OLD MUTUAL UNIT TRUST FUNDS ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016

Transcription

1 OLD MUTUAL UNIT TRUST FUNDS ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016

2 Old Mutual Unit Trust Funds Table of contents Table of contents Page No Corporate information 3 Trustee s report 4-8 Statement of trustee s responsibilities 9 Chairman s statement to unit holders Performance graphs Report of the custodian 19 Report of the independent auditor Financial statements Old Mutual Equity Fund 24 Statement of comprehensive income 25 Statement of financial position 26 Statement of changes in equity 27 Statement of cash flows 28 Notes Old Mutual Money Market Fund 43 Statement of comprehensive income 44 Statement of financial position 45 Statement of changes in equity 46 Statement of cash flows 47 Notes Old Mutual Balanced Fund 62 Statement of comprehensive Income 63 Statement of financial position 64 Statement of changes in equity 65 Statement of cash flows 66 Notes

3 Old Mutual Unit Trust Funds Table of contents Table of contents Page No Old Mutual Bond Fund 81 Statement of comprehensive income 82 Statement of financial position 83 Statement of changes in equity 84 Statement of cash flows 85 Notes Old Mutual East African Fund 99 Statement of comprehensive income 100 Statement of financial position 101 Statement of changes in equity 102 Statement of cash flows 103 Notes

4 Old Mutual Unit Trust Funds Corporate Information OLD MUTUAL UNIT TRUST FUNDS Fund Manager: Chairperson: Ag Retail Director: Trustee: Portfolio Management: Custodian: Auditor: Address: Old Mutual Investment Services (OMIS) controlled by Old Mutual Holdings Limited. Rose N. Ogega. Jerim Otieno KCB Bank Kenya Limited, KCB Tower, 7 th Floor, Junction of Hospital and Kenya Road, Upper Hill, P.O. Box Nairobi, Kenya Old Mutual Investment Group (Kenya) Limited, UAP Old Mutual Tower, Upper Hill Road, P.O. Box 11589, 00400, Nairobi, Kenya. KCB Bank Kenya Limited, KCB Tower, 7 th Floor, Junction of Hospital and Kenya Road, Upper Hill, P.O. Box Nairobi, Kenya PricewaterhouseCoopers, PwC Tower, Waiyaki way, Westlands, P.O. Box 43963, Nairobi, Kenya. I & M building, 3 rd Floor, Ngong road, Upper hill, P.O. Box 30059, Nairobi, Kenya. Telephone: (020) Facsmile: (020) Internet: clientservices@oldmutualkenya.com, 3

5 Old Mutual Unit Trust Funds Trustee s Report The trustee submits its report together with the audited financial statements for the year ended 31 December 2016 that discloses the state of affairs of the Funds. INVESTMENT OBJECTIVES Old Mutual Unit Trust Fund is an umbrella with five sub Funds each of which is described below: 1. The objective of the Old Mutual Equity Fund is to generate long-term capital growth through investing principally in equities i.e. stocks or shares in a corporation s earnings and assets, providing a medium to high-risk profile by investing in stocks of several sectors of the Kenyan economy. The guiding principles for the Old Mutual Equity Fund are: To research and select a solid spread of shares in companies with proven performance and good prospects for growth. To administer the portfolio according to best practice by taking capital profits when appropriate and by spreading shareholding over those economic sectors that meet the criteria of performance and growth. 2. The objective of the Old Mutual Money Market Fund is to generate a total return through investing in a range of debt securities, and fixed deposit instruments or near cash holdings in the Kenyan market, while offering maximum security to the investor. The guiding principles for the Old Mutual Money Market Fund are: To invest only in first class money market instruments spread between institutions of repute. To administer the portfolio according to best practice. To minimize losses, while maximising on investment returns, by investing in near cash or cash deposits. To treat the generation of income as a higher priority than capital growth or as the case may be to place equal emphasis on the generation of income and on capital growth and that (in either case) this may accordingly constrain capital growth. 3. The objective of the Old Mutual Balanced Fund is to achieve steady regular income from the money market portion of the Fund and capital growth in the medium to long term from the equity portion, while carrying only a medium level of risk. The guiding principles for the Old Mutual Balanced Fund are: To invest only in listed securities spread between institutions of repute. A solid spread of high performance shares is selected. Selected shares fall into the medium risk category in the medium to long term. Selected shares to have proven performance and good prospects for growth. To take capital profits when appropriate. To manage the portfolio according to best practice. 4. The objective of the Old Mutual Bond Fund is to generate a total return through investing in a range of debt securities, and fixed deposit instruments or near cash holdings in the Kenyan market, while offering maximum security to the investor. 4

6 Old Mutual Unit Trust Funds Chairman s Statement to Unit Holders The guiding principles for the Old Mutual Bond Fund are: To invest only in first class money market instruments spread between institutions of repute. To administer the portfolio according to best practice. To minimise losses, while maximising on investment returns, by investing in near cash or cash deposits. To treat the generation of income as a higher priority than capital growth or as the case may be to place equal emphasis on the generation of income and on capital growth and that (in either case) this may accordingly constrain capital growth. 5. The objective of the Old Mutual East Africa Fund is to achieve steady regular income from the money market portion of the Fund and capital growth in the medium to long term from the equity portion, while carrying only a medium level of risk. The guiding principles for the Old Mutual East Africa Fund are: To invest only in listed securities spread between institutions of repute. A solid spread of high performance shares is selected. Selected shares fall into the medium risk category in the medium to long term. Selected shares to have proven performance and good prospects for growth. To take capital profits when appropriate. To manage the portfolio according to best practice. CHANGES TO INCORPORATION DOCUMENTS There were no changes made to incorporation documents (Trust Deed, Information Memorandum, Rules of the scheme) during the year. 5

7 Old Mutual Unit Trust Funds Chairman s Statement to Unit Holders FUND PERFORMANCE Fund Year Highest Price (based on repurchase price) Old Mutual Equity Fund Lowest Price (based on repurchase price) Fund Year Highest annual yield Lowest annual yield Old Mutual Money Market Fund % 6.17% % 7.36% % 6.24% % 6.14% % 10.25% Fund Year Highest Price (based on repurchase price) Old Mutual Balanced Fund Lowest Price (based on repurchase price) Fund Year Highest Price (based on repurchase price) Old Mutual Bond Fund Lowest Price (based on repurchase price)

8 Old Mutual Unit Trust Funds Chairman s Statement to Unit Holders FUND PERFORMANCE (CONTINUED) Fund Year Highest Price (based on repurchase price) Old Mutual East African Fund FUND GROWTH Lowest Price (based on repurchase price) Fund Old Mutual Equity Fund growth % % 7.61% 12.83% % Old Mutual Money Market Fund growth 15.91% -9.54% -3.40% 14.06% 41.50% Old Mutual Balanced Fund growth % % 8.44% 16.72% % Old Mutual Bond Fund growth -6.88% % -7.90% -9.67% % Old Mutual East African Fund growth -9.37% % -2.22% 19.32% -7.48% INCOME DISTRIBUTIONS Year Equity Fund Money Market Fund Balanced Fund Bond Fund Old Mutual East African Fund () () () () () ,054, ,862,758 19,208,880 3,404, , ,681, ,133,428 18,393,681 5,068, , ,102, ,930,418 14,515,467 4,391, , ,019, ,482,803 10,472,617 4,384, , ,592, ,929,707 22,379,699 5,957, ,288 7

9 Old Mutual Unit Trust Funds Chairman s Statement to Unit Holders FUND VALUE AT END OF THE YEAR Year Equity Fund Money Market Fund Balanced Fund Bond Fund Old Mutual East African Fund () () () () () ,392,410,690 6,212,952, ,751,011 59,776,412 23,816, ,783,565,227 5,360,260, ,997,567 64,194,645 26,279, ,172,580,927 5,925,699, ,087,585 80,231,040 30,263, ,018,976,386 6,134,120, ,034,933 87,113,019 30,950, ,789,354,290 5,377,897, ,549,922 96,435,547 25,940,405 AUDITOR The Fund s auditor, PricewaterhouseCoopers, continues in office. By order of the trustee KCB Bank Kenya Limited 8

10 Old Mutual Unit Trust Funds Statement of Trustee s Responsibilities The Capital Markets Act requires the trustee to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Fund as at the end of the year and of the results of its operations. It also requires the trustee to ensure that the Fund manager keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the Fund. The trustee is also responsible for safeguarding the assets of the Fund. The trustee accepts responsibility for the annual financial statements, which have been prepared using appropriate accounting policies in conformity with International Financial Reporting Standards and the requirements of the Capital Markets Act. The trustee is of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the Fund and of its operating results. DECLARATION STATEMENT The Old Mutual Unit Trust Fund is an approved unit trust within the meaning of the Capital Markets Act; Old Mutual Unit Trust Fund is an umbrella Fund comprising of five sub- funds; The unit-holders are not liable for the debts of the unit trust funds; The Old Mutual Equity Fund is a securities Fund investing in the Nairobi Stock Exchange in Kenya; The Old Mutual Money Market Fund is a securities Fund investing in a range of debt securities, fixed deposit instruments or near cash & cash holding in the Kenyan market; The Old Mutual Balanced Fund is a securities Fund investing in equity and interest bearing assets; The Old Mutual Bond Fund is a securities Fund investing in a range of debt securities instruments or near cash & cash holding in the Kenyan market; The Old Mutual East African Fund is a securities fund investing in equity and interest bearing assets; In future there may be other sub funds in the umbrella collective investment scheme; A sub fund is not a legal entity, if the assets attributable to any sub fund were insufficient to meet the liabilities attributable to it the shortfall may have to be met out of the assets attributable to one or more other sub Funds of the umbrella scheme; Nothing has come to the attention of the trustee to indicate that the Fund will not remain a going concern for at least twelve months from the date of this statement. By order of the trustee KCB Bank Kenya Limited 9

11 Old Mutual Unit Trust Funds Chairman s Statement to Unit Holders Chairman s Statement to Unit Holders About Us Old Mutual Plc is an international long-term savings, protection and investment Group. Founded in South Africa in 1845, the Group provides life assurance, asset management, banking and general insurance in Europe, the Americas, Africa and Asia to over 16 million customers. The Kenya business is a subsidiary of Old Mutual Plc listed on the London, Johannesburg, Zimbabwe, Nambia and Malawi stock exchanges Economic Review The Kenyan economy is estimated to have grown by 5.6% in 2016, mainly supported by improved agricultural production and high government spending on infrastructural projects. Inflation reduced in the year from 8.1% in December 2015 to 6.35% in December Inflation moved from a high elevated level due to the Excise Duty Bill introduction in December 2015 that increased the prices of alcoholic beverages and tobacco products in that month. In the year, the Monetary Policy Committee reduced the Central Bank Rate by 150 basis points during the year to 10% with the MPC citing a favourable inflation outlook, currency stability and a slowdown in private sector credit growth. The NSE 20 and NASI indices shed 21.1% and 8.5% respectively in 2016 as the equity market was concerned by the introduction of the Interest Rate Cap legislation in the second half of the year and its impact on the future earnings growth of the listed bank stocks that comprise a significant proportion of the equity market. Our Ambition Since inception of the in 2003 we have strived to make the Unit Trust Funds accessible to all through significantly lowering the minimum amount of funds that need to be invested in any fund; enabling access via your mobile phone and expanding our network of branches and service centres. As we further seek to improve the services to our existing 33,400 unit holders we have in 2016 renovated our historic Kimathi Street branch to launch of our 1st integrated customer service centre offering all our services across insurance, savings, investment and banking. The first SISI Centre was opened by the UAP Old Mutual Group Chief Executive Peter Mwangi on 2nd August 2016 with an aim at offering our customers all Group financial services under one roof. The launch of the integrated customer service centre is a key milestone in the Group. I am proud to report that we have merged our insurance and investment service offering to be provided under a single brand UAP Old Mutual, in Nyeri, Kisumu and Kisii thus far. 10

12 Old Mutual Unit Trust Funds Chairman s Statement to Unit Holders Unit Holders Funds in Old Mutual Unit Trust Funds Fund K K AUM change (%) Old Mutual Equity Fund 1,392,410,690 1,783,565,227-22% Old Mutual Money Market Fund 6,256,434,589 5,360,260,080 17% Old Mutual Balanced Fund 403,751, ,997,567-14% Old Mutual Bond Fund 59,776,412 64,194,645-7% Old Mutual East African Fund 23,816,788 26,279,637-9% Total 8,136,189,490 7,706,297,156 6% Investor Returns on Old Mutual Unit Trust Funds Fund 5 Year Cumulative return Old Mutual Equity Fund 71.19% -5.60% % 12.80% 25.57% 42.59% Old Mutual Money Market Fund 47.78% 7.75% 8.19% 7.08% 6.71% 10.78% Old Mutual Balanced Fund 64.38% 2.67% -4.41% 10.11% 16.54% 30.52% Old Mutual Bond Fund 37.56% 6.06% 4.51% 4.49% 4.13% 14.06% Old Mutual East Africa Fund 45.76% -1.13% -7.54% 8.57% 17.62% 24.86% Our Funds holding equities suffered during 2016 due to the falling prices of the vast majority of shares listed at the Nairobi Securities Exchange. Whilst corporate performance was not as difficult for companies as in 2015 the bear market trend continued and was exacerbated by the introduction of the Interest Rate Cap legislation that inflicted a significant fall on the share prices of banking stocks. Sentiment towards the equity market was largely depressed with investors both of domestic and foreign origin showing limited reluctance to buy securities with instead a focus on other asset classes or other frontier markets. Long term investors in funds with equity investments will appreciate that there are often years where the equity market may fall significantly during a long term upward trend. It continues to be our expectation that the equity market will be rewarding where investments are held in companies that seek to maximise shareholder wealth over the long term. Investors are encouraged to pursue a similar long term investment horizon and note the inherent price volatility of investing in equities or the Old Mutual Equity Fund is part and parcel of investing in equities. If this volatility does not sit well with any unit holders the option exists to invest in Old Mutual Balanced Fund that has a less aggressive risk profile. 11

13 Old Mutual Unit Trust Funds Chairman s Statement to Unit Holders The Fund Manager continues to prudently invest client monies with the appropriate portfolio diversification combined with careful and thoughtful fundamental analysis. Portfolio construction and risk management continues to be at the heart of our investment process. Over the longer term of which all unit holders are encouraged to invest, the non-money Market Funds have seen solid performance combined with a high degree of diversification of investments and the Old Mutual Money Market Fund continues to be attractive with a 17% increase in assets in The Money Market Fund seeks to provide an attractive yield when compared to other money market investments whilst simultaneously providing Unit Holders access to their funds within a matter of a few days Outlook In 2017 politics will dominate the news headlines in the first eight months of the year and this may impact investor sentiment. However over the long term looking through the lense of a sufficiently long term investor, election noise pales in comparison to economic growth and corporate profit and dividend growth in determining your investment fortunes. Economic Growth is forecast to be in the region of 5.5% in We do continue to expect a high level of government activity to complete infrastructural developments which will benefit society and the economy in the years ahead. Inflation is expected to rise largely driven by increases in food prices and a possible rise in oil prices. The Kenya Shilling is expected to remain broadly stable barring any adverse shocks and is supported by the narrower current account deficit, high foreign exchange reserves, and the intermittent activity by the Central Bank of Kenya in ensuring the volatility of Shilling is not excessive. Financial Planning All investors, whether with a short term, medium or long term investment time frame, should each year under-go a reassessment of their financial plan and goals to ascertain whether they are on track to achieve them, whilst being cognisant of the risks. In this regard Old Mutual has invested extensively in the numbers and capability of our client service officers and financial advisors that are always available to offer advice suitable to your unique individual circumstances and I encourage you to meet with them. We thank you for investing in the Old Mutual Unit Trusts and making us your partner of choice. We will strive to provide consistent and helpful financial advisory and support structures, whilst ensuring that we present a good offering of financial products that will help you meet your needs. Gratitude I would like to convey my appreciation to the management and staff for their hard work during the year. My appreciation goes to the Board of Directors for continuously providing strategic direction to the company. My appreciation goes to our clients and business affiliates for their continued support throughout the year. We look forward to continue working with you in the future. 12

14 Old Mutual Unit Trust Funds Chairman s Statement to Unit Holders Lastly, I thank the Government of Kenya and the regulatory authorities namely: Capital Markets Authority, Insurance Regulatory Authority, Retirement Benefits Authority, and Kenya Revenue Authority who continue to provide an enabling business environment. Thank you. Rose N. Ogega. Chairperson 13

15 Old Mutual Unit Trust Funds Performance Graphs Equity Fund performance against NSE 20 share index Benchmark The yield above is arrived at after netting of Fund expenses from the Funds investment income and fair value changes. The Benchmark above is NSE 20 Index. Old Mutual Equity Fund Asset Allocation as at 31st December

16 Old Mutual Unit Trust Funds Performance Graphs Money Market Fund performance against weighted average Benchmark The yield above is arrived after netting of Fund expenses from the Fund s investment income Benchmark above is the weighted average bank deposit rate and three months average of the 182 day Treasury bill rate. Old Mutual Money Market Fund Asset Allocation as at 31 December

17 Old Mutual Unit Trust Funds Performance Graphs Balanced Fund performance against weighted average Benchmark The yield above is arrived after netting of Fund expenses from the Funds investment income (excluding fair value changes) The Benchmark above is the weighted average three months average of the 182-day Treasury bill rate. Old Mutual Balanced Fund Asset Allocation as at 31 December

18 Old Mutual Unit Trust Funds Performance Graphs Bond Fund performance The yield above is arrived after netting of Fund expenses from the Fund s investment income The Benchmark above is the weighted three months average of the 182 day Treasury bill rate plus 2% per annum. Old Mutual Bond Fund Asset Allocation as at 31 December

19 Old Mutual Unit Trust Funds Performance Graphs East African Fund performance against weighted average benchmark The yield above is arrived after netting of Fund expenses from the Fund s investment income (excluding fair value changes) The Benchmark above is the weighted three months average of the 182 day Treasury bill rate. Old Mutual East African Fund Asset Allocation as at 31 December

20 Old Mutual Unit Trust Funds Report of the Custodian a) In accordance with the Capital Markets (Collective Investments Schemes) Regulations, 2001 (the regulations) and the Custody Agreement between KCB Bank Kenya Limited as the custodian and Old Mutual Investment Services (Kenya) Limited as the Fund manager, we confirm that we have discharged the duties prescribed for a Custodian under Regulation 35 of the regulations, to. For the year 1 st January 2016 to 31 st December 2016, we have held the assets for the Old Mutual Unit Trust Funds, including title deeds, securities and income that accrue thereof, to the order of the Fund manager and facilitated the transfer, exchange or delivery in accordance with the instructions received from the Fund manager. b) We confirm having affected the sale, redemption and cancellation of units in accordance with the creation/liquidation instructions received from the Fund manager. By order of the custodian KCB Bank Kenya Limited 19

21 REPORT OF THE INDEPENDENT AUDITOR TO THE UNIT HOLDERS OF OLD MUTUAL UNIT TRUST FUND Report on the audit of the financial statements Opinion We have audited the accompanying financial statements of the following unit portfolios of the Old Mutual Unit Trusts Funds; 1. Old Mutual Equity Fund set out on pages 25 to Old Mutual Money Market Fund set out on pages 44 to Old Mutual Balanced Fund set out on pages 63 to Old Mutual Bond Fund set out on pages 82 to Old Mutual East African Fund set out on pages 100 to 117 These financial statements each comprise the statement of financial position at 31 December 2016, and the statements of comprehensive income, changes in equity and cash flows for the year then ended and the notes to the financial statements, which include a summary of significant accounting policies. In our opinion, the financial statements give a true and fair view of the financial position of the Old Mutual Unit Trust Funds at 31 December 2016, and of their respective net income and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Capital Market Act (Collective Investments Schemes) Regulations, Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s responsibilities for the audit of the financial statements section of our report. We are independent of the funds in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Kenya, and we have fulfilled our ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the Company financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. There were no key audit matters identified from our audit. 20

22 REPORT OF THE INDEPENDENT AUDITOR TO THE UNIT HOLDERS OF OLD MUTUAL UNIT TRUST FUND (CONTINUED) Other information The Trustee is responsible for the other information. The other information comprises the information included in the annual report but does not include the financial statements and our auditor s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the trustee for the financial statements The Trustee is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards and the requirements of the Capital Market Act (Collective Investments Schemes) Regulations, 2001, and for such internal control as the trustee determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the trustee is responsible for assessing the Fund s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the trustee either intend to liquidate the Funds or to cease operations, or have no realistic alternative but to do so. The Trustee is responsible for overseeing the Fund s financial reporting process. Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. 21

23 REPORT OF THE INDEPENDENT AUDITOR TO THE UNIT HOLDERS OF OLD MUTUAL UNIT TRUST FUND (CONTINUED) Auditor s responsibilities for the audit of the financial statements (continued) Conclude on the appropriateness of the Trustees use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the funds to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the Trustees regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 22

24 REPORT OF THE INDEPENDENT AUDITOR TO THE UNIT HOLDERS OF OLD MUTUAL UNIT TRUST FUND (CONTINUED) Report on other legal requirements We confirm that the financial statements have been properly prepared in accordance with the Capital Markets Authority (collective Investment Schemes (Regulations), The Capital Markets Authority (Collective Investments schemes) Regulations, 2001 also requires that in carrying out our audit we consider and report to you on the following matters. If the auditor is of the opinion that proper accounting records for the collective investment scheme have not been kept or that the accounts are not in agreement with those records, If the auditor has not been given all the information and explanation which, to the best of his knowledge and belief, are necessary for the purpose of his audit, or If the auditor is of the opinion that the information given in the report of the Trustee for that period is inconsistent with the accounts. We confirm that there are no matters to report in respect of the foregoing requirements. The engagement partner responsible for the audit resulting in this independent auditor s report is FCPA Richard Njoroge - P/No

25 OLD MUTUAL EQUITY FUND 24

26 OLD MUTUAL EQUITY FUND STATEMENT OF COMPREHENSIVE INCOME INCOME Notes Interest and dividend income 4 125,493, ,644,256 Fair value (loss) on investments at fair value through profit or loss 9 (131,606,053) (255,472,191) Total (loss) from investing activities (6,112,910) (138,827,935) EXPENSES Service fees and other expenses 5 (68,869,303) (88,396,910) (Loss) before tax (74,982,213) (227,224,845) Income tax expense (Loss) for the year (74,982,213) (227,224,845) Other comprehensive income, net of tax - - Total comprehensive (loss) for the year (74,982,213) (227,224,845) The notes on page 29 to 42 are an integral part of these financial statements. 25

27 As at 31 December 2016 OLD MUTUAL EQUITY FUND STATEMENT OF FINANCIAL POSITION ASSETS Notes Investment balances 8 1,416,799,110 1,778,234,472 Receivables 597,665 5,125,175 Bank and cash balances 14,902,574 16,920,581 TOTAL ASSETS 1,432,299,349 1,800,280,228 EQUITY Unit holder balances 9 1,392,410,690 1,783,565,227 LIABILITIES Current liabilities 10 39,888,659 16,715,001 TOTAL EQUITY AND LIABILITIES 1,432,299,349 1,800,280,228 The notes on page 29 to 42 are an integral part of these financial statements. The financial statements on pages 29 to 42 were approved for issue by the Trustee on 2017 and signed on its behalf by: Trustee, KCB Bank Kenya Limited 26

28 OLD MUTUAL EQUITY FUND STATEMENT OF CHANGES IN EQUITY Unit holder capital balances At 1 January ,172,580,927 Comprehensive income to unit holders: Total comprehensive income (227,224,845) Withholding tax on distributions (2,566,060) Net comprehensive income (229,790,905) Transactions with unit holders: Additional units purchased 237,685,163 Units liquidated (395,154,947) Distributions paid out in cash (1,755,011) Total transactions with unit holders (159,224,795) At 31 December ,783,565,227 At 1 January ,783,565,227 Comprehensive income to unit holders: Total comprehensive income (74,982,214) Withholding tax on distributions (4,569,300) Net comprehensive income (79,551,514) Transactions with unit holders: Additional units purchased 26,623,662 Units liquidated (335,210,055) Distributions paid out in cash (3,016,630) Total transactions with unit holders (311,603,023) At 31 December ,392,410,690 The notes on page 29 to 42 are an integral part of these financial statements. 27

29 OLD MUTUAL EQUITY FUND STATEMENT OF CASH FLOWS Operating activities Notes Interest and dividend income received 130,020, ,556,844 Fees paid (45,695,646) (95,550,019) Net proceeds from sale/(purchase) of investments 235,453,165 (43,081,316) Income tax paid (1,525,159) (2,069,682) Net cash generated/(used in) from operating activities 318,253,012 (25,144,173) Financing activities Net proceeds from sale of units (256,503,011) (131,898,333) Distributions paid (3,016,630) (1,755,011) Net cash used in financing activities (259,519,641) (133,653,344) Increase/(decrease) in cash and cash equivalents 58,733,371 (158,797,517) Movement in cash and cash equivalents At start of year 24,920, ,718,099 Increase/(decrease) 58,733,371 (158,797,517) At end of year 8 (iii) 83,653,953 24,920,582 The notes on page 29 to 42 are an integral part of these financial statements. 28

30 Notes 1 General information Old Mutual Equity Unit Trust Fund ( the Fund ) is a collective investment scheme which is registered under the Capital Markets Authority Act and is domiciled in Kenya. The Fund was established under a trust deed dated 1 April The address of its registered office is: Old Mutual Investment Services (Kenya) Limited Old Mutual Building Mara Road, Upper Hill P.O. Box 30059, Nairobi. 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. (a) Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). The measurement basis applied is the historical cost basis, except where otherwise stated in the accounting policies below. The financial statements are presented in Kenya Shillings (). The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the trustee to exercise its judgement in the process of applying the Fund s accounting policies. Areas involving a higher degree of judgement or complexity relate to classification of assets, determination of whether the assets are impaired and the tax status of the Fund as explained in note 6. Changes in accounting policy and disclosures (i) New and amended standards adopted The following standards and amendments have been applied by the fund for the first time for the financial year beginning 1 January 2016: Amendments to IAS 1, Presentation of : The amendments are made in the context of the IASB s Disclosure Initiative, which explores how financial statement disclosures can be improved. The amendments, effective 1 January 2016, provide clarifications on a number of issues, including: Materiality an entity should not aggregate or disaggregate information in a manner that obscures useful information. Where items are material, sufficient information must be provided to explain the impact on the financial position or performance. Disaggregation and subtotals line items specified in IAS 1 may need to be disaggregated where this is relevant to an understanding of the entity s financial position or performance. There is also new guidance on the use of subtotals. Notes confirmation that the notes do not need to be presented in a particular order. 29

31 2 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) Changes in accounting policy and disclosures (continued) OCI arising from investments accounted for under the equity method the share of OCI arising from equity-accounted investments is grouped based on whether the items will or will not subsequently be reclassified to profit or loss. Each group should then be presented as a single line item in the statement of other comprehensive income. According to the transitional provisions, the disclosures in IAS 8 regarding the adoption of new standards/accounting policies are not required for these amendments. Annual Improvements to IFRSs Cycle. The latest annual improvements, effective 1 January 2016, clarify: IFRS 5 when an asset (or disposal group) is reclassified from held for sale to held for distribution or vice versa, this does not constitute a change to a plan of sale or distribution and does not have to be accounted for as such. IFRS 7 specific guidance for transferred financial assets to help management determine whether the terms of a servicing arrangement constitute continuing involvement and, therefore, whether the asset qualifies for de recognition. IFRS 7 that the additional disclosures relating to the offsetting of financial assets and financial liabilities only need to be included in interim reports if required by IAS 34. As these amendments merely clarify the existing requirements, they do not affect the fund s accounting policies or any of the disclosures. (ii) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016, and have not been applied in preparing these financial statement. None of these is expected to have a significant effect on the financial statements of the Fund, except the following set out below. IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. 30

32 2 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) Changes in accounting policy and disclosures (continued) (ii) New standards and interpretations not yet adopted (continued) The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. IFRS 15, Revenue from contracts with customers deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Fund 31

33 2 Summary of significant accounting policies (continued) (b) Revenue recognition Interest income is recognised on a time proportion basis that takes into account the effective yield on the asset. Dividends are recognised as income in the year in which the right to receive payment is established. (c) Investments The Fund designates its investments in treasury bonds and equity securities at fair value through profit or loss while fixed deposits and corporate debt are at amortised cost. The Funds policy requires the investment manager and the trustee to evaluate information about financial assets on fair value basis together with other related information. Regular purchase and sale of investments are recognised at the trade date, the date on which the Fund commits to purchase or sell the investment. Financial assets at fair value through profit or loss are initially recognised at fair value. Transaction costs are expensed as incurred in the statement of comprehensive income. Financial assets are de-recognised when rights to receive cash flows from the investments have expired or the Fund has transferred substantially all the risk and rewards of ownership. Subsequent to initial recognition, all financial assets at fair value through profit or loss are measured at fair value. Gains and losses arising from the changes in fair value of financial assets at fair value through profit and loss category are presented in the statement of comprehensive income. Fixed deposits and corporate debt are subsequently measured at amortised cost using the effective interest method. The fair values of financial assets that are traded in an active market are based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Fund is the current bid price. Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Fund assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. 32

34 2 Summary of significant accounting policies (continued) (c) Investments (continued) The fair value of financial assets that are not traded in active market is determined by using valuation techniques. The Fund uses a variety of methods and makes assumptions that are based on market conditions existing at each balanced sheet date. Valuation techniques used include the use of comparable recent arms-length transactions referenced to other instruments that are substantially the same, discounted cash flow analysis and other valuation techniques commonly used by market participants making maximum use of market inputs and relying as little as possible on entity specific inputs. For loans and receivables category, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss. (d) Distribution All income arising from receipts of investment income is distributed to unit holders after provision for expenses and taxes. The unit holders have an option of taking their distributions in cash or having the distribution re-invested to form part of the unit holder capital balance. (e) Unit holder balances Unit holder balances are redeemable on demand at an amount equal to a proportionate share of the unit portfolio s net asset value. The balances are carried at the redemption amount that is payable at the balance sheet date if the holder exercised their right to redeem the balances. Unit holder balances are classified as equity. (f) Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise cash in hand and deposits held at call with banks. 33

35 3 Risk management objectives and policies Financial risk management The Fund generates revenues for unit holders by investing in various income generating activities which involve trading in the stock exchange and trading in government securities. These activities expose the Fund to a variety of financial risks, including credit, liquidity risk and the effects of changes in debt and equity market prices and interest rates. The Fund s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on its financial performance. Risk management is carried out by the investment managers under direction of the Old Mutual Investment Services ( OMIS ) Board. The OMIS Board works within policies approved by the Fund s Trustee. Investment managers review the market trends and information available to evaluate the potential exposures. They then arrive at strategies to mitigate against these risks. The OMIS Board provides the investment managers with written guidelines for appropriate investments. These guidelines are reviewed on a regular basis and are within the Collective Investment Scheme regulations issued by the Capital Markets Authority. Liquidity risk The Fund is exposed to daily cash redemptions of redeemable units. It therefore invests the majority of its assets in investments that are traded at the Nairobi Stock Exchange. The Fund s listed securities are considered readily realizable, as they are listed on the Nairobi Stock Exchange. In accordance with the Fund s policy, the Investment Manager monitors the Fund s liquidity position on a daily basis and has developed a comprehensive history of the Fund s daily and/or periodic liquidity requirements. Guided by this history, the manager maintains sufficient cash and near cash investments to meet the day to day redemption requirements. 34

36 3 Risk management objectives and policies (continued) Liquidity risk (continued) The table below illustrates the Fund s typical redemption history and cash/near cash holdings over the past two years: Annual redemption 335,210, ,154,947 Annual daily average 1,289,269 1,519,827 The table below shows the Funds investments in cash and near cash equivalents at 31 December 2016 and 31 December Item Cash and bank balances 14,902,574 16,920,581 Cash on call, deposits, treasury bills and bonds maturing in less than 3 months 68,751,379 8,000,000 Total 83,653,953 24,920,581 For a detailed analysis refer to note 8 Maturity Analysis of Financial Liabilities and Unit Holders Balances (all on demand) Item Unit holder balances 1,392,410,690 1,783,565,227 Current liabilities 39,888,659 16,715,001 Total 1,432,299,349 1,800,280,228 Capital management The capital of the Fund is represented by unit holder balances. The amount of unit holder balances can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of unit holders. The Fund s objectives when managing capital are to safeguard the Fund s ability to continue as a going concern in order to provide returns for unit holders. 35