixed Hungary posted double-digit gains while Poland, the Czech Republic, and Greece fell double digits. In Poland, the right-wing Law and Justice Party elected in October has put forward populist policy proposals that have met with investors disapproval, including an asset tax on banks and plans to take control of the country s pension system by merging all private pension funds into a single entity. Greece is a tiny market (0.4% of the Index). We have not owned Greek stocks in the portfolio for many years, and this is unlikely to change anytime soon given the dearth of companies that meet our quality-growth investment criteria. 23

53 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Emerging Markets Equity Fund (continued) The worst regional returns were experienced in the Middle East and North Africa, where the unmitigated negative impact of collapsing oil was compounded by heightened security risks. From a sector perspective, Industrials did the worst, a reflection of the continued slowdown in China s industrial economy. Shares of heavyweight South Korean industrials also fell sharply, a demonstration of the importance of China to corporate performance in South Korea. Financials also lagged significantly, but returns exhibited high dispersion across countries. In Russia, the sector was notably strong (+35%) relative to Europe ex-russia (-29%), a reflection of improving expectations for Russia s economy, including stabilization in its banking asset quality. By contrast, Financials stocks in China (-29%) and neighboring markets in north Asia showed severe weakness. China s financial system showed increasing signs of stress, with non-performing loans for banks rising. Bank shares also suffered as the government has made gradual efforts to reform the industry, including pushing the development of alternative forms of financing that compete with banks such as deeper bond markets. The best-performing sector in the period was Consumer Staples, exhibiting safe-haven properties in a period of rising uncertainty, particularly in Asia. Information Technology (IT) also proved resilient, supported by solid earnings reports from sector leaders (and portfolio holdings) Samsung Electronics and Tencent. Investment Perspectives Economic Diversity and Innovation in China Our insights into investment opportunities in China are developed through the analysis of individual companies, complemented by the deep local knowledge and perspectives of our China specialist analysts. One point the latter regularly stress is the profound complexity and diversity of China s economy, which has developed in a staggered fashion across different regions leading to significant disparity of wealth. On a national level, China s average per capita GDP, now about US$8,000, is still bedded deep in the middle-income bracket. But this average does not convey the radical differences in prosperity by region. Notably, China s group of Tier One cities (Beijing, Shanghai, Guangzhou, Shenzen) representing a combined population of around 100 million people have already ascended to high-income status, with per capita income of roughly US$17,000. Among EMs, only Greece, South Korea, and Taiwan are richer than these cities. The regional income disparity and uneven pace of development adds complexity to the growth strategies of Chinese businesses. Our portfolio currently tilts toward companies targeting higher-income consumers who are demanding greater variety and quality of services, be they international travel with complex itineraries (Ctrip.com), white-collar job search and placement (51Job Inc.), or social media and online gaming (Tencent). However, our research takes us to all corners of China. Many of our companies touch all income groups, including China Mobile, Baidu, and Jiangsu Expressway. We are also cognizant that the sustainability of China s economic growth model is reliant upon expanding the provision of universal, basic services across the population. Thus we are looking for durable-growth opportunities that cover the needs of the population and not just the wants. Health care services represent a potentially rich opportunity in this regard. We have held Hong Kong-listed Sino Biopharmaceutical for about a year, and our expanding research on A-share companies has unveiled businesses that undoubtedly have growth opportunities and potentially may meet our investment criteria. China has identified innovation as a prerequisite for a successful long-term transition to a high-income country, and has been pursuing it through aggressive government funding of research and development (R&D). We observe parallel efforts at the company level, where businesses are accelerating their technological advancement by complementing their internal R&D with intellectual property acquired through strategic acquisitions. Chinese companies have the financial capacity to pursue such a strategy and their appetite appears to be increasing. With a spate of acquisitions announced across technology, industrials, utilities, and health care, Chinese outbound M&A so far this year is already close to surpassing the US$110 billion of deals done in all of Our work on Chinese companies thus entails a growing need to assess managements ability to enhance shareholder returns through such business combinations, as history suggests more will fail than succeed. Tencent s recently announced US$9 billion layout for videogame-maker Supercell may seem profligate to some as Supercell s business is built upon just four games, but these games are already extremely successful globally, and we think Tencent s ability to further monetize such content through its network of over 760 million active users of its platform should not be underestimated. In June, index-provider MSCI announced that it would delay the inclusion of China A securities into its index series, notwithstanding the significant improvements to A-share accessibility that China had made as a result of market reforms. The decision has no direct impact on our permissible investment universe. We routinely invest in off-benchmark securities, in China and elsewhere, and will consider for the portfolio any high-quality, attractively priced Chinese business trading in the A-share market. 24

54 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Emerging Markets Equity Fund (continued) Corporate Governance and Investments in South Korea Development in EM countries occurs incrementally, but noting the extent of such change over decades reminds one of the importance of a suitably long time horizon when assessing investment opportunities. On a recent visit to South Korea, we were struck anew by its vast transformation since some of us first visited the country 40 years ago when its main investable businesses were pipe manufacturers and shipbuilders. MSCI confirmed in June that, due to limitations placed upon the convertibility of the won, it will continue to categorize South Korea as emerging, even though in many respects the country moved beyond this description years ago. Seoul is a truly modern, cosmopolitan, and livable city. It offers a real breadth in entertainment options that includes, for a few brave souls, waterskiing through the city on the Han River. South Korea s telecommunications systems have been world leading for years now and there is a high-tech edge to most everything including the mirror in your hotel room, which, of course, is also an LED TV in-waiting. Our research efforts in South Korea have focused on companies with demonstrable competitive advantages within various industries, including technology, health care, and consumer products. However, we have struggled against the prevalent obstacles of opaque, complex corporate structures and weak corporate governance records. Waterskiing the Han is perhaps a good metaphor for daring to risk weak corporate governance in this market encounter one small disturbance and you are underwater, fast! Fortunately, our disciplined insistence upon high-quality corporate governance has saved us a few baths. Now we wonder if the governance issue is finally improving in South Korea. The new generation of Korea s corporate management class multilingual, well-traveled, with strong representation from both men and women appears to really get it when it comes to issues like standards of corporate governance. Their septuagenarian founding bosses may not fully grasp or practice what these young executives preach, but we will continue talking to the corporate leaders of tomorrow to identify future opportunities. While we have been underweight South Korea relative to the Index for many years, we have increased our exposure this year through purchasing the country s number-one cosmetics manufacturer AmorePacific in March, adding a new holding in another leading cosmetics company, LG Household and Health Care (LGH&HC) in April, and increasing our position in Samsung Electronics in June. South Korea s largest listed company, Samsung Electronics is an example of improving management practices. Having heard remonstrations from foreign shareholders for years, the company has finally implemented a sensible and transparent capital management policy, committing to return 30 50% of excess cash back to investors. Over the past year we have increased our stake in Samsung, due in part to these signs of better corporate governance, but also to its rapid commercialization of two important technologies where the company is a clear global leader: OLED display devices and 3D NAND memory devices. OLEDs are lighter, more flexible, have higher resolution, and consume far less power than LED displays, and are becoming mainstream in handsets and some high-end TVs. 3D NAND technology allows memory devices to offer greater storage capacity, rapid speeds, and, again, lower power consumption. Such devices are the core in solid state drives that have largely replaced disc drives in mobile devices, and are now being used in advanced server farms and high-end enterprise applications. Products based on these two technologies should support Samsung s revenues and margins in the years ahead, as growth in its legacy products such as TFT-LCD displays and standard DRAM disappears. Founded in 2001, LGH&HC is South Korea s largest diversified consumer company. It enjoys the country s leading market position in home care products, is number two in soft drinks, and is just behind AmorePacific in beauty and personal care. LGH&HC has been creating value both through acquisitions of consumer businesses and through developing its own lines of premium cosmetics. One of its successful brands is The History of WHOO, launched in CEO Suk-yong Cha made a bold move by going against the prevailing industry emphasis on mass cosmetics. The WHOO brand, with its gold packaging and evocation of South Korea s dynastic heritage, presents a more upscale and conservative image. This concept has turned out to be very successful among Chinese visitors to Korea, making it the top-selling brand in Korean duty-free stores. To capitalize on this success, LGH&HC recently introduced into China its SU:M brand, which appears to be achieving a similarly successful growth pattern. LGH&HC s long-term growth prospects are tied to China, where its market share is still small. 25

55 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Emerging Markets Equity Fund (continued) Performance (% Total Return) as of 30 June 2016 Class A Since Class A 6 months 1 year 3 Year Inception US Dollar 25 September 2012 Emerging Markets Equity Fund USD A MSCI Emerging Markets Index Class B Since Class B 6 months 1 year 3 Year Inception US Dollar 25 October 2013 Emerging Markets Equity Fund USD B MSCI Emerging Markets Index Class I Since Class I 6 months 1 year 3 Year Inception US Dollar 3 14 November 2013 Emerging Markets Equity Fund USD I MSCI Emerging Markets Index months 1 year 3 Year Since Inception Canadian Dollar 14 November 2013 Emerging Markets Equity Fund CAD I MSCI Emerging Markets Index Class M Since Class M 6 months 1 year 3 Year Inception US Dollar 23 December 2015 Emerging Markets Equity Fund USD M MSCI Emerging Markets Index months 1 year 3 Year Since Class Inception Euro 19 June 2015 Emerging Markets Equity Fund EUR M MSCI Emerging Markets Index Canadian Dollar 22 December 2014 Emerging Markets Equity Fund CAD M MSCI Emerging Markets Index Class F Since Class F 6 months 1 year 3 Year Inception Australian Dollar 04 December 2015 Emerging Markets Equity Fund AUD F MSCI Emerging Markets Index Net of fees; 2 Net of withholding taxes; 3 USD Class I shares are not yet launched; returns are derived from CAD Class I returns. Returns are annualized for periods greater than one year. 26

56 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Emerging Markets Equity Fund (continued) Fund Exposures as of 30 June 2016 Sector Fund MSCI EM Region Fund MSCI EM Consumer Discretionary Brazil Consumer Staples China + Hong Kong Energy India Financials Mexico Health Care Russia Industrials South Africa Information Technology South Korea Materials Taiwan Telecom Services Small Emerging 5 Markets Utilities Frontier Markets Cash Developed Market 7 Listed Cash The Emerging Markets Equity Fund s end weight in China is 16.9% and Hong Kong is 6.1%. The Benchmark does not include Hong Kong; 5 Includes the remaining emerging markets, which individually, comprise less than 5% of the Index; 6 Includes countries with less developed markets outside the Index; 7 Emerging markets or frontier markets companies listed in developed markets outside the Index; Source: FactSet (Run Date: 20 July 2016); Emerging Markets Equity Fund, based on the underlying holdings; MSCI Inc. and S&P. MSCI and S&P do not make any express or implied warranties or representations and shall have no liability whatsoever with respect to any GICS data contained herein. All data is based on the US dollar class. Sector and geographical weightings data is sourced from: FactSet, Harding Loevner Funds, and MSCI Inc. Differences may exist between this source data and similar information reported in the financial statements due to timing differences and/or adjustments required pursuant to International Financial Reporting Standards (IFRS). Largest Holdings Sector Country % Assets 8 Samsung Electronics Info Technology South Korea 5.3 Taiwan Semiconductor Info Technology Taiwan 4.2 Tencent Info Technology China 3.1 Sberbank Financials Russia 2.9 AIA Group Financials Hong Kong 2.8 Largest Contributors Sector Country Contribution % Assets 9 Sberbank Financials Russia Taiwan Semiconductor Info Technology Taiwan BM&F Bovespa Financials Brazil Samsung Electronics Info Technology South Korea Arcelik Cons Discretionary Turkey Largest Detractors Sector Country Contribution % Assets 9 Jarir Marketing Cons Discretionary Saudi Arabia China Merchants Industrials China Nostrum Oil & Gas Energy United Kingdom Televisa Cons Discretionary Mexico Mediatek Info Technology Taiwan

57 Investment Manager s Report For the year ended 30 June 2016 (continued) The Harding Loevner Emerging Markets Equity Fund (continued) Performance Attribution as of 30 June 2016 Sector Attribution Trailing 12 Months Total Effect: 7.2 Selection Effect: 6.4 Allocation Effect: 0.8 Region Attribution Trailing 12 Months Total Effect: 7.2 Selection Effect: 5.6 Allocation Effect: End weight; 9 Average weight; 10 Includes emerging markets and frontier markets companies listed in developed markets; 11 Includes the remaining emerging markets that individually comprise less than 5% of the Benchmark; 12 Includes countries with less-developed markets outside the Benchmark. Source: FactSet; Harding Loevner Funds plc Emerging Markets Equity Fund, based on the underlying holdings; MSCI Inc. and S&P. MSCI and S&P do not make any express or implied warranties or representations and shall have no liability whatsoever with respect to any GICS data contained herein. All data is expressed in US dollar terms. 28