Hong Leong Bond Fund

Transcription

1 Reaching out to you Hong Leong Bond Fund Annual Report 2016/ June 2017 Audited

2 Hong Leong Bond Fund Contents Page Manager s Review and Report Statement by the Manager Trustee s Report Independent Auditors Report Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Performance Data Corporate Information Corporate Directory

3 Manager s Review and Report I. FUND INFOATION Fund Name Hong Leong Bond Fund Fund Category Bond Fund Type Income Investment Objective To seek current income* whilst at the same time aims to offer stability** of the capital value with minimal risk. Benchmark RAM Quant Shop MGS Bond (Short) Index Distribution Policy It is the intention of the Fund to declare regular cash distributions. The amount of cash distributions to be distributed will vary from period to period, depending on interest rates, market conditions and the performance of the Fund. Cash distributions may be made out of net interest and net income returns received by the Fund and profits from the realisation of portfolio investments, after deducting expenses incurred by the Fund. Breakdown of Unitholdings By Size Size of Holdings No. of Accounts 5,000 and below 105 5,001 to 10, ,001 to 50, ,001 to 500, ,001 and above 11 No. of Units Held 177, , ,585, ,661, ,299, Notes: * Income may be distributed in the form of cash and/or units. ** Please take note that this Fund is not a capital guaranteed fund or a capital protected fund and the returns are not guaranteed. HONG LEONG BOND FUND 1

4 II. FUND PERFOANCE Chart 1: Performance of the Fund versus the benchmark covering the last five financial years Percentage Growth /06/ /06/ /06/ /06/ /06/ /06/2017 From 30/06/2012 To 30/06/2017 Hong Leong Bond Fund (HLBoF): Quant Shop MGS Bond Short 13 Years: Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per UnittoNAV Per Unit basis with gross income (if any) from HLBoF reinvested. Past performance is not necessarily indicative of future performance and unit prices and investment returns may go down, as well as up. 2 HONG LEONG BOND FUND

5 Performance Review This Annual Report covers the twelvemonth financial year from 1 July 2016 to 30 June The Fund rose 1.87% in the past twelve months, while its benchmark the RAM Quant Shop MGS Bond Short 13 Years Index registered a return of 3.17%. During the financial year under review, the Fund has distributed an income distribution of 0.10 sen per unit to its Unitholders. Prior to the income distribution, the cumdistribution net asset value (NAV) per unit of the Fund was , while the exdistribution NAV per unit was Unitholders should note that income distribution has the effect of reducing the NAV per unit of the Fund after distribution. For the five financial years ended 30 June 2017, the Fund garnered a return of 15.95% compared to the benchmark s return of 19.05% while distributing a total net income of 6.60 sen per unit. As such, the Manager concluded that the Fund has not achieved its investment objective. Table 1: Performance of the Fund for the following periods as at 30 June 2017 (Source: Lipper For Investment Management) 31/03/17 31/12/16 30/06/16 30/06/17 30/06/17 30/06/17 3 Months 6 Months 1 Year 30/06/15 30/06/17 2 Years 30/06/14 30/06/17 3 Years 30/06/07 30/06/17 10 Years 30/06/12 30/06/17 5 Years 29/01/02 30/06/17 Since Launch HLBoF (%) Benchmark (%) HONG LEONG BOND FUND 3

6 Table 2: Return of the Fund based on NAV Per UnittoNAV Per Unit basis for the period 30 June 2016 to 30 June 2017 (Source: Lipper For Investment Management) 30Jun17 30Jun16 Return (%) NAV Per Unit Benchmark vs Benchmark (%) , , # # Return is calculated after adjusting for income distribution of 0.10 sen per unit on 21/07/2016. Table 3: Financial Highlights The Net Asset Value attributable to Unitholders is represented by: 30Jun17 () 30Jun16 () Change (%) Unitholders Capital Retained Earnings Net Asset Value 3,943,988 16,189,169 20,133,157 18,137,464 15,689,306 33,826, Units in Circulation 37,063,557 63,321, HONG LEONG BOND FUND

7 Table 4: The Highest and Lowest NAV Per Unit, Total Return of the Fund and the breakdown into Capital Growth and Income Distribution for the financial years Financial Year 30/06/16 30/06/17 Financial Year 30/06/15 30/06/16 Financial Year 30/06/14 30/06/15 Highest NAV Per Unit () Lowest NAV Per Unit () Capital Growth (%) Income Distribution (%) Total Return (%) Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per UnittoNAV Per Unit basis with gross income (if any) from HLBoF reinvested. Table 5: Average Total Return of the Fund 30/06/16 30/06/17 1 Year 30/06/14 30/06/17 3 Years 30/06/12 30/06/17 5 Years Average Total Return (%) Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per UnittoNAV Per Unit basis with gross income (if any) from HLBoF reinvested. Table 6: Annual Total Return of the Fund Financial Year 30/06/16 30/06/17 30/06/15 30/06/16 30/06/14 30/06/15 30/06/13 30/06/14 30/06/12 30/06/13 Annual Total Return (%) Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per UnittoNAV Per Unit basis with gross income (if any) from HLBoF reinvested. HONG LEONG BOND FUND 5

8 III. INVESTMENT PORTFOLIO Chart 2: Asset Allocation July 2016 to June % 80% 60% 40% 20% 0% Jul 16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 Feb17 Mar17 Apr17 May17 Jun17 Fixed Income Securities Collective Investment Schemes Chart 3: Sector Allocation as at 30 June 2017 Malaysian Government Securities 33.02% Deposites & Cash Equivalents 9.07% Corporate Bonds 57.91% 6 HONG LEONG BOND FUND

9 Chart 4: Portfolio Composition by Ratings as at 30 June 2017 Malaysian Government Securities 33.02% Deposits & Cash Equivalents AA1 9.07% 12.65% AA2 9.98% AA % AAA 25.27% Strategies employed during the period under review Most of the holdings are kept in the AA credit segment to benefit from the higher carry and on relative value play. The Fund increased its duration during the review period due to its tactical positioning. The Fund s duration is approximately 5.38 years. As of 30 June 2017, the topthree holdings of the Fund are GENM Capital BerhadUnlisted Bond (15.22%), Malaysian Government Securities2033 (15.16%) and Malaysian Government Securities2027 (12.80%). For the financial year under review, there were no significant changes in the state of affairs of the Fund or circumstances that would materially affect the interest of Unitholders up to the date of this Manager s report. HONG LEONG BOND FUND 7

10 IV. MARKET REVIEW During the review period, the local sovereign bond market experienced volatile trading. The US presidential election saw most emerging bond markets fall, in the wake of the incoming President s policies and the increasing expectation of a rate hike by the Federal Reserve (Fed). The 10year rose to 4.46% at the high, but recovered gradually at the turn of the year. The 3year benchmark rose 22 basis points (bps) to 3.39% whilst the 10year benchmark declined 2bps to 3.91%. Trump s victory in the November US Presidential election convinced global bond investors that inflation could rise on the back of the Presidentelect s trade protectionism and public spending policies. Expectations of rising inflation and interest rate hike triggered a withdrawal of funds from the emerging market debt space into safer havens. After months of speculation, the Fed raised its benchmark rate by 25bps at the last meeting of 2016 and guided for three rate hikes in The central bank proceeded to deliver rate hikes at its March and June meeting, further explaining its intention to reduce its balance sheet soon. In April, Bank Negara Malaysia (BNM) announced the new forward hedging framework and short selling regulations which were well received by investors. Investors saw the announcements as a positive and progressive measure towards a becoming a developed capital market. 8 HONG LEONG BOND FUND

11 V. FUTURE PROSPECT AND PROPOSED STRATEGIES The Fed has signalled the reduction of its balance sheet will start relatively soon, of which most market participants anticipated as soon as September. The central bank remains on course meet its target of one more hike at the end of the year. In the local government bonds market, we anticipate near term weakness on poorer sentiment due to impending details on balance sheet reduction by the Fed. Local inflation continues to moderate to 3.6% in June compared with a 3.9% in May, largely contributed by transportation costs. We reaffirm our view that BNM will maintain its policy rate for the rest of the year. VI. SOFT COMMISSIONS The Manager has received soft commissions from brokers/ dealers in the form of goods and services such as research materials, data and quotation services incidental to investment management of the Fund and investment related publications. Such soft commissions received are of demonstrable benefit to Unitholders. VII. CROSSTRADE TRANSACTIONS There were crosstrade transactions undertaken by the Fund during the financial year under review. The transactions were executed through brokers/dealers on an arm s length and fair value basis and in the best interest of Unitholders. HONG LEONG BOND FUND 9

12 STATEMENT BY THE MANAGER I, Hoo See Kheng, as the Director of Hong Leong Asset Management Bhd, do hereby state that, in the opinion of the Manager, the financial statements set out on pages 16 to 55 are drawn up in accordance with the provision of the Deeds and give a true and fair view of the financial position of the Fund as at 30 June 2017 and of its financial performance, changes in equity and cash flows for the financial year ended 30 June 2017 in accordance with the Malaysian Financial Reporting Standards ( MFRS ) and International Financial Reporting Standards ( IFRS ). For and on behalf of the Manager, Hong Leong Asset Management Bhd (Company No.: M) HOO SEE KHENG Chief Executive Officer / Executive Director Kuala Lumpur 21 August HONG LEONG BOND FUND

13 TRUSTEE S REPORT TO THE UNITHOLDERS OF HONG LEONG BOND FUND We have acted as the Trustee for Hong Leong Bond Fund ( the Fund ) for the financial year ended 30 June To the best of our knowledge, for the financial year under review, Hong Leong Asset Management Bhd ( the Manager ) has operated and managed the Fund in accordance with the following: (a) limitations imposed on the investment powers of the Manager under the Deed(s), the Securities Commission s Guidelines on Unit Trust Funds, the Capital Markets and Services Act 2007 and other applicable laws; (b) valuation and pricing for the Fund has been carried out in accordance with the Deed(s) of the Fund and applicable regulatory requirements; and (c) creation and cancellation of units for the Fund have been carried out in accordance with the Deed(s) of the Fund and applicable regulatory requirements. We are of the view that the distribution made during the financial period ended 30 June 2017 by the Manager are not inconsistent with the objectives of the Fund. For Deutsche Trustees Malaysia Berhad Soon Lai Ching Senior Manager, Trustee Operations Richard Lim Hock Seng Chief Executive Officer Kuala Lumpur 21 August 2017 HONG LEONG BOND FUND 11

14 INDEPENDENT AUDITORS REPORT TO THE UNITHOLDERS OF HONG LEONG BOND FUND REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Our Opinion In our opinion, the financial statements of Hong Leong Bond 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 16 to 55. 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 ( ByLaws ) 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 ByLaws and the IESBA Code. 12 HONG LEONG BOND FUND

15 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 Review & 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. 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. HONG LEONG BOND FUND 13

16 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) 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. (b) 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. (c) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Manager. 14 HONG LEONG BOND FUND

17 (d) Conclude on the appropriateness of the Manager s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements of the Fund or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Fund to cease to continue as a going concern. (e) 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. OTHER MATTERS This report is made solely to the unitholders 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 21 August 2017 HONG LEONG BOND FUND 15

18 STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 30 JUNE 2017 Note INVESTMENT INCOME Interest income Dividend income Net (loss)/gain on financial assets at fair value through profit or loss ( FVTPL ) Net loss on derivative Net foreign currency exchange gain Management fee rebate EXPENDITURE Management fee Trustee s fee Auditors remuneration Tax agent s fee Custodian fees Transaction costs Other expenses ,215,485 28,604 (298,983) 2, ,497 (296,538) (23,723) (5,000) (2,950) (9,439) (39,546) (377,196) 1,450, ,244 23,363 (6,119) 2,686 8,393 1,583,737 (352,444) (28,195) (5,000) (2,950) (308) (764) (37,168) (426,829) PROFIT BEFORE TAXATION Taxation PROFIT AFTER TAXATION AND TOTAL COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR 7 570, ,301 1,156,908 1,156,908 Profit after taxation is made up as follows: Realised amount Unrealised amount 491,054 79, ,301 1,149,311 7,597 1,156,908 Distributions for the financial year: Net distribution Net distribution per unit (sen) Gross distribution per unit (sen) , , The accompanying notes to the financial statements form an integral part of these financial statements. 16 HONG LEONG BOND FUND

19 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017 Note ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss ( FVTPL ) Amount due from the Manager creation of units Amount due from the Manager management fee rebate TOTAL ASSETS ,335,177 18,307,094 20,642, ,614 33,106, , ,870,506 LIABILITIES Amount due to the Manager cancellation of units Amount due to the Manager management fee Amount due to the Trustee Amount due to the Managerexpenses Other payables and accruals TOTAL LIABILITIES 481,501 17,083 1,367 9, ,114 4,363 27,289 2, ,824 43,736 NET ASSET VALUE OF THE FUND 20,133,157 33,826,770 EQUITY Unitholders capital Retained earnings NET ASSETS ATTRIBUTABLE TO UNITHOLDERS 3,943,988 16,189,169 20,133,157 18,137,464 15,689,306 33,826,770 UNITS IN CIRCULATION (UNITS) 11 37,063,557 63,321,248 NET ASSET VALUE PER UNIT () The accompanying notes to the financial statements form an integral part of these financial statements. HONG LEONG BOND FUND 17

20 STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 30 JUNE 2017 Note Unitholders capital Retained earnings Total Balance as at 1 July 2016 Movement in net asset value: Creation of units from applications Creation of units from distribution Cancellation of units Total comprehensive income for the financial year Distribution for the financial year Balance as at 30 June ,137,464 10,080,027 69,706 (24,343,209) 3,943,988 15,689, ,301 (70,438) 16,189,169 33,826,770 10,080,027 69,706 (24,343,209) 570,301 (70,438) 20,133,157 Balance as at 1 July 2015 Movement in net asset value: Creation of units from applications Creation of units from distribution Cancellation of units Total comprehensive income for the financial year Distribution for the financial year Balance as at 30 June ,695,594 1,358, ,621 (7,279,969) 18,137,464 14,900,587 1,156,908 (368,189) 15,689,306 38,596,181 1,358, ,621 (7,279,969) 1,156,908 (368,189) 33,826,770 The accompanying notes to the financial statements form an integral part of these financial statements. 18 HONG LEONG BOND FUND

21 STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 30 JUNE 2017 Note CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from sales of financial assets at FVTPL Proceeds from redemptions of financial assets at FVTPL Purchase of financial assets at FVTPL Realised loss on derivative Realised foreign exchange differences arising from operating activities Interest received Dividends received Management fee rebate received Management fee paid Trustee s fee paid Payment for other fees and expenses Net cash generated from/(used in) operating activities 29,556,470 3,000,000 (18,250,311) 1,410,233 28,604 3,129 (306,744) (24,539) (57,673) 15,359,169 4,320,986 (7,038,311) (6,829) 7,540 1,433, ,244 7,655 (357,955) (28,636) (45,513) (1,602,023) CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from units created Payments for cancellation of units Distribution paid Net cash used in financing activities 10,712,903 (23,866,071) (70,438) (13,223,606) 1,158,669 (8,576,193) (369,824) (7,787,348) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS EFFECTS OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT BEGINNING OF THE FINANCIAL YEAR CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL YEAR 9 2,135, ,614 2,335,177 (9,389,371) (4,854) 9,593, ,614 The accompanying notes to the financial statements form an integral part of these financial statements. HONG LEONG BOND FUND 19

22 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 30 JUNE THE FUND, THE MANAGER AND THEIR PRINCIPAL ACTIVITIES Hong Leong Bond Fund ( the Fund ) was constituted pursuant to the execution of a Deed dated 5 December 2001 and Supplemental Deeds dated 30 September 2003, 2 June 2009 and 30 April 2010 between the Manager, Hong Leong Asset Management Bhd, Universal Trustee (Malaysia) Berhad and the registered unitholders of the Fund. Universal Trustee (Malaysia) Berhad has been replaced with Deutsche Trustees Malaysia Berhad ( the Trustee ) effective 1 August 2013 and Supplemental Master Deeds were entered into between the Manager, the Trustee and the registered unitholders of the Fund on 30 May 2013 and 25 March 2015 to effect the change ( the Deeds ). The Fund aims to seek current income whilst at the same time aims to offer stability of the capital value with minimal risk. The Fund intends to invest mainly in fixed income securities which include but are not limited to corporate bonds, mediumterm notes, convertibles, bankers acceptances, repurchase agreements, negotiable certificates of deposit with financial institutions and commercial papers. The Fund commenced operations on 29 January 2002 and will continue its operations until terminated as provided under Part 12 of the Deed. The Manager of the Fund is Hong Leong Asset Management Bhd, a company incorporated in Malaysia. The principal activity of the Manager is the management of unit trust funds and private investment mandates. Its holding company is Hong Leong Capital Berhad, a company incorporated in Malaysia and listed on the Main Market of Bursa Malaysia Securities Berhad. The financial statements were authorised for issue by the Manager on 21 August HONG LEONG BOND FUND

23 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements: (a) Basis of preparation The financial statements have been prepared in accordance with the Malaysian Financial Reporting Standards ( MFRS ) and International Financial Reporting Standards ( IFRS ). The financial statements have been prepared under the historical cost convention, as modified by the financial assets at fair value through profit or loss. The preparation of financial statements in conformity with MFRS and IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue 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. The Manager believes that the underlying assumptions are appropriate and the Fund s financial statements therefore present the financial position results fairly. 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 2(k). HONG LEONG BOND FUND 21

24 The Fund has applied the relevant new accounting standards, amendments and improvements to published standards and interpretations to existing accounting standards that are effective 1 January 2016 are as follows: Amendments to MFRS 101 Presentation of financial statements Disclosure initiative Annual Improvements to MFRS Cycle The adoption of these amendments did not have any impact on the current period or any prior period and is not likely to affect future years. The 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: 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. MFRS 9 Financial Instruments (effective from 1 January 2018) will replace MFRS 139 Financial Instruments: Recognition and Measurement. MFRS 9 retains but simplifies the mixed measurement model in MFRS 139 and establishes three primary measurement categories for financial assets: amortised cost, fair value through profit or loss and fair value through other comprehensive income ( OCI ). The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are always measured at fair value through profit or loss with an 22 HONG LEONG BOND FUND

25 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 losses model on impairment that replaces the incurred loss impairment model used in MFRS 139. The expected credit losses model is forwardlooking and eliminates the need for a trigger event to have occurred before credit losses are recognised. MFRS 15 Revenue from Contracts with Customers (effective from 1 January 2018) replaces MFRS 118 Revenue and MFRS 111 Construction Contracts and related interpretations. The standard 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. HONG LEONG BOND FUND 23

26 The 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: The core principle in MFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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 Fund will apply these standards when effective. These standards are not expected to have a significant impact on the Fund s financial statements. (b) Financial assets and financial liabilities Classification Financial assets are designated at fair value through profit or loss when their performance are managed and evaluated on a fair value basis. The Fund designates its investment in unquoted fixed income securities and unquoted collective investment scheme as financial assets at fair value through profit or loss at inception. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market and have been included in assets. The Fund s loans and receivables comprise cash and cash equivalents, amount due from the Managercreation of units and amount due from the Managermanagement fee rebate. 24 HONG LEONG BOND FUND

27 Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability. The Fund classifies amount due to the Managercancellation of units, amount due to the Managermanagement fee, amount due to the Trustee, amount due to the Managerexpenses and other payables and accruals as other financial liabilities. Recognition and measurement Regular purchases and sales of financial assets are recognised on the tradedate 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 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 assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Fund has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when it is extinguished, i.e. when the obligation specified in the contract is discharged or cancelled or expired. Unrealised gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss are presented in the statement of comprehensive income within net gain or loss on financial assets at fair value through profit or loss in the period which they arise. HONG LEONG BOND FUND 25

28 Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income as part of 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 Malaysia as per the Securities Commission Malaysia s Guidelines on Unit Trust Funds. Where such quotation are not available or where the Manager is of the view that the price quoted by the BPA for a specific unquoted fixed income securities differs from the market price by more than 20 basis points, the Manager may use the market price, provided that the Manager: (i) records its basis for using nonbpa price; (ii) obtains necessary internal approvals to use the nonbpa price; and (iii) keeps an audit trail of all decisions and basis for adopting the market yield. Unquoted collective invectment scheme is valued at the last published NAV per unit at the date of the statement of financial position. 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, which is a close estimate of their fair value due to the short term nature of the deposits. Loans and receivables and other financial liabilities are subsequently carried at amortised cost using the effective interest method. 26 HONG LEONG BOND FUND

29 Impairment 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 carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If loans and receivables 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. HONG LEONG BOND FUND 27

30 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 has been determined. (c) Foreign currency Functional and presentation currency Items included in the financial statements of the Fund are measured using the currency of the primary economic environment in which the Fund operates (the functional currency ). The financial statements are presented in Ringgit Malaysia ( ), which is the Fund s functional and presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at periodend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges. Translation differences on nonmonetary financial assets and liabilities such as collective investment scheme held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. (d) Income recognition Dividend income is recognised on the exdividend date when the Fund s right to receive payment is established. 28 HONG LEONG BOND FUND

31 Interest income from deposits with licensed financial institutions and unquoted fixed income securities are recognised on the effective interest method on an accrual basis. Realised gain or loss on disposal of quoted and unquoted collective investment scheme is accounted for as the difference between the net disposal proceeds and the carrying amount of investments, determined on a weighted average cost basis. Realised gain or loss on disposal of unquoted fixed income securities is accounted for as the difference between the net disposal proceeds and the carrying amount of unquoted fixed income securities, determined on cost adjusted for accretion of discount or amortisation of premium. (e) Cash and cash equivalents For the purpose of statement of cash flows, cash and cash equivalents comprise cash at banks 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. (f) Taxation Current tax expense is determined according to Malaysian tax laws at the prevailing tax rate based on the taxable profit earned during the financial year. Tax on investment income from foreign investments is based on the tax regime of the respective countries that the Fund invests in. (g) Distributions A distribution to the Fund s unitholders is accounted for as a deduction from realised reserve. A proposed distribution is recognised as a liability in the finacial year in which it is approved by the Board of Directors of the Manager. HONG LEONG BOND FUND 29

32 (h) Transaction costs Transaction costs are costs incurred to acquire or dispose financial assets or liabilities at fair value through profit or loss. They include fees and commissions paid to agents, advisors and brokers/dealers. Transaction costs, when incurred, are immediately recognised in the statement of comprehensive income as expenses. (i) Unitholders capital The unitholders contributions 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 unitholder to a proportionate share of the Fund s net asset value; 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 the units; and the total expected cash flows from the units over its life are based substantially on the profit or loss and change in the net asset value of the Fund. The outstanding units are carried at the redemption amount that is payable at the date of the statement of financial position if unitholder exercises the right to put the unit back to the Fund. Units are created and cancelled at prices based on the Fund s net asset value per unit at the time of creation and cancellation. The Fund s net asset value per unit is calculated by dividing the net assets attributable to unitholders with the total number of outstanding units. 30 HONG LEONG BOND FUND

33 (j) Segmental information Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decisionmaker. The chief operating decisionmaker, 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. (k) Critical accounting estimates and judgments 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 are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 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 Malaysia s Guidelines on Unit Trust Funds. However, the Manager is of the opinion that there are no accounting policies which require significant judgment to be exercised. HONG LEONG BOND FUND 31

34 3. RISK MANAGEMENT OBJECTIVES AND POLICIES The Fund is exposed to a variety of risks which include market risk (inclusive of price risk and interest rate risk), credit risk, liquidity risk and capital risk. Financial risk management is carried out through internal control process adopted by the Manager and adherence to the investment restrictions as stipulated in the prospectus. The following table analyses the financial assets and financial liabilities of the Fund in the statement of financial position as at the reporting date: Financial assets at FVTPL Loans and receivables/ other financial liabilities Total 2017 Financial assets Cash and cash equivalents (Note 9) Financial assets at FVTPL (Note 10) 18,307,094 18,307,094 2,335,177 2,335,177 2,335,177 18,307,094 20,642,271 Financial liabilities Amount due to the Manager cancellation of units Amount due to the Manager management fee Amount due to the Trustee Other payables and accruals 481,501 17,083 1,367 9, , ,501 17,083 1,367 9, , Financial assets Cash and cash equivalents (Note 9) Financial assets at FVTPL (Note 10) Amount due from the Manager creation of units Amount due from the Manager management fee rebate 33,106,984 33,106, , , , ,614 33,106, , ,870,506 Financial liabilities Amount due to the Manager cancellation of units Amount due to the Manager management fee Amount due to the Trustee Amount due to the Managerexpenses Other payables and accruals 4,363 27,289 2, ,824 43,736 4,363 27,289 2, ,824 43,736 All liabilities are financial liabilities which are carried at amortised cost. 32 HONG LEONG BOND FUND

35 (a) Market risk (i) Price risk Price risk arises mainly from the uncertainty about future prices of investments. It represents the potential loss the Fund might suffer through holding market positions in the face of price movements. The Manager manages the risk of unfavourable changes in prices by continuous monitoring of the performance and risk profile of the investment portfolio. The price risk is managed through diversification and selection of securities and other financial instruments within specified limits according to the Deeds. The Fund s overall exposure to price risk is as follows: Financial assets at FVTPL: Unquoted fixed income securities* Unquoted collective investment scheme ,307,094 18,307, ,107,384 2,999,600 33,106,984 * Includes interest receivables of 180,488 (2016: 345,504) HONG LEONG BOND FUND 33

36 The table below summarises the sensitivity of the Fund s net asset value and profit after taxation to movements in prices of unquoted fixed income securities and unquoted collective investment scheme at the end of each reporting period. The analysis is based on the assumptions that the price of the unquoted fixed income securities and unquoted collective investment scheme fluctuated by 5% with all other variables held constant. This represents management s best estimate of a reasonable possible shift in the unquoted fixed income securities and unquoted collective investment scheme, having regard to the historical volatility of the prices. % Change in price of financial assets at FVTPL Market value Impact on profit after taxation/ net asset value % 0% 5% % 0% 5% 17,220,276 18,126,606 19,032,936 31,123,406 32,761,480 34,399,554 (906,330) 906,330 (1,638,074) 1,638, HONG LEONG BOND FUND

37 (ii) Interest rate risk In general, when interest rates rise, prices of fixed income securities will tend to fall and vice versa. Therefore, the NAV of the Fund may also tend to fall when interest rates rise or are expected to rise. However, investors should be aware that should the Fund hold a fixed income securities till maturity, such price fluctuations would dissipate as it approaches maturity, and thus the growth of the NAV shall not be affected at maturity. In order to mitigate interest rates exposure of the Fund, the Manager will manage the duration of the portfolio via shorter or longer tenured assets depending on the view of the future interest rate trend of the Manager, which is based on its continuous fundamental research and analysis. This risk is crucial since unquoted fixed income securities portfolio management depends on forecasting interest rate movements. Prices of unquoted fixed income securities move inversely to interest rate movements, therefore as interest rates rise, the prices of unquoted fixed income securities decrease and vice versa. Furthermore, unquoted fixed income securities with longer maturity and lower yield coupon rates are more susceptible to interest rate movements. Investors should note that unquoted fixed income securities are subject to interest rate fluctuations. Such investments may be subject to unanticipated rise in interest rates which may impair the ability of the issuers to make payments of interest income and principal, especially if the issuers are highly leveraged. An increase in interest rates may therefore increase the potential for default by an issuer. HONG LEONG BOND FUND 35

38 The table below summarises the sensitivity of the Fund s net asset value and profit after taxation to movements in prices of unquoted fixed income securities held by the Fund at the end of the reporting period as a result of movement in interest rate. The analysis is based on the assumptions that the interest rate changed by 1% (100 basis points) with all other variables held constant. This represents management s best estimate of a reasonable possible shift in the interest rate, having regard to the historical volatility of the interest rate. Impact on profit after taxation/net asset value % Change in interest rate +1% 1% 2017 (47,299) 47, (59,874) 60,318 The Fund s exposure to interest rate risk associated with deposits with licensed financial institutions is not material as the deposits with licensed financial institutions are placed on a short term basis. 36 HONG LEONG BOND FUND

39 (b) Credit risk Credit risk refers to the risk that an issuer or counterparty will default on its contractual obligation resulting in financial loss to the Fund. Investment in unquoted fixed income securities may involve a certain degree of credit/default risk with regards to the issuers. Generally, credit risk or default risk is the risk of loss due to the issuer s nonpayment or untimely payment of the investment amount as well as the returns on investment. This will cause a decline in value of the defaulted unquoted fixed income securities and subsequently depress the NAV of the Fund. Usually credit risk is more apparent for an investment with a longer tenure, i.e. the longer the duration, the higher the credit risk. Credit risk can be managed by performing continuous fundamental credit research and analysis to ascertain the creditworthiness of its issuer. In addition, the Manager imposes a minimum rating requirement as rated by either local and/or foreign rating agencies and manages the duration of the investment in accordance with the objective of the Fund. The credit risk arising from placements of deposits with licensed financial institutions is managed by ensuring that the Fund will only place deposits in reputable licensed financial institutions. The settlement terms of the proceeds from the creation of units receivable from the Manager are governed by the Securities Commission Malaysia s Guidelines on Unit Trust Funds. The credit/default risk is minimal as all transactions in quoted and unquoted investments are settled/paid upon delivery using approved brokers/dealers. HONG LEONG BOND FUND 37