ANNUAL REPORT. smartshares SMARTSHARES LIMITED ANNUAL REPORT

Transcription

1 ANNUAL REPORT smartshares SMARTSHARES LIMITED ANNUAL REPORT

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3 c o n T e n t s CHAIRMAN S REPORT 2 NZX 10 FUND (smarttenz) 6 NZX MIDCAP INDEX FUND (smartmidz) 7 NZX 50 PORTFOLIO INDEX FUND (smartfonz) 8 NZX MIDCAP AUSTRALIAN INDEX FUND (smartmozy) 9 SMARTSHARES ANNUAL REPORT

4 chairman s report In this slot last year I closed with: will see Smartshares hone the focus on even smarter and better ways to give New Zealanders the opportunity to secure their future with Smartshares. I am pleased to have the opportunity now to share with Smartshares investors how that honing up worked for Smartshares in. In June we introduced smartozzy to the range of Smartshares funds. smartozzy tracks the S&P/ASX 20 Index, an index covering the top 20 Australian ASX listed companies. Included in this Index, and the smartozzy Fund, are iconic Australian companies such as Woolworths, Westpac and Fosters. Invest, Save, Grow is the catchcry for Smartshares investors, both current and potential. In savings came to the fore. The launch of the Regular Savings Plan, and Smartshares appointment to manage the passive New Zealand equity sector for the New Zealand Superannuation Fund, were key events in support of saving. Smartshares investors continued to see the benefits of the Regular Savings Plan in, with many of our new investors taking advantage of this facility. In the theme for Smartshares was growth. Smartshares grew and passed milestones in Funds Under Management (FUM), in investors on register and number of funds to invest in. FUM across the five Smartshares and wholesale funds hit a record of $500 million at the end of the year. The year ending December was the first time in 18 months that net fund flows had been positive for a rolling 12-month period for the retail managed funds industry, with a net fund inflow of $4.5 million. In there was a net outflow of over $600 million. This significant shift is a very positive signal. At the end of the year we had 14,718 Smartshares investors on register, a 41% increase on the same time in. This data is evidence that New Zealand investors have developed an appetite for exchange traded funds and investment generally, which is encouraging to see. The smartmidz fund had a standout performance in. The NZX MidCap Index that the fund tracks was up 46.87%* in the year. smartfonz and smartmozy were not far behind, with the indices tracked by the two funds up 31.88%* and 30.51%* respectively. 2

5 Smartshares funds are a proven tool for for investment, savings and growth. In 2007 KiwiSaver will become a reality for New Zealanders. KiwiSaver has been put in place by the government with the aim of helping Kiwis to be smarter about their own investment and savings. Also in 2007, there will be some significant changes introduced in October to the way in which managed funds are taxed. We expect the impact for Smartshares investors to be minimal and we will keep you informed of developments in this area. I look forward to updating you this time next year on continued growth for Smartshares, and for New Zealand investors. Don Trow Chairman *Gross with imputation credits index value and exchange rate taken into account where relevant

6 IN VEST S A

7 V E G R O W

8 smarttenz NZX 10 Fund (smarttenz) Performance for the Financial Year Ended 31 December Fund Performance For the year to 31 December, the NZX 10 Fund (smarttenz) returned 3.67% before the payment of any dividends. For the full year, distributions totalled 6.85 cents per unit gross*. This equates to a gross dividend yield of 5.39% based on the market price at the end of (market price at end of : $1.27). smarttenz had 61 million units on issue with a market capitalisation of $79.1 million as at 31 December. Index Performance The NZX 10 Gross Index, which includes any dividends paid, returned 10.47% over. During the last five years the NZX 10 Gross Index has had an annualised return of 14.22% per annum. Performance of the NZX 10 Gross Index Index Value (including dividends) Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Date There was one constituent company change to the NZX 10 Index in : IN: VCT OUT: CAH Key Metrics for the Financial Year ended 31 December 31 December 31 December 31 December December December 2002 NZX 10 Capital Index 1, , , , Net assets per unit $1.297 $1.242 $1.192 $1.062 $0.879 Distribution per unit over year* 6.85 cents 7.21 cents 6.99 cents 5.36 cents 4.43 cents Number of Unitholders 3,317 3,507 3,813 4,167 4,646 Units on Issue 60,957,228 64,334,297 70,445,142 78,771,153 89,420,496 Total value of Unitholders funds $79,065,436 $79,874,964 $83,937,327 $83,687,260 $78,564,848 * Before management fees are deducted 6

9 smartmidz NZX MidCap Index Fund (smartmidz) Performance for the Financial Year ended 31 December Fund Performance For the year to 31 December, the NZX MidCap Index Fund (smartmidz) returned 38.66% before the payment of any dividends. For the full year, distributions totalled 9.48 cents per unit gross*. This equates to a gross dividend yield of 2.87% based on the market price at the end of (market price at the end of : $3.30). smartmidz had 16.5 million units on issue with a market capitalisation of $54.8 million as at 31 December. Index Performance The NZX MidCap Gross Index, which includes any dividends paid, returned 44.69% over. During the last five years the NZX MidCap Gross Index has had an annualised return of 18.85%. Performance of the NZX MidCap Gross Index Index Value (including dividends) Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Date There were a number of constituent company changes to the NZX MidCap Index in : IN: CAH, NZR, SKL, EBO, RBD OUT: CAH, WAM, TEN, RBD Key Metrics for the Financial Year ended 31 December 31 December 31 December 31 December December December 2002 NZX MidCap Capital Index 3, , , , , Net assets per unit $3.320 $2.385 $2.431 $2.086 $1.893 Distribution per unit over year* 9.48 cents cents cents cents cents Number of Unitholders 2,125 2,086 2,072 n/a n/a Units on issue 16,506,647 17,798,418 18,169,198 17,179,021 15,231,512 Total value of Unitholders funds $54,807,913 $42,455,407 $44,186,596 $35,990,048 $29,092,187 * Before management fees are deducted 7

10 smartfonz NZX 50 Portfolio Index Fund (smartfonz) Performance for the Financial Year ended 31 December Fund Performance For the year to 31 December, the NZX 50 Portfolio Fund (smartfonz) returned 28.0% before the payment of any dividends. For the full year, distributions totalled 5.89 cents per unit gross*. This equates to a gross dividend yield of 3.07% based on the market price at the end of (market price at the end of : $1.92). smartfonz had 20 million units on issue with a market capitalisation of $37.3 million as at 31 December. Index Performance The NZX 50 Portfolio Gross Index, which includes any dividends paid, returned 30.54% over. During the last five years the NZX 50 Portfolio Gross Index has had an annualised gross return of 17.71% per annum. Performance of the NZX 50 Portfolio Gross Index Index Value (including dividends) Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Date There were a number of constituent company changes to the NZX 50 Portfolio Index in : IN: NZR, SKL, EBO, RBD OUT: CAH, AXA, WAM, TEN key metrics for the financial Year ended 31 December 31 December 31 December 31 December 2004 NZSX 50 Portfolio Capital Index 1, , , Net asset value per unit $1.894 $1.515 $ Distribution per unit over year* 5.89 cents 4.57 cents n/a Number of Unitholders 2,786 2,535 2,337 Units on issue 19,713,950 19,356,940 11,941,479 Total value of Unitholders funds $37,307,360 $29,324,825 $17,599,352 * Before management fees are deducted 8

11 smartmozy NZX Australian MidCap Index Fund (smartmozy) Performance for the Financial Year ended 31 December Fund Performance For the year to 31 December, the NZX Australian MidCap Fund (smartmozy) returned 26.46% before the payment of any dividends. For the full year, distributions totalled cents per unit gross*. This equates to a gross dividend yield of 2.90% based on the market price at the end of (market price at the end of : $6.50). smartmozy had 9.3 million units on issue with a market capitalisation of NZ$61.3 million as at 31 December. Index Performance The S&P/ASX MidCap 50 Accumulation Index, which includes dividends paid, returned 28.99% over. During the last five years the S&P/ASX MidCap 50 Gross Index has had an annualised gross return of 20.44% per annum. *Returns quoted after exchange rate has been taken into account. Performance of the S&P/ASX Accumulation Index Value (NZD) Index Value (including dividends) Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Date There were a number of constituent company changes to the S&P/ASX MidCap 50 Index in : IN: AAN, ABS, AFG, BBI, CCL, CFX, DXL, GFF, JHX, PDN, SIP, WOR OUT: ALN, APN, AWB, DVC, GAN, PBG, PRK, SIPN, TEN, TOL, UTB, ZFX Key Metrics for the Financial Year ended 31 December 31 December 31 December 31 December 2004 S&P/ASX MidCap 50 Index (NZD) NZD 6, NZD 5, NZD 4, Net asset value per unit NZ$6.56 NZ$5.183 NZ$4.442 Distribution per unit over year* cents cents n/a Number of Unitholders 2,655 2,410 2,164 Units on issue 9,338,457 8,756,347 8,571,445 Total value of Unitholders funds NZ$61,338,983 NZ$45,385,992 NZ$38,075,216 * Before management fees are deducted 9

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13 c o n T e n t s FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER smarttenz 12 smartmidz 22 smartfonz 4 smartmozy 46 CORPORATE GOVERNANCE 59 SMARTSHARES ANNUAL REPORT

14 smarttenz NZX 10 Fund Financial Statements for the Year Ended 31 December STATEMENT OF FINANCIAL PERFORMANCE for the year ended 31 December Note Company dividends 4,385 4,784 Tax credit/(expense) (195) Surplus for the Period 4,521 4,589 Statement of Movements in Unitholders Funds for the year ended 31 December Note Unitholders Funds at beginning of period 79,874 83,937 Surplus for the period 4,521 4,589 Net subscriptions redeemed 7 (4,534) (7,486) Increase in value of investments 3,725 3,423 Distribution to Unitholders 3 (4,521) (4,589) Unitholders Funds at end of Period 79,065 79,874 12

15 Statement of Financial Position as at 31 December Note Assets Cash at call 2,058 2,225 Accounts receivable Investments at market value 6 79,065 79,874 Total Assets 81,179 82,227 Liabilities and Unitholders Funds Accounts payable Funds held for unit purchases Tax payable (262) 33 Distribution payable to Unitholders 3 2,179 2,186 Unitholders Funds 4 79,065 79,874 Total Liabilities and Unitholders Funds 81,179 82,227 The Board of Directors of Smartshares Limited authorised these financial statements for issue on 1 March D G Trow Chairman Smartshares Limited M R Weldon Director Smartshares Limited 13

16 FINANCIAL STATEMENTS NZX 10 fund CONTINUED STATEMENT OF CASH FLOWS for the year ended 31 December Cash Flows from Operating Activities Cash was provided from: Note Company dividends 4,385 4,711 Cash inflows from operating activities 4,385 4,711 Cash was applied to: Tax paid directly by the Fund Cash outflows from operating activities Net cash flows from operating activities 4,287 4,544 Cash Flows from Investing Activities Cash was provided from: Capital receipts - 1,644 Interest received on behalf of the Fund manager - 40 Cash inflows from investing activities - 1,684 Cash was applied to: Investment in securities - 1,643 Cash outflows from investing activities - 1,643 Net cash flows from investing activities - 41 Cash Flows from Financing Activities Cash was provided from: Savings plan & direct purchase deposits Cash inflows from financing activities Cash was applied to: Units & securities purchased Dividend reinvestment 3 1,187 1,071 Distributions directly to Unitholders 3 2,961 2,764 Management charge paid by Unitholders Cash outflows from financing activities 5,432 4,281 Net cash flows from financing activities (4,454) (4,158) Net increase in cash held (167) 427 Opening cash balance 2,225 1,798 Cash at end of period 2,058 2,225 Reconciliation of Surplus after tax with net cash flows from operating activities Surplus for the period 4,521 4,589 Movement in tax payable (295) 27 Movement in accounts receivable 72 (72) Movement in accounts payable (11) - Net cash flows from operating activities 4,287 4,544 14

17 NOTES TO THE FINANCIAL STATEMENTS NZX 10 FUND 1. Statement of accounting policies The financial statements presented are the financial statements of the NZX 10 Fund (the Fund) a Group Investment Fund established under the Trustee Companies Act 1967 and a Trust Deed dated 7 May The Manager of the Fund is an Issuer as defined in the Financial Reporting Act 1993 and these financial statements are presented in compliance with the Act. The following accounting policies, recognised as appropriate for the measurement and reporting of financial performance, cashflows and financial position, have been followed in the preparation of these financial statements. The historical cost method, as modified by the revaluation of investments, has been used. Revenue Company dividends are recognised in the Statement of Financial Performance at the date declared by the company in which the shareholding is held. Investments As prescribed by the Trust Deed, the Fund only invests in the securities included in the NZX 10 Fund in proportion to the market capitalisation of the Index and the available capital of the Fund. Investments are valued at market value according to closing prices on the New Zealand Exchange on 31 December (see Note 6). The Fund holds a portfolio of marketable securities for the long term as an investment vehicle for individual Unitholders and distributions are confined only to dividends received from the portfolio of investments. As a consequence, all changes in value of investments, both realised and unrealised, are recorded in the Statement of Movements in Unitholders Funds. Taxation Taxation is calculated using the liability method on a comprehensive basis. The Fund has a binding ruling from the Inland Revenue Department that states that any gains realised from the sale of shares, in order to match the composition and weighting of the Index or to fund redemption of units, will not be taxable to the Fund. This ruling has been renewed to 30 June The Fund is liable for tax at the prevailing company rate of 33% on dividends and interest from the companies listed in Note 6. With most of this income, the Fund is able to utilise imputation credits to satisfy the tax liability. The Fund pays tax to the extent that the imputation credits do not cover the tax liability in full. Hence all distributions to Unitholders are made on a fully imputed basis. Surplus for Distribution to Unitholders Dividend and interest income from investments is attributed to Unitholders on the basis of the number of units held at the time the income is declared. Distribution of this income is made on a fully imputed basis as at 28 February and 31 August each year. Pursuant to the Trust Deed, management charges are deducted from these distributions at the time that the payments to Unitholders are made. Concentration of Funding Funding is sourced solely from investor deposits. Investors are primarily corporate organisations and other financial institutions. 15

18 NOTES TO THE FINANCIAL STATEMENTS NZX 10 FUND CONTINUED Cash Flows Cash is considered to be cash on hand and current accounts in banks, net of bank overdrafts. Operating activities include all transactions or events that are not investing or financing activities. Investing activities are those activities that relate to the acquisition, holding and disposal of investments and securities not falling within the definition of cash. Financing activities are those activities that relate to cash contributions from, or cash distributions to, Unitholders. Changes in Accounting Policies There have been no material changes to accounting policies during the period. Comparatives Comparative figures where necessary have been restated to correspond to the current year classifications. Financial Instruments Financial instruments carried on the statement of financial position include cash, accounts receivable, investments and payables. The particular recognition methods are disclosed in the individual policy statements associated with each item. 2. Taxation Income tax expense 16 Surplus before tax 4,385 4,784 Imputation credits 1,991 2,066 Taxable Income 6,376 6,850 Taxation at 33% 2,104 2,261 Less imputation credits and FITC (2,087) (2,066) Prior period adjustment (153) - Current taxation expense (136) 195 Imputation credits Opening balance 2,026 1,678 Imputation credits received during the period 1,922 1,946 Net tax paid during the period ,008 3,791 Credits attached to distributions paid (2,028) (1,765) Credits to be attached to next distribution 1,980 2,026 DIVIDEND WITHHOLDING PAYMENT CREDITS Opening DWP balance DWP credits received during the period Credits attached to distributions paid (130) (86) Closing balance 26 86

19 3. Distribution to Unitholders Total Attributed to Unitholders Payments to the Manager Payments to Unitholders Total Attributed to Unitholders Distribution payable at beginning period 2,186-2,186 1,767 Surplus for the period 4, ,141 4,589 6, ,327 6,356 Distributed to Unitholders/Manager (4,528) (380) (4,148) (4,170) Distribution payable to Unitholders 2,179-2,179 2, Unitholders Funds As at 31 December there were 60,957,228 (Dec : 64,334,297) units on issue. The net asset backing of each unit at 31 December was $ (Dec : $1.2416). 5. Related Parties The Fund is managed by Smartshares Limited, a wholly owned subsidiary of New Zealand Exchange Limited. Smartshares Limited receives a management fee directly from the Unitholders. Under the Trust Deed the Manager pays Trustee, Custodian, Registrar and Audit charges in respect of the Fund and receives all basket application and withdrawal fees and interest earned on cash at call. At 31 December the Fund has payables to Smartshares Limited of $108,000 (Dec : $121,000). 6. Investments as at 31 December Company Number of Securities Market Value $ Auckland International Airport Limited 3,011,157 6,594,434 Contact Energy Limited 1,422,580 11,835,866 Fisher & Paykel Appliances Limited 698,752 2,683,208 Fisher & Paykel Healthcare Limited 1,260,309 5,368,916 Fletcher Building Limited 1,158,186 12,797,955 Kiwi Income Property Trust 1,756,664 2,705,263 Sky City Entertainment Group Limited 1,060,552 5,451,237 Sky Network Television Limited 960,023 6,288,151 Telecom Corporation of New Zealand Limited 4,837,725 23,511,344 Vector Limited 725,819 1,829,064 $79,065,438 The market value of securities held at 31 December was $79,874,265. The investments are registered in the name of The New Zealand Guardian Trust Company Limited, the custodian of the Fund. 17

20 NOTES TO THE FINANCIAL STATEMENTS NZX 10 FUND continued 7. Unitholder subscriptions and redemptions Subscriptions subsequent to the initial public offering can be made in the form of baskets of constituent securities of the NZX 10 Index (i.e. not for cash) and therefore have not been included in the Statement of Cash Flows. Redemptions can also be made in the form of baskets and therefore have not been included in the Statement of Cash Flows. 8. Financial Instruments Credit Risk Credit risk is the potential risk of financial loss resulting from the failure of counterparties to honour fully the terms and conditions of a contract with the Fund. Financial instruments that potentially subject the Fund to credit risk consist primarily of cash, accounts receivable and investments. The maximum credit risk of financial instruments is considered to be book value. The risk of non-recovery of monetary assets is considered minimal due to the quality of counterparties dealt with. The Fund does not require collateral or other security to support financial instruments with credit risk. Maximum exposures to credit risk at balance date are: Cash 2,058 2,225 Accounts receivable Investments 79,065 79,874 Fair Value The carrying amount of financial instruments approximates their fair value. Interest Rate Risk Interest rate risk is the risk of earnings loss arising from adverse movements in levels and volatilities of interest rates. The Fund does not have any exposure to interest rate risk. 9. New Zealand International Financial Reporting Standards In December 2002 the New Zealand Accounting Standards Review Board announced that the New Zealand equivalents to the International Financial Reporting Standards (IFRS) will apply to all New Zealand entities for the periods commencing on or after 1 January 2007 with the opportunity to early adopt by up to two years. Smartshares Limited, manager of the NZX 10 Fund, intends to adopt NZIFRS for the Fund for the period ended 31 March Smartshares Limited has reviewed the differences between existing NZ GAAP and NZIFRS as they impact on the NZX 10 Fund. No material changes have been identified other than the market value of investments being restated to the last bid price rather than the last trade price. 18

21 UNITHOLDER INFORMATION nzx 10 fund Distribution of security holders and security holdings as at 31 January 2007 No. of Holders % of Holders No. of Securities % of Securities Up to 6,999 1, % 4,841, % 7,000 to 499,999 1, % 38,824, % 500,000 to 1,499, % 2,531, % 1,500,000 to 4,999, % 5,934, % 5,000,000 and over % 8,941, % Total 3, % 61,074, % 20 Largest registered holders of quoted equity securities as at 31 January 2007 Full Name Total Percentage Sovereign Assurance Company Limited 8,941, % Metropolitan Life Assurance Company of NZ Limited 2,978, % Sovereign Superannuation Funds Limited 2,956, % Sovereign Assurance Company Limited 881, % National Nominees Limited 604, % Lancashire Limited 539, % Eeshala Nominees Limited 505, % Minnow Investments Limited 435, % HSBC Nominees (New Zealand) Limited 421, % Custodial Services Limited 404, % Ross R Stuhlmann & Graham & Stevens & Stewart Co Trust Services Limited 341, % Dennis & Joan Row & SW Trust Services Limited 265, % Citibank Nominees New Zealand Limited 229, % Thomas & Annette Schnackenberg 224, % Maori Investments Limited 185, % Diana Renker 170, % Bruce Moncur Stewart 161, % NZ Guardian Trust Company Limited 157, % FNZ Custodians Limited 148, % Julian Charles Stanley Smith & Trevor Donald Scott & John Murray Fox 142, % 20,698,073 34% 19

22 UNITHOLDER INFORMATON NZX 10 FUND continued Substantial Security Holders As at 31 January 2007, the Fund has not received any notices from Substantial Security Holders pursuant to section 26 of the Securities Amendment Act Directors Interests in units as at 31 December Beneficial Non-Beneficial Donald Trow - 30,840 Mark Weldon - - Geoffrey Brown 5,224 - Waivers Granted New Zealand Exchange Limited has granted, either fully, partially or subject to conditions, the following waivers from the Listing Rules that were applicable at 31 December : Listing Rules: 1.9.1, 3.1.1(a), 3.1.1(b), 3.1.3, 3.3.1(c) to 3.3.1C, to , 3.4, 3.5, 3.6, Section 4, 7.1.7, , 7.3, 7.5, 7.61 to 7.6.3, , to 8.2.3, 8.3.1, 9.1.1(b), 9.2.1, , (b),10.5.2, (a), , , and Appendix DISTRIBUTION REINVESTMENT PLAN Each Smartshares Fund receives dividends from the Constituent Companies in which it invests. These dividends and other distributions are pooled in your Unitholder distribution account and are automatically reinvested (after the deduction of management fees) as additional units twice a year unless you choose to have these paid out to you by direct credit. Notice of election for the Distribution Reinvestment Plan (forms are available from Smartshares Limited) received by the Registrar 10 Business Days or more prior to a semi-annual distribution date will be effective at that distribution. Once you have elected to reinvest your distributions, reinvestment will continue until you advise the Registrar otherwise. 20

23 Auditors Report To the Unitholders of NZX 10 Fund PricewaterhouseCoopers The Terrace PO Box 243 Wellington, New Zealand Telephone Facsimile We have audited the financial statements on pages 12 to 18. The financial statements provide information about the past financial performance and cash flows of NZX 10 Fund ( the Fund ) for the year ended 31 December and its financial position as at that date. This information is stated in accordance with the accounting policies set out on pages 15 and 16. Manager s Responsibilities The Funds Manager is responsible for the preparation and presentation of the financial statements which give a true and fair view of the financial position of the Fund as at 31 December and its financial performance and cash flows for the year ended on that date. Auditors Responsibilities We are responsible for expressing an independent opinion on the financial statements presented by the Manager and reporting our opinion to you. Basis of Opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: (a) (b) the significant estimates and judgements made by the Manager in the preparation of the financial statements; and whether the accounting policies are appropriate to the circumstances of the Fund, consistently applied and adequately disclosed. We conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We have no relationship with or interests in the Fund other than in our capacity as auditors. Unqualified Opinion We have obtained all the information and explanations we have required. In our opinion: (a) proper accounting records have been kept by the Fund as far as appears from our examination of those records; and (b) the financial statements on pages 12 to 18: (i) (ii) (iii) comply with generally accepted accounting practice in New Zealand; and are in accordance with the trust deed dated 7 May 1996; and give a true and fair view of the financial position of the Fund as at 31 December and its financial performance and cash flows for the year ended on that date. Our audit was completed on 15 March 2007 and our unqualified opinion is expressed as at that date. Chartered Accountants Wellington

24 smartmidz NZX MidCap Index Fund Financial Statements for the Year Ended 31 December STATEMENT OF FINANCIAL PERFORMANCE for the year ended 31 December Note Company dividends 2,009 1,789 Tax credit/(expense) 2 31 (118) Surplus for the Period 2,040 1,671 Statement of Movements in Unitholders Funds for the year ended 31 December Note Unitholders Funds at beginning of period 42,455 44,186 Surplus for the period 2,040 1,671 Net subscriptions redeemed 7 (3,198 (931) Increase/(decrease) in value of investments 15,551 (800) Distribution to Unitholders 3 (2,040) (1,671) Unitholders Funds at end of Period 54,808 42,455 22

25 Statement of Financial Position as at 31 December Assets Note Cash at call Accounts receivable 15 4 Tax receivable Investments at market value 6 54,808 42,455 Total Assets 55,778 43,399 Liabilities and Unitholders Funds Accounts payable Funds held for unit purchases Distribution payable to Unitholders Unitholders Funds 4 54,808 42,455 Total Liabilities and Unitholders Funds 55,778 43,399 The Board of Directors of Smartshares Limited and the Board of Directors of Trustees Executors Limited authorised these financial statements for issue on 1 March D G Trow M R Weldon D Gupta P R S Hocking Chairman Director Director Director Smartshares Ltd Smartshares Ltd Trustees Executors Ltd Trusteees Executors Ltd 23

26 FINANCIAL STATEMENTS nzx midcap INDEX FUND CONTINUED STATEMENT OF cash flows for the year ended 31 December Cash Flows from Operating Activities Cash was provided from: Note Company dividends 2,009 1,789 Reinvestment funds - - Cash inflows from operating activities 2,009 1,789 Cash was applied to: Payments to creditors - - Tax paid directly by the Fund Cash outflows from operating activities Net cash flows from operating activities 1,589 1,661 Cash Flows from Investing activities Cash was provided from: Capital receipts - 1,871 Reimbursement of expenses paid on behalf of Fund manager 41 - Cash inflows from investing activities 41 1,871 Cash was applied to: Investment in securities - 1,586 Capital distribution to Unitholders Accounts paid on behalf of Fund manager - 34 Cash outflows from investing activities 285 1,620 Net cash flows from investing activities (244) 251 Cash Flows from Financing Activities Cash was provided from: Savings plan deposits Cash inflows from financing activities Cash was applied to: Units & securities purchased Dividend reinvestment Distributions directly to Unitholders Management charge paid by Unitholders Cash outflows from financing activities 2,717 1,492 Net cash flows from financing activities (1,770) (1,368) Net (decrease)/increase in cash held (425) 544 Opening cash balance Cash at end of period

27 NOTES TO THE FINANCIAL STATEMENTS nzx midcap INDEX FUND STATEMENT OF cash flows for the year ended 31 December CONTINUED Note Reconciliation of Surplus after tax with net cash flows from operating activities Surplus for the period 2,040 1,671 Movement in tax receivable (440) (10) Movement in accounts receivable (11) - Net cash flows from operating activities 1,589 1, Statement of accounting policies The financial statements presented are the financial statements of the NZX MidCap Index Fund (the Fund), a Group Investment Fund established under the Trustee Companies Act 1967 and a Trust Deed dated 15 April The Manager of the Fund is an Issuer as defined in the Financial Reporting Act 1993 and these financial statements are presented in compliance with the Act. The following accounting policies, recognised as appropriate for the measurement and reporting of financial performance, cashflows and financial position, have been followed in the preparation of these financial statements. The historical cost method, as modified by the revaluation of investments, has been used. Revenue Company dividends are recognised in the Statement of Financial Performance at the date declared by the company in which the shareholding is held. Investments As prescribed by the Trust Deed, the Fund only invests in the securities included in the NZX MidCap Index in proportion to the market capitalisation of the Index and the available capital of the Fund. Investments are valued at market value according to closing prices on the New Zealand Exchange on 31 December (see Note 6). The Fund holds a portfolio of marketable securities for the long term as an investment vehicle for individual Unitholders and distributions are confined only to dividends received from the portfolio of investments. As a consequence, all changes in value of investments, both realised and unrealised, are recorded in the Statement of Movements in Unitholders Funds. Taxation Taxation is calculated using the liability method on a comprehensive basis. The Fund has a binding ruling from the Inland Revenue Department that states that any gains realised from the sale of shares, in order to match the composition and weighting of the Index or to fund a redemption of units, will not be taxable to the Fund. This ruling has been renewed to 10 August

28 NOTES TO THE FINANCIAL STATEMENTS nzx midcap INDEX FUND continued The Fund is liable for tax at the prevailing company rate of 33% on dividends and interest from the companies listed in Note 6. With most of this income, the Fund is able to utilise imputation credits to satisfy the tax liability. The Fund pays tax to the extent that the imputation credits do not cover the tax liability in full. Hence all distributions to Unitholders are made on a fully imputed basis. Surplus for Distribution to Unitholders Dividend and interest income from investments is attributed to Unitholders on the basis of the number of units held at the time the income is declared. Distribution of this income is made on a fully imputed basis as at 31 May and 30 November each year. Pursuant to the Trust Deed, management charges are deducted from these distributions at the time that the payments to Unitholders are made. Concentration of Funding Funding is sourced solely from investor deposits. Investors are primarily corporate organisations and other financial institutions. Cash Flows Cash is considered to be cash on hand and current accounts in banks, net of bank overdrafts. Operating activities include all transactions or events that are not investing or financing activities. Investing activities are those activities that relate to the acquisition, holding and disposal of investments and securities not falling within the definition of cash. Financing activities are those activities that relate to cash contributions from, or cash distributions to, Unitholders. Changes in Accounting Policies There have been no material changes to accounting policies during the period. Comparatives Comparative figures where necessary have been restated to correspond to the current year classifications. Financial Instruments Financial instruments carried on the statement of financial position include cash, accounts receivable, investments and payables. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. 26

29 2. Taxation Income tax expense Surplus before tax 2,009 1,789 Imputation credits Taxable Income 2,646 2,493 Taxation at 33% Less Imputation credits and FITC (822) (704) Prior period adjustment (83) - Current taxation (credit)/expense (31) 118 Imputation credits Imputation credits received during the period Tax paid during the period Prior period adjustment 35 - Imputation credits brought forward (53) (37) Credits attached to distributions paid (753) 848 Credits to be attached to next distribution (107) (53) 3. Distribution to Unitholders Total attributed to Unitholders Payments to the Manager Payments to Unitholders Total attributed to Unitholders Distribution payable at beginning of period Surplus for the period 2, ,697 1,671 2, ,381 2,061 Distributed to Unitholders/Manager (1,821) (343) (1,478) (1,377) Distribution payable to Unitholders Unitholders Funds As at 31 December there were 16,506,647 (Dec : 17,798,418) units on issue. The net asset backing of each unit at 31 December was $ (Dec : $2.3854). 5. Related Parties The Fund is managed by Smartshares Limited, a wholly owned subsidiary of New Zealand Exchange Limited. Smartshares Limited receives a management fee directly from the Unitholders. Under the Trust Deed the Manager pays Trustee, Custodian, Registrar and Audit 27

30 NOTES TO THE FINANCIAL STATEMENTS nzx midcap INDEX FUND continued charges in respect of the Fund and receives all basket application and withdrawal fees and interest earned on cash at call. At 31 December the Fund has payables to Smartshares Limited of $nil (Dec : $42,000). 6. Investments as at 31 December Company Number of Securities Market Value $ Air New Zealand Limited 973,638 1,840,176 AMP NZ Office Trust 1,542,641 2,005,433 Cavalier Corporation Limited 187, ,363 Calan Healthcare Properties Trust 470, ,596 Ebos Group Limited 129, ,402 Freightways Limited 636,543 2,896,271 Hellaby Holdings Limited 136, ,987 Hallenstein Glasson Holdings Limited 235,297 1,242,368 Infratil Limited 1,076,113 5,864,816 ING Property Trust 1,815,243 2,359,816 Mainfreight Limited 389,493 3,115,944 Macquarie Goodman Property Trust 2,224,679 3,203,538 Michael Hill International Limited 76, ,643 Nuplex Industries Limited 388,905 2,877,897 New Zealand Oil and Gas Limited 1,161,056 1,068,172 New Zealand Refining Company Limited 159,780 1,038,570 Property For Industry Limited 1,029,650 1,492,993 PGG Wrightson Limited 666,736 1,093,447 Port of Tauranga Limited 298,928 1,778,622 Pumpkin Patch Limited 610,518 2,838,909 Restaurant Brands 291, ,004 Rubicon Limited 884, ,641 Ryman Healthcare Limited 495,900 5,330,925 Sanford Limited 285,809 1,486,207 Skellerup Holdings Limited 356, ,789 Steel & Tube Holdings Limited 213,974 1,037,774 Tourism Holdings Limited 414, ,710 TrustPower Limited 194,926 1,530,169 Tower Limited 835,531 1,846,524 Warehouse Group Limited 432,668 3,115,210 $54,807,916 The market value of securities held at 31 December was $42,455,407.The investments are registered in the name of Custodial Services Limited, the custodian of the Fund. 28

31 7. Unitholder subscriptions and redemptions Subscriptions subsequent to the initial public offering can be made in the form of baskets of constituent securities of the NZX MidCap Index (i.e. not for cash) and therefore have not been included in the Statement of Cash Flows. Redemptions can also be made in the form of baskets and therefore have not been included in the Statement of Cash Flows. 8. Financial Instruments Credit Risk Credit risk is the potential risk of financial loss resulting from the failure of counterparties to honour fully the terms and conditions of a contract with the Fund. Financial instruments that potentially subject the Fund to credit risk consist primarily of cash, accounts receivable and investments. The maximum credit risk of financial instruments is considered to be book value. The risk of non-recovery of monetary assets is considered minimal due to the quality of counterparties dealt with. The Fund does not require collateral or other security to support financial instruments with credit risk. Maximum exposures to credit risk at balance date are: Cash Accounts receivable 15 4 Investments 54,808 42,455 Fair Value The carrying amount of financial instruments approximates their fair value. Interest Rate Risk Interest rate risk is the risk of earnings loss arising from adverse movements in levels and volatilities of interest rates. The Fund does not have any exposure to interest rate risk. 9. New Zealand International Financial Reporting Standards In December 2002 the New Zealand Accounting Standards Review Board announced that the New Zealand equivalents to the International Financial Reporting Standards (IFRS) will apply to all New Zealand entities for the periods commencing on or after 1 January 2007 with the opportunity to early adopt by up to two years. Smartshares Limited, manager of the NZX MidCap Index Fund intends to adopt NZIFRS for the Fund for the period ended 31 March Smartshares Limited has reviewed the differences between existing NZ GAAP and NZIFRS as they impact on the NZX MidCap Index Fund. No material changes have been identified other than the market value of investments being restated to the last bid price rather than the last trade price. 29

32 UNITHOLDER INFORMATION nzx midcap INDEX FUND Distribution of security holders and security holdings as at 31 January 2007 No. of Holders % of Holders No. of Securities % of Securities Up to 1, % 355, % 2,000 to 399,999 1, % 16,200, % 400,000 to 2,499, ,500,000 and over Total 2, % 16,555, % 20 Largest registered holders of quoted equity securities as at 31 January 2007 Full Name Total Percentage Custodial Services Limited 365, % HSBC Nominees (New Zealand) Limited 319, % Custodial Services Limited 263, % New Zealand Law Foundation 214, % FNZ Custodians Limited 207, % Custodial Services Limited 167, % Dennis G & Joan D Row & SW Trust Services Limited 119, % NZ Guardian Trust Company Limited 112, % Maori Investments Limited 65, % NZ Guardian Trust Company Limited 63, % Martin Johnson 63, % Daisy J Burrell 59, % Gavin D Horne & Brett R Highsted 56, % Kerry W Petersen & Beverly Peterson 56, % Kathryn M Kelly & David A Smith 56, % David A Smith & Graeme A Small 56, % Citibank Nominees New Zealand Limited 53, % Joan Cann & Jeremy J Rickman 52, % Geoffrey W Smith 52, % Mosca Holdings Limited 48, % 2,455, % 30

33 Substantial Security Holders As at 31 January 2007, the Fund has not received any notices from Substantial Security Holders pursuant to section 26 of the Securities Amendment Act Directors Interests in units as at 31 December Beneficial Non-Beneficial Donald Trow - 5,042 Mark Weldon - - Geoffrey Brown - - Waivers Granted New Zealand Exchange Limited has granted, either fully, partially or subject to conditions, the following waivers from the Listing Rules that were applicable at 31 December : Listing Rules: 1.9.1, 3.1.1(a), 3.1.1(b), 3.1.3, 3.3.1, to , 3.4, 3.5, Section 4, , 7.3, 7.5, to 7.6.3, , to 8.2.3, 8.3.1, 9.1.1(b), 9.2.1, , (b),10.5.2, (a), , (a), and Appendix DISTRIBUTION REINVESTMENT PLAN Each Smartshares Fund receives dividends from the Constituent Companies in which it invests. These dividends and other distributions are pooled in your Unitholder distribution account and are automatically reinvested (after the deduction of management fees) as additional units twice a year unless you choose to have these paid out to you by direct credit. Notice of election for the Distribution Reinvestment Plan (forms are available from Smartshares Limited) received by the Registrar 10 Business Days or more prior to a semi-annual distribution date will be effective at that distribution. Once you have elected to reinvest your distributions, reinvestment will continue until you advise the Registrar otherwise. 31

34 Auditors Report To the Unitholders of NZX MidCap Index Fund PricewaterhouseCoopers The Terrace PO Box 243 Wellington, New Zealand Telephone Facsimile We have audited the financial statements on pages 22 to 29. The financial statements provide information about the past financial performance and cash flows of NZX MidCap Index Fund ( the Fund ) for the period ended 31 December and its financial position as at that date. This information is stated in accordance with the accounting policies set out on pages 25 and 26. Manager s Responsibilities The Funds Manager and Trustee is responsible for the preparation and presentation of the financial statements which give a true and fair view of the financial position of the Fund as at 31 December and its financial performance and cash flows for the year ended on that date. Auditors Responsibilities We are responsible for expressing an independent opinion on the financial statements presented by the Manager and Trustee and reporting our opinion to you. Basis of Opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: (a) (b) the significant estimates and judgements made by the Manager in the preparation of the financial statements; and whether the accounting policies are appropriate to the circumstances of the Fund, consistently applied and adequately disclosed. We conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We have no relationship with or interests in the Fund other than in our capacity as auditors. Unqualified Opinion We have obtained all the information and explanations we have required. In our opinion: (a) proper accounting records have been kept by the Fund as far as appears from our examination of those records; and (b) the financial statements on pages 22 to 29: (i) (ii) (iii) comply with generally accepted accounting practice in New Zealand; and are in accordance with the trust deed dated 15 April 1997; and give a true and fair view of the financial position of the Fund as at 31 December and its financial performance and cash flows for the year ended on that date. Our audit was completed on 15 March 2007 and our unqualified opinion is expressed as at that date. Chartered Accountants Wellington

35

36 smartfonz NZX 50 Portfolio Index Fund Financial Statements for the Year Ended 31 December STATEMENT OF FINANCIAL PERFORMANCE for the year ended 31 December Note Company dividends 1,515 1,129 Other income Tax expense 2 (165) (132) Surplus for the Period 1, statement of movements in unitholders funds for the year ended 31 December Note Unitholders Funds at beginning of period 29,325 17,600 Surplus for the period 1, Net subscriptions received ,626 Increase in value of investments 7,906 1,099 Distribution to Unitholders 3 (1,460) (997) Unitholders Funds at end of Period 37,307 29,325 34

37 Statement of Financial Position as at 31 December Note Assets Cash at call 1, Accounts receivable - 5 Investments at market value 6 37,307 29,325 Total Assets 38,569 30,319 Liabilities and Unitholders Funds Accounts payable Funds held for unit purchases Tax payable Distribution payable to Unitholders Unitholders Funds 4 37,307 29,325 Total Liabilities and Unitholders Funds 38,569 30,319 The Board of Directors of Smartshares Limited authorised these financial statements for issue on 1 March D G Trow Chairman Smartshares Limited M R Weldon Director Smartshares Limited 35

38 FINANCIAL STATEMENTS nzx 50 portfolio index fund CONTINUED Statement of CasH Flows for the year ended 31 December Cash Flows from Operating Activities Cash was provided from: Note Company dividends 1,515 1,124 Other income Cash inflows from operating activities 1,625 1,124 Cash was applied to: Tax paid directly by the Fund Cash outflows from operating activities Net cash flows from operating activities 1,441 1,124 Cash Flows from Investing Activities Cash was provided from: Capital receipts Cash inflows from investing activiteis Cash was applied to: Investment in securities Cash outflows from investing activities Net cash flows from investing activities - 45 Cash Flows from Financing Activities Cash was provided from: Savings plan & direct purchase deposits 4,445 5,670 Cash inflows from financing activities 4,445 5,670 Cash was applied to: Units & securities purchased 4,408 5,425 Dividend reinvestment Distributions directly to Unitholders Management charge paid by Unitholders Cash outflows from financing activities 5,613 5,948 Net cash flows from financing activities (1,168) (278) Net increase in cash held Opening cash balance Cash at end of period 1, Reconciliation of Surplus after tax with net cash flows from operating activities Surplus for the period 1, Movement in tax payable (24) 132 Movement in accounts receivable 5 (5) Net cash flows from operating activities 1,441 1,124 36

39 NOTES TO THE FINANCIAL STATEMENTS nzx 50 portfolio index fund 1. Statement of accounting policies The financial statements presented are the financial statements of the NZX 50 Portfolio Index Fund (the Fund); a Group Investment Fund established under the Trustee Companies Act 1967 and a Trust Deed dated 15 October The Manager of the Fund is an Issuer as defined in the Financial Reporting Act 1993 and these financial statements are presented in compliance with the Act. The following accounting policies, recognised as appropriate for the measurement and reporting of financial performance, cashflows and financial position, have been followed in the preparation of these financial statements. The historical cost method, as modified by the revaluation of investments, has been used. Revenue Company dividends are recognised in the Statement of Financial Performance at the date declared by the company in which the shareholding is held. Investments As prescribed by the Trust Deed, the Fund only invests in the securities included in the NZX 50 Portfolio Index in proportion to the market capitalisation of the Index and the available capital of the Fund. Investments are valued at market value according to closing prices on the New Zealand Exchange on 31 December (see Note 6). The Fund holds a portfolio of marketable securities for the long term as an investment vehicle for individual Unitholders and distributions are confined only to dividends received from the portfolio of investments. As a consequence, all changes in value of investments, both realised and unrealised, are recorded in the Statement of Movements in Unitholders Funds. Taxation Taxation is calculated using the liability method on a comprehensive basis. The Fund has a binding ruling from the Inland Revenue Department that states that any gains realised from the sale of shares, in order to match the composition and weighting of the Index or to fund redemption of units, will not be taxable to the Fund. This ruling has been renewed to 30 June The Fund is liable for tax at the prevailing company rate of 33% on dividends and interest from the companies listed in Note 6. With most of this income, the Fund is able to utilise imputation credits to satisfy the tax liability. The Fund pays tax to the extent that the imputation credits do not cover the tax liability in full. Hence all distributions to Unitholders are made on a fully imputed basis. Surplus for Distribution to Unitholders Dividend and interest income from investments is attributed to Unitholders on the basis of the number of units held at the time the income is declared. Distribution of this income is made on a fully imputed basis as at 28 February and 31 August each year. Pursuant to the Trust Deed, management charges are deducted from these distributions at the time that the payments to Unitholders are made. 37