Annual Report June 2018

Transcription

1 Annual Report June 2018 For the Year Ended 30 June 2018 Areca Steady fixedincome Fund

2 Contents CORPORATE DIRECTORY 2 MANAGER S REPORT Fund Information, Performance & Review 3 Market Review & Outlook 8 TRUSTEE S REPORT 11 STATEMENT BY MANAGER 11 AUDITORS REPORT 12 AUDITED FINANCIAL STATEMENTS FOR Areca Steady fixedincome Fund 15

3 CORPORATE DIRECTORY MANAGER Areca Capital Sdn Bhd ( D) 107, Blok B, Pusat Dagangan Phileo Damansara 1, No. 9, Jalan 16/11, Off Jalan Damansara, Petaling Jaya, Selangor. Tel: , Fax: website: BOARD OF DIRECTORS Edward Iskandar Toh Bin Abdullah (CIO / Executive Director) Wong Teck Meng (Executive) Raja Datuk Zaharaton Bt Raja Dato Zainal Abidin (Non-Executive Non-Independent) Dr. Junid Saham (Independent) INVESTMENT COMMITTEE MEMBERS Edward Iskandar Toh Bin Abdullah (CIO / Executive Director) Raja Datuk Zaharaton Bt Raja Dato Zainal Abidin (Non-Independent) Dr. Junid Saham (Independent) TRUSTEE RHB Trustees Berhad ( U) Level 11, Tower 1, RHB Centre Jalan Tun Razak Kuala Lumpur Tel: Fax: AUDITOR PricewaterhouseCoopers (AF1146) Level 10, 1 Sentral, Jalan Rakyat, Kuala Lumpur, Sentral, P O Box Tel: , Fax: TAX ADVISER PricewaterhouseCoopers Taxation Services Sdn Bhd ( M) Level 10, 1 Sentral, Jalan Rakyat, Kuala Lumpur, Sentral, P O Box Tel: , Fax: MANAGER S OFFICE AND BRANCHES HEAD OFFICE 107, Blok B, Pusat Dagangan Phileo Damansara 1, No. 9, Jalan 16/11, Off Jalan Damansara, Petaling Jaya, Selangor Tel: , Fax: website: invest@arecacapital.com PENANG PULAU TIKUS PERAK IPOH MALACCA Belissa Row Jalan Burma, Georgetown Pulau Pinang Tel : Fax: A, (First Floor) Persiaran Greentown 5 Greentown Business Centre Ipoh, Perak Tel : /6698 Fax: A, Jalan Melaka Raya 24 Taman Melaka Raya Melaka Tel : Fax:

4 FUND INFORMATION Name of the Fund Areca Steady fixedincome Fund Fund Category/ Type Objective of the Fund Benchmark Distribution Policy of the Fund Profile of unitholdings * excluding units held by the Manager Rebates & Soft Commissions Fixed Income (Wholesale Fund)/Income To provide sophisticated investors with a stable stream of consistent income while maintaining capital stability by investing in fixed income investments with medium to long term investment horizon. Maybank s 12-month fixed deposit rate Yearly or more frequent, subject to availability of the distributable income. In the absence of instructions to the contrary from a Unit Holder, the Manager is entitled to reinvest the income distributed from the Fund in additional units of that Fund at the NAV per unit at the end of the distribution day with no entry fee. As at 30 June 2018 No. of Size of Holding No. of % units held % (Units) accounts million Up to 5, ,001 to 10, ,001 to 50, ,001 to 500, ,001 and above Total* The Manager retains soft commissions received from stockbrokers, provided these are of demonstrable benefit to unitholders. The soft commissions may take the form of goods and services such as data and quotation services, computer software incidental to the management of the Fund and investment related publications. Cash rebates, if any, are directed to the account of the Fund. During the year under review, the Manager had not received any soft commissions. Inception Date 11 May 2009 Initial Offer Price RM per unit during the initial offer period of 21 days ended 31 May 2009 Pricing Policy Single Pricing Selling and repurchase of units by Manager are at Net Asset Value per unit Financial year end 30 June 3

5 FUND PERFORMANCE Net Asset Value ( NAV ) as at 30 June Total Net Asset Value (RM million) 37.89* 38.71* 34.19* Units in circulation (million units) 34.85* 37.17* 32.48* NAV per unit (RM) * * * * Ex-Distribution HIGHEST & LOWEST NAV for the year ended 30 June Please refer to Note 1 for further information on NAV and pricing policy Highest NAV per unit (RM) * * * Lowest NAV per unit (RM) * * * * Ex-Distribution ASSET ALLOCATION % of NAV as at 30 June Fixed Income Securities Collective investment scheme Quoted securities-local Unquoted bonds-local Unquoted bonds-foreign Floating rate negotiable instrument of deposit (FRIND) Cash & cash equivalents including placements and repo DISTRIBUTION Please refer to Note 2 for further information Distribution dates Gross distribution (sen per unit) Net distribution (sen per unit) NAV before distribution (RM per unit) NAV after distribution (RM per unit) Dec Jun (30 Dec) 3.00 (30 Jun) 3.00 (30 Dec) 3.00 (30 Jun) (29 Dec) (29 Jun) (30 Dec) (30 Jun) 31 Dec Jun (31 Dec) 3.00 (29 Jun) 2.00 (31 Dec) 3.00 (29 Jun) (30 Dec) (28 Jun) (31 Dec) (29 Jun) UNIT SPLITS There was no unit split exercise for the financial year under review. EXPENSE/ TURNOVER for the year ended 30 June Management expense ratio (MER)(%) Please refer to Note 3 for further information Portfolio turnover ratio (PTR)(times) Please refer to Note 4 for further information

6 FUND PERFORMANCE TOTAL RETURN for the year ended 30 June Please refer to Note 5 for further information Total Return (%) Capital Return (%) 4.38 (1.06) (0.84) - Income Return (%) Annual Total Return (%) Benchmark: Average Maybank's 12-month fixed deposit rate yr 3-yrs 5-yrs Average Total Return per annum (%) NOTES: Note 1: Selling of units by the Management Company (i.e. when you purchase units and invests in the Fund) and redemption of units by the Management Company (i.e. when you redeem your units and liquidate your investments) will be carried out at NAV per unit (the actual value of a unit). The entry/ exit fee (if any) would be computed separately based on your net investment/ liquidation amount. Note 2: MER is calculated based on the total fees and expenses incurred by the Fund, divided by the average net asset value calculated on a daily basis. Note 3: PTR is computed based on the average of the total acquisitions and total disposals of the investment securities of the Fund, divided by the average net asset value calculated on a daily basis. Note 4: Fund performance figures are calculated based on NAV to NAV and assume reinvestment of distributions (if any) at NAV. The total return is sourced from Lipper. Benchmark data is sourced from Malayan Banking Berhad. Past performance is not necessarily indicative of future performance. Unit prices and investment returns may go down, as well as up. 5

7 FUND REVIEW For the year ending 30 June 2018, the Fund posted a return of 4.38% against the benchmark Maybank s 12mth FD of 3.20%. The Fund outperformed its benchmark for the period under review as the corporate bonds held benefited from a stable and accommodative monetary policy despite OPR hike in January. It fulfilled the objective of the fund in providing a stable income stream while preserving a steady capital growth over the medium and long term investment horizon. The Fund is fully invested with exposure to 18 issues in a varied spread of sectors. The largest sector exposure remains the banking / finance (24.1%) from the corporate bonds. The performance of the portfolio is further supported by the contribution from 27.37% in a combination of high yield bond collective investment schemes. We will remain highly invested with an intention to raise the duration over the next year. Investment Policy and Strategy The Fund primarily invests in a diversified portfolio of fixed income investments with intention to hold until maturity. The Fund focuses mainly on quality debentures with maturity of 3 to 7 years with small exposure to other maturity periods. NAV per unit as at 30 June 2018 Movement of asset allocation as a percentage of Net Asset Value for the year ended 30 June 2017 RM % 80% 60% 40% 20% 0% 98.96% 96.72% 97.51% 95.02% Sep-17 Dec-17 Mar-18 Jun-18 Bonds and other fixed income securities Equities & equity related securities Cash & cash equivalents *as a % of net asset value Asset Allocation / Portfolio Composition as at 30 June % 4.80% 0.18% % Collective investment scheme 27.37% 19.65% 15.88% Quoted securities-local 0.18% 0.76% 0.91% Unquoted bonds-local 67.65% 74.25% 81.48% Unquoted bonds-foreign Floating rate negotiable instrument of deposit Cash & cash equivalents 4.80% 5.34% 1.67% 6

8 FUND REVIEW Top 5 Holdings by Issuers: As at 30 Sep 2017 (%) As at 31 Dec 2017 (%) 1) Alpha Circle Sdn Bhd (AA-IS) ) Areca Situational Income Fund (CIS) ) Hong Leong Bank Berhad (AA3) ) Alpha Circle Sdn Bhd (AA-IS) ) Eastern & Oriental Berhad (Not Rated) ) Eastern & Oriental Berhad (Not Rated) 4) Jati Cakerawala Sdn Bhd (AA3) ) Hong Leong Bank Berhad (A3) ) CIMB Bank Berhad (AA+) ) Areca Situational Income Fund 2.0 (CIS) As at 31 Mar 2018 (%) As at 30 Jun 2018 (%) 1) Areca Situational Income Fund (CIS) ) Areca Situational Income Fund (CIS) ) Alpha Circle Sdn Bhd (AA-IS) ) Alpha Circle Sdn Bhd (AA-IS) ) Eastern & Oriental Berhad (Not Rated) ) Eastern & Oriental Berhad (Not Rated) 4) Hong Leong Bank Berhad (AA3) ) Hong Leong Banking Berhad (AA3) ) AMMB Holdings Berhad (A1&A3) ) Areca Situational Income Fund 2.0 (CIS) Performance of Areca Steady fixedincome Fund for the financial period since inception to 30 June Areca Steady fixedincome Maybank 12 Months Fixed Deposit Rate 7

9 MARKET REVIEW & OUTLOOK ECONOMIC REVIEW The last 12 months can be largely characterized by the upswing in the US economy. From third quarter last year, quarterly year-on-year GDP grew 2.3%, 2.5%, 2.6% and 2.8% respectively, clearly forming an upward trend. Operating at practically full employment, unemployment registered its lowest level in 18 years in May this year at 3.8%. Inflation has also been on an uptrend with core inflation breaching 2% in the last 4 months of this year in review. Significantly, 12 months moving average stands at 1.89% as at June. Credit has to be given partially for the successful passing of the tax reform bill towards the end of 2017 where top bracket corporate rates were reduced from 35% to 21% to help energize the economy further. In this period, Federal Fund s rate was raised 3 times from 1.25% to 2% while the Federal Reserve began their balance sheet shrinking task in October A gradual paring down of their mammoth US$4.5 trillion balance sheet may take a while but will complement the general mode of draining the excess liquidity that built up over a six year Quantitative Easing programs phase from 2008 to The first full year of the Trump presidency is also fraught with much distractions and controversies. Apart from the ongoing investigation into Russian collusion with Trumps campaign, there were the multiple sackings of government personnel and ongoing battle with the media. Geopolitics were mixed. Taking a step back from Syria conflict, Trump seem to add fuel to fire by relocating the US embassy in Israel to Jerusalem from Tel-Aviv, a decision passed by congress several Presidents ago but never carried out for obvious reasons. He then appeared to have made some headway with North Korea culminating with a summit in Singapore which produced more fanfare than substance. The latest sideshow is the instigating of Iran where the US pulled out of the Iran nuclear deal and reimposing economic sanctions. During the course of the year, he ruffled the feathers of friends and foe alike by insulting NATO and imposed wide ranging tariffs that affect Canada, Mexico, Europe, Japan and China. The ongoing trade tariffs war began in January with introduction of tax on solar panels and washing machines. Over the months, it gained momentum and tariffs were attached to steel and aluminum imports. Then in targeting China directly, US$34 billion of Chinese goods were taxed. This would then be raised to US$50 billion, and eventually to over US$200 billion of imports from China. In response, China has steadfastly resisted by focusing on internal issues by devaluing their currency, strengthening financial market and reducing borrowing cost. They recorded a strong 2Q GDP of 6.7% growth over the same period last year. In June, they surprised market with a 1% reduction to Reserve Ratio, freeing up more than US$100 billion of liquidity directing banks to repay high cost medium term facility with PBOC and to release loans to SMEs. As for Malaysia, the 14 th General Election was carried out with unprecedented and unexpected results leading to a change in government through the ballot boxes without untoward incidences. There is a general mood of cautious optimism with a sense of renewed hope and reborn ideals in this new Malaysia. However, the current exercise of kitchen sinking especially from the financial accounts of the nation does not sit well with foreign investors as well as international rating agencies. In zero rating GST and replacing it with Sales and Services tax, a massive shortfall in revenue is to be expected. The plan is to meet this by a combination deferring high cost projects and increased contribution from Petronas. In light of their perceived uncertainties, foreign participants have withdrawn RM19 billion from the fixed income markets and RM6 billion from the stock market this year alone. Rating agencies have been patient but alert to the need for concrete policies from this new government as they continue to unearth further mismanagements by previous administration. 8

10 Economically, 1Q GDP came in at a respectable 5.4% following 6.2% and 5.9% for 3Q and 4Q last year respectively. Foreign Reserves stands at USD104.7 billion (or RM423.4 billion) at the end of June against end last June s USD99.8 billion (or RM424.8 bil). Inflation for June dropped drastically to 0.8% on zero rating GST, the lowest level since February 2015, easing from the high of this year in review of 4.3% recorded in September FIXED INCOME MARKET REVIEW The period under review saw the issuance of RM97.0 bil MGS/GII through 34 tenders vs RM84.5 bil in the previous period (July 16 June 17). In addition, there were also 16 issues privately placed raising another RM13.5 bil. On the foreign holdings of our debt; data shows a marked improvement in the second half of 2017 with an inflow of RM12.6 billion following the previous 12 months (July 16- June 17) outflow of RM42.1 billion. However, the first six months of 2018 saw a complete reversal with foreign investors pulling out RM19.0 bil as reaction to the uncertainties that naturally come with a new government. As at end June 2018, foreign holdings of Malaysian debt securities total RM171.6 bil or 23.8% (vs RM178.0 bil or 26.6% for end June 2017), which is the lowest percentage level since my records began in During this period, there were 6 OPR meetings where the benchmark rate was raised by 0.25% to 3.25% in January this year reacting to the strong US growth and potential inflationary pressures. Malaysian sovereign yield curve shifted up between 10 and 30 bps reflecting pressure from the US rate hikes as well as our own Overnight Policy rate hike. Global inflation picked up throughout the year fueled by higher oil prices with Crude oil rising from US$48 per barrel to just below US$80 at end of period. However, the sluggish economies in Europe and Japan, the ongoing trade war with China and China s rising bad debt helped quell the excitement. Constant Maturity Conventional Yield-To-Maturity: June 2018 vs June 2017 Tenure 1Y 3Y 5Y 7Y 10Y Jun 17 Jun 18 Jun 17 Jun 18 Jun'17 Jun 18 Jun 16 Jun 18 Jun 16 Jun 18 MGS AAA AA A Source: Bond Pricing Agency Malaysia Sdn Bhd (BPA) 9

11 ECONOMIC OUTLOOK With the US chugging along the economic uptrend, it is hoped that the rest of the world gets dragged along. Supported by solid labour data, growth is expected to trudge positively along. Signs of improving wages have recently added to factors that will keep inflation on the incline. The gradual shrinking of the Fed s balance sheet and the ongoing trade spat and its uncertain trade policies will help rein in some exuberance from the cheap and easy money perspective. Unfortunately, Europe continue to be mired by sporadic news of deteriorating debt with Italy, Spain and Greece leading the headlines despite improved inflation and unemployment data. Softer economic data can be expected. Meantime, the UK remains embroiled with Brexit negotiations. The ongoing trade war also poses an uncertain path for China. However, China has invested in spreading and hedging delivery and distribution channels at Government to Government level decades ago. With this edge, it is no surprise that China appear to project themselves as the bigger man in this rift by calmly reacting to Trump s instigation while obscurely maintaining underhand tactics. China has demonstrated their desire to improve credit risk of the financial industry while maintaining supportive monetary policies. For Malaysia, it may be prudent to downplay expectations as the new government goes about fixing and plugging the excesses of the previous government. It may even be overly optimistic to maintain fiscal debt discipline of 2.8%. It has been said that domestic consumption may have to take up the slack from reduced government expenditure, growth may taper down a tad while inflation firmly lower as the zero rating of GST take full effect. There is also the possible disruption to oil supply as dispute with Iran expands. Iran; being the fifth largest producer in the world, cutting of their supply may have significant and widespread ramifications. Important to note that OPEC s agreement to reduce supply have aided the rise over the last 12 months by about 60%. FIXED INCOME MARKET OUTLOOK The US dotplot show 2 more rate hikes for 2018 and another 2 more in This fairly hawkish view is premised on the optimism that the full effect of the tax reform is yet to be felt and the need to balance that with the gradual reduction of excess liquidity. The strengthening economy has also attracted huge inflows from fund mangers financial investments abroad boosting US$ strength further. This has capped US Treasury 10 year benchmark yields to below 3%. Touching a low of 2.05% in September last year in this period in review, 10 year yields have steadily risen to a high of 3.11% in May accompanied by the 3 rate hikes this period, before being ushered back down to 2.86% tempered by trade war fears. The upcoming anticipated hikes may pressure yields above the 3% mark again but will likely be hard pressed to sustain in the absence of resolution to the trade dispute. For Malaysia, interest rates will likely take the path of inward looking as priority. This means that the focus is on keeping cost low and sustainable for the larger masses of citizens and ensuring affordability at all strata of societies amidst moderation of growth while we transition to new policies. Only if there is an aggressive series of rate hikes by the US or spillover effects of hyperinflation from external economies, it is strongly believed that our domestic rates may not change for at least the next six months with a slight possibility of even a cut. This remains conducive for our fixed income markets in that interest rates and duration risk is fairly contained. 10

12 TRUSTEE S REPORT For The Financial Year Ended 30 June 2018 To the Unit holders of Areca Steady fixedincome Fund We have acted as Trustee of Areca Steady fixedincome Fund (the Fund ) for the financial year ended 30 June In our opinion and to the best of our knowledge, Areca Capital Sdn Bhd, the Manager, has operated and managed the Fund in accordance with the following:- (a) limitations imposed on the investment powers of the Manager and the Trustee under the Deed, the Securities Commission Malaysia s Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework, the Capital Markets and Services Act 2007 and other applicable laws; (b) valuation/pricing is carried out in accordance with the Deed and any regulatory requirements; (c) creation and cancellation of units are carried out in accordance with the Deed and other regulatory requirements; and For and on behalf of the Trustee RHB TRUSTEES BERHAD (Company No: U) TONY CHIENG SIONG UNG DIRECTOR Kuala Lumpur 17 August 2018 STATEMENT BY THE MANAGER To the Unit holders of Areca Steady fixedincome Fund We, Wong Teck Meng and Edward Iskandar Toh Bin Abdullah, two of the Directors of Areca Capital Sdn Bhd, do hereby state that in our opinion as the Manager, the financial statements set out on pages 15 to 38 are drawn up in accordance with the provisions of the Deed and give a true and fair view of the financial position of the Fund as at 30 June 2017 and of its results, changes in net assets attributable to unitholders and cash flows of the Fund for the financial year ended 30 June 2017 in accordance with the Malaysian Financial Reporting Standards and International Financial Reporting Standards. For and on behalf of the Manager, ARECA CAPITAL SDN BHD WONG TECK MENG CEO/EXECUTIVE DIRECTOR EDWARD ISKANDAR TOH BIN ABDULLAH CIO/EXECUTIVE DIRECTOR Kuala Lumpur 17 August

13 INDEPENDENT AUDITORS REPORT TO THE UNIT HOLDERS OF ARECA STEADY FIXEDINCOME FUND REPORT ON THE AUDIT OF FINANCIAL STATEMENTS Our Opinion In our opinion, the financial statements of Areca Steady fixedincome Fund (the Fund ) give a true and fair view of the financial position of the Fund as at 30 June 2017, and of its financial performance and its cash flows for the year then ended in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. What we have audited We have audited the financial statements of the Fund, which comprise the statement of financial position as at 30 June 2017, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, as set out on pages 15 to 38. Basis for opinion We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence and other ethical responsibilities We are independent of the Fund in accordance with the By-Laws (on Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants ("By-Laws") and the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants ("IESBA Code"), and we have fulfilled our other ethical responsibilities in accordance with the By-Laws and the IESBA Code. Information other than the financial statements and auditors report thereon The Manager of the Fund is responsible for the other information. The other information comprises Manager s report but does not include the financial statements of the Fund and our auditors report thereon. Our opinion on the financial statements of the Fund does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements of the Fund, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements of the Fund or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Manager for the financial statements The Manager of the Fund is responsible for the preparation of the financial statements of the Fund that give a true and fair view in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. The Manager is also responsible for such internal control as the Manager determine is necessary to enable the preparation of financial statements of the Fund that are free from material misstatement, whether due to fraud or error. 12

14 In preparing the financial statements of the Fund, the Manager is responsible for assessing the Fund s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Manager either intend to liquidate the Fund or have no realistic alternative but to do so. Auditors responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements of the Fund as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with approved standards on auditing in Malaysia and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: (a) (b) (c) (d) (e) Identify and assess the risks of material misstatement of the financial statements of the Fund, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Manager. Conclude on the appropriateness of the Manager s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements of the Fund or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Fund to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements of the Fund, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the Manager regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 13

15 OTHER MATTERS This report is made solely to the unitholder of the Fund and for no other purpose. We do not assume responsibility to any other person for the content of this report. PRICEWATERHOUSECOOPERS (No. AF: 1146) Chartered Accountants Kuala Lumpur 17 August

16 STATEMENT OF FINANCIAL POSITION As At 30 June 2018 Current Assets Financial assets at fair value through profit or loss Note RM RM 8 36,074,734 36,647,067 Cash and cash equivalents 9 1,868,374 1,358,201 Amount due from Manager - 764,000 Total Assets 37,943,108 38,769,268 Current Liabilities Accrued management fee 28,103 30,408 Other payables and accruals 10 21,935 24,090 Total Liabilities 50,038 54,498 Net Asset Value of the Fund 37,893,070 38,714,770 Equity Unitholders capital 35,453,952 37,858,292 Retained earnings 2,439, ,478 Total Net Assets Attributable to UnitHolders 37,893,070 38,714,770 Number of Units in Circulation 11 34,848,473 37,173,286 Net Asset Value Per Unit (Ex-Distribution) The accompanying notes form an integral part of these financial statements. 15

17 STATEMENT OF COMPREHENSIVE INCOME For The Financial Year Ended 30 June 2018 Investment Income Note RM RM Dividend income 91, ,545 Interest income 3 1,416,124 1,498,152 Net gain on financial assets at fair value through profit or loss Expenses 8 461,762 23,006 1,969,631 2,023,703 Management fee 4 341, ,551 Trustee's fee Audit fee 9,490 9,490 Tax agent s fee 5,900 4,200 Other expenses 21,086 32, , ,716 Profit Before Taxation 1,591,850 1,616,987 Taxation 6 9,210 3,070 Net Profit After Taxation And Total Comprehensive Income For The Financial Year 1,582,640 1,613,917 Net Profit After Taxation Is Made Up As Follows: Realised amount 1,105,178 1,609,814 Unrealised amount 477,462 4,103 1,582,640 1,613,917 The accompanying notes form an integral part of these financial statements. 16

18 STATEMENT OF CHANGES IN EQUITY For The Financial Year Ended 30 June 2018 Note Unit holders capital Retained earnings Total net asset value RM RM RM Balance as at 1 July ,858, ,478 38,714,770 Movement in unit holders capital: Creation of units arising from applications 3,636,396-3,636,396 Cancellation of units (6,040,736) - (6,040,736) Total comprehensive income for the financial year - 1,582,640 1,582,640 Balance as at 30 June ,453,952 2,439,118 37,893,070 Balance as at 1 July ,665,583 1,256,177 34,191,760 Movement in unit holders capital: Creation of units arising from applications 7,412,939-7,412,939 Creation of units arising from distributions 2,013,615-2,013,615 Cancellation of units (4,503,845) - (4,503,845) Distributions 7 - (2,013,616) (2,013,616) Total comprehensive income for the financial year - 1,613,917 1,613,917 Balance as at 30 June ,858, ,478 38,714,770 The accompanying notes form an integral part of these financial statements. 17

19 STATEMENT OF CASH FLOWS For The Financial Year Ended 30 June 2018 Cash Flows From Operating Activities Note RM RM Proceeds from disposal of investments 4,488,600 6,421,566 Purchase of investments (3,411,030) (8,949,785) Interest received from deposits with licensed financial institutions Interest received from unquoted fixed income securities 43,586 32,405 1,420,808 1,470,094 Management fee paid (343,610) (359,612) Payment for other fees and expenses (38,631) (36,945) Tax Refund Tax paid (9,536) (3,070) Net cash flows generated/(used in) from operating activities Cash Flows From Financing Activities 2,150,513 (1,425,347) Cash proceeds from creation of units 4,400,396 8,662,555 Payments for cancellation of units (6,040,736) (4,503,845) Distribution paid - (2,013,616) Net cash flows generated from/(used in) financing activities (1,640,340) 2,145,094 Net increase in cash and cash equivalents 510, ,747 Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 1,358, ,454 1,868,374 1,358,201 Cash and cash equivalents comprise: Deposit with a licensed financial institution 9 1,867,497 1,328,069 Bank balance with a licensed bank ,132 1,868,374 1,358,201 The accompanying notes form an integral part of these financial statements. 18

20 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR THE FINANCIAL YEAR ENDED 30 JUNE 2018 The following accounting policies have been used consistently in dealing with items which are considered material in relation to the financial statements. A BASIS OF PREPARATION OF FINANCIAL STATEMENTS The financial statements have been prepared under the historical cost convention in accordance with the Malaysian Financial Reporting Standards ( MFRS ) and International Financial Reporting Standards ( IFRS ), as modified by financial assets at fair value through profit or loss. The preparation of financial statements in conformity with the MFRS and IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported financial year. It also requires the Manager to exercise their judgment in the process of applying the Fund s accounting policies. Although these estimates and judgment are based on the Manager s best knowledge of current events and actions, actual results may differ. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note J. (a) Standards, amendments to published standards and interpretations that are effective The Fund has applied the following amendments for the first time for the financial year beginning on 1 July 2017: Amendments to MFRS 101 Presentation of financial statements Disclosure initiative Annual Improvements to MFRSs Cycle The adoption of these amendments did not have any impact on the current are not likely to affect future periods. (b) The new standards, amendments to published standards and interpretations to existing standards that are applicable to the Fund but not yet effective and have not been early adopted are as follows: (i) Financial year beginning on/after 1 July 2018 Amendments to MFRS 107 Statement of Cash Flows Disclosure Initiative (effective from 1 January 2017) introduce an additional disclosure on changes in liabilities arising from financing activities. The adoption of these amendments did not have any impact on the current are not likely to affect future periods. (ii) Financial year beginning on/after 1 July 2018 MFRS 9 Financial Instruments (effective from 1 January 2018) will replace MFRS 139 Financial Instruments: Recognition and Measurement. MFRS 9 retains but simplifies the mixed measurement model in MFRS 139 and establishes three primary measurement categories for financial assets: amortised cost, fair value through profit or loss and fair value through other comprehensive income ( OCI ). The basis of classification depends on the entity s business model and the cash flow characteristics of the 19

21 financial asset. Investments in equity instruments are always measured at fair value through profit or loss with an irrevocable option at inception to present changes in fair value in OCI (provided the instrument is not held for trading). A debt instrument is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. For liabilities, the standard retains most of the MFRS 139 requirements. These include amortised cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. MFRS 9 introduces an expected credit loss model on impairment that replaces the incurred loss impairment model used in MFRS 139. The expected credit loss model is forward-looking and eliminates the need for a trigger event to have occurred before credit losses are recognised. The Fund has reviewed its financial assets and liabilities and is expecting the following impact from the adoption of the new standard on 1 July 2018: There will be no impact on the Fund's accounting for financial assets as the Fund's equity investments currently measured at fair value through profit or loss will continue to be measured on the same basis under MFRS 9 There will be no impact on the Fund's accounting for financial liabilities as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Fund does not have any such liabilities. The new impairment model requires the recognition of impairment provisions based on ECL rather than only incurred credit losses as is the case under MFRS 139. It applies to financial assets classified at amortised cost. Based on the assessments undertaken to date, the Fund does not expect any loss allowance to be recognised upon adoption of MFRS 9. The Fund will apply this standard when effective. This standard is not expected to have a significant impact on the Fund s financial statements. B INCOME RECOGNITION Dividend income is recognised on the ex-dividend date when the right to receive payment is established. Interest income from short-term deposits and unquoted fixed income securities are recognised on an accrual basis using the effective interest method. Realised gain or loss on disposal of collective investment scheme is accounted for as the difference between the net disposal proceeds and the carrying amount of collective investment scheme, determined on a weighted average cost basis. Realised gains or losses on disposal of investments are accounted for as the difference between the net disposal proceeds and the carrying amount of investments, determined on cost adjusted for accretion of discount or amortisation of premium on investments. 20

22 C TAXATION Current tax expense is determined according to the Malaysian tax laws and includes all taxes based upon the taxable profits earned during the financial year. D FUNCTIONAL CURRENCY AND PRESENTATION Items included in the financial statements of the Fund are measured using the currency of the primary economic environment in which the Fund operates (the functional currency ). The financial statements are presented in Ringgit Malaysia, which is the Fund s functional and presentation currency. E FINANCIAL ASSETS AND FINANCIAL LIABILITIES i) Classification The Fund designates its investment in unquoted fixed income securities as financial assets at fair value through profit or loss at inception. Financial assets are designated at fair value through profit or loss when they are managed and their performance evaluated on a fair value basis. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been included in current assets. The Fund s loans and receivables comprise cash and cash equivalents and amount due from Manager which are all due within 12 months. Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability. The Fund s financial liabilities which include amount due to Manager, accrued management fee and other payables and accruals. ii) Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade-date, the date on which the Fund commits to purchase or sell the asset. Investments are initially recognised at fair value. Transaction costs are expensed in the statement of comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Fund has transferred substantially all risks and rewards of ownership. Financial liabilities, within the scope of MFRS 139, are recognised in the statement of financial position when, and only when, the Fund becomes a party to the contractual provisions of the financial instrument. Financial liability is derecognised when the obligation under the liability is extinguished. Gain and losses are recognised in the statement of comprehensive income when the liabilities are derecognised, and through the amortisation process. Derivative investment consists currency forward contract. Foreign exchange gains and losses on the derivative financial instrument are recognised in statement of comprehensive income when settled or at date of the statement of financial position at which time they are included in the measurement of the derivative financial instrument. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit of loss including the effects of foreign transactions are presented in the statement of comprehensive income within net gain/(loss) on financial assets at fair value through profit and loss in the financial year in which they arise. Any unrealised gains however are not distributable. Collective investment scheme is valued based on the most recent published NAV per unit or 21

23 share of such collective investment scheme or, if unavailable, the last published price of such unit or share (excluding any sales charge included in such selling price). Quoted securities in Malaysia are valued at the last done market price quoted on the Bursa Securities Berhad ( Bursa Securities ) at the date of the statement of financial position. Dividend income from financial assets at fair value through profit of loss is recognised in the statement of comprehensive income as part of gross dividend income when the Fund s right to receive payments is established. Unquoted fixed income securities are revalued on a daily basis based on fair value prices quoted by a bond pricing agency ( BPA ) registered with the Securities Commission as per the Securities Commission Guidelines on Unlisted Capital Market Products Under the Lodge and Launch Framework. Refer to Note L for further explanation. Deposits with licensed financial institutions are stated at cost plus accrued interest calculated on the effective interest method over the period from the date of placement to the date of maturity of the respective deposits. Loan and receivables and other financial liabilities are subsequently carried at amortised cost using the effective interest method. iii) Impairment for assets carried at amortised costs For assets carried at amortised cost, the Fund assesses at the end of the 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. 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 asset s carrying amount is reduced and the amount of the loss is recognised in statement of comprehensive income. If loan and receivables or a held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Fund may measure impairment on the basis of an instrument s fair value using an observable market price. 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 statement of comprehensive income. When an asset is uncollectible, it is written off against the related allowance account. Such assets are written off after all the necessary procedures have been completed and the amount of the loss been determined. F CASH AND CASH EQUIVALENTS For the purpose of statement of cash flows, cash and cash equivalents comprise cash and bank balances and deposits held in highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. 22

24 G UNITHOLDERS CAPITAL The unitholders's contributors to the Fund meet the criteria to be classified as equity instruments under MFRS 132 "Financial Instruments: Presentation". Those criteria include: the units entitle the holder to a proportionate share of the Fund s net asset value ( NAV ); the units are the most subordinated class and class features are identical; there is no contractual obligations to deliver cash or another financial asset other than the obligation on the Fund to repurchase; and the total expected cash flows from the units over its life are based substantially on the profit or loss of the Fund. The outstanding units are carried at the redemption amount that is payable at each financial year if the unitholder exercises the right to put the unit back to the Fund. Units are created and cancelled at prices based on the Fund s NAV per unit at the time of creation or cancellation. The Fund s NAV per unit is calculated by dividing the net assets attributable to unitholders with the total number of outstanding units. H DISTRIBUTION A distribution to the Fund s Unitholders is accounted for as a deduction from realised reserves. A proposed distribution is recognised as a liability in the period in which it is approved by the Trustee of the Fund. I SEGMENTAL INFORMATION Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Investment Committee of the Fund s Manager that undertakes strategic decisions for the Fund. J CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Fund makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. To enhance the information content of the estimates, certain key variables that are anticipated to have material impact to the Funds results and financial position are tested for sensitivity to changes in the underlying parameters. Estimates and judgments are continually evaluated by the Manager and the Trustee and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Estimate of fair value of unquoted fixed income securities In undertaking any of the Fund s investment, the Manager will ensure that all assets of the Fund under management will be valued appropriately, that is at fair value and in compliance with the Securities Commission valuation guidelines. Unquoted fixed income securities are valued using fair value prices quoted by a bond pricing agency (BPA). Where the manager is of the view that the price quoted by BPA for a specific bond differs from the market price by more than 20 basis points, the Manager may use the market price, provided that the Manager records its basis for using a non-bpa price, obtains necessary internal approvals to use the non-bpa price, and keeps an audit trail of all decisions and basis for adopting the use of non-bpa price. 23

25 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR 30 JUNE THE FUND, THE MANAGER AND THEIR PRINCIPAL ACTIVITIES Areca Steady fixedincome Fund ( the Fund ) is a wholesale fund that was formed under a custodian structure on 11 May A trustee was later appointed for the Fund with the signing of a Trust Deed dated 24 July 2009 as modified by the First Supplemental Deed dated 15 August 2013 ( the Deed ) between Areca Capital Sdn Bhd as the Manager, RHB Trustees Berhad as the Trustee and all the registered unitholders of the Fund. The principal activity of the Fund is to invest in investments as defined under Schedule 6 of the Deed, which include money market instruments, fixed income securities and deposits with financial institutions. The Fund commenced operations on 11 May 2009 and will continue its operations until terminated by the Trustee in accordance with Part 11 of the Deed. The objective of the Fund is to provide sophisticated investors with a stable stream of consistent income while maintaining capital stability by investing in fixed income investments with medium to long term investment horizon. The Manager of the Fund is Areca Capital Sdn Bhd, a company incorporated in Malaysia. Its principal activities are managing private and unit trust funds. 2 FINANCIAL INSTRUMENT AND RISK MANAGEMENT OBJECTIVES AND POLICIES Financial instruments of the Fund as follows: Note Loan and receivables RM Financial assets at fair value through profit or loss RM Total RM 30 June 2018 Collective investment scheme 8-10,371,998 10,371,998 Quoted securities 8-67,500 67,500 Unquoted fixed income securities 8-25,635,236 25,635,236 Cash & cash equivalents 9 1,868,374-1,868, June ,868,374 36,074,734 37,943,108 Collective investment scheme 8-7,606,416 7,606,416 Quoted securities 8-295,00 295,000 Unquoted fixed income securities 8-28,745,651 28,745,651 Cash & cash equivalents 9 1,358,201-1,358,201 Amount due from Manager 764, ,000 2,122,201 36,647,067 38,769,268 All current liabilities are financial liabilities which are carried at amortised cost. The Fund seeks to provide sophisticated investors with a stable stream of consistent income while maintaining capital stability by investing in fixed income investments with medium to long term investment horizon. In order to meet its stated investment objectives, the Fund utilises risk management for both defensive and proactive purposes. Rigorous analysis of sources of risk in the portfolio is carried out and the following policies are implemented to provide effective ways to reduce future risk and enhance future returns within the Fund s mandate. The Fund is exposed to a variety of risks which include market risk (including price risk and interest rate risk ), credit risk, liquidity risk and capital risk.