CIMB-PRINCIPAL US MORTGAGE FUND UNAUDITED QUARTERLY REPORT FOR THE QUARTER AND FINANCIAL PERIOD ENDED 30 APRIL 2018

Transcription

1 UNAUDITED QUARTERLY REPORT FOR THE QUARTER AND FINANCIAL PERIOD ENDED 30 APRIL 2018

2 CONTENTS PAGE(S) INVESTORS' LETTER 1 MANAGER'S REPORT 2-10 Fund Objective and Policy Performance Data Market Review Fund Performance Portfolio Structure Market Outlook Investment Strategy Unit Holdings Statistics Soft Commissions and Rebates UNAUDITED STATEMENT OF COMPREHENSIVE INCOME 11 UNAUDITED STATEMENT OF FINANCIAL POSITION UNAUDITED STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS 14 UNAUDITED STATEMENT OF CASH FLOWS 15 NOTES TO THE FINANCIAL STATEMENTS DIRECTORY 34

3 INVESTORS' LETTER Dear Valued Investor, Thank you for your continued support and for the confidence that you have placed in us. We are pleased to share that CIMB-Principal Asset Management Berhad ("CIMB-Principal") Malaysia concluded the 1 st Quarter of 2018 with RM52.06 billion in Asset under Management ( AUM ). Our AUM for Private Retirement Schemes ("PRS") business increased by 33% year-on-year ( y-o-y ) to RM541 million as at 31 March We continue to achieve prestigious recognitions from The Edge Thomson Reuters Lipper Fund Awards as follows: The Edge Thomson Reuters Lipper Malaysia Fund Awards 2018 Best Fund Over 5 Years, Equity Global - Malaysia : CIMB-Principal Global Titans Fund Best Fund Over 5 Years, Equity Asia Pacific ex Japan - Malaysia : CIMB-Principal Asian Equity Fund Best Fund Over 5 Years, Equity Asia Pacific ex Japan - Malaysia : CIMB Islamic Asia Pacific Equity Fund Best Fund Over 5 Years, Equity Malaysia Diversified - Malaysia : CIMB-Principal Equity Growth & Income Fund Best Fund Over 5 Years, Mixed Asset MYR Bal - Malaysia : CIMB-Principal Income Plus Balanced Fund Best Fund Over 3 Years, Equity Global - Malaysia : CIMB-Principal Global Titans Fund Thomson Reuters Lipper Fund Award Global Islamic 2017 Best Equity Asia Pacific Ex-Japan (Islamic), Best Fund over 5 years : CIMB Islamic Asia Pacific Equity Fund These prestigious awards are a celebration of the trust that you have placed in us and testament to our capability in bringing potential value to your financial goals and needs. CIMB-Principal was also awarded Fund House of the Year in Malaysia by AsianInvestor for the Asset Management Awards 2017, its second consecutive win and The Employees' Provident Fund ("EPF") External Portfolio Managers Awards 2017 for the Best Global Bond Portfolio Manager. These industry recognitions reflect our success in scaling up our investment capabilities while building a solid track record and earning the trust of our clients over time. Thank you. Yours faithfully, for CIMB-Principal Asset Management Berhad Munirah Khairuddin Chief Executive Officer 1

4 MANAGER S REPORT FUND OBJECTIVE AND POLICY What is the investment objective of the Fund? The Fund aims to maximize total return through investments in one collective investment scheme, which invests primarily in mortgage related securities in the US. Has the Fund achieved its objective? For the financial period under review, the Fund has performed in line with its objective as stated under the Fund Performance section. What are the Fund investment policy and principal investment strategy? The Fund is a feeder fund and it invests in a single collective investment scheme, i.e. BNP Paribas Flexi I US Mortgage Fund. The Fund may also invest in Liquid Asset for liquidity purpose. In order to achieve its investment objective, the Fund will invest at least 95% of its Net Asset Value ( NAV ) in the BNP Paribas Flexi I US Mortgage Fund ( Target Fund ); an Undertaking for Collective Investment in Transferable Securities ( UCITS ) domiciled in Luxembourg and established on 25 September The Fund will also maintain up to 5% of its NAV in Liquid Assets for liquidity purposes. Information on the Target Fund: Company : BNP Paribas Flexi I, an open-ended investment company with variable capital (société d'investissement à capital variable) incorporated on 4 July 2006 under the name FORTIS SOLUTIONS for an indefinite period in accordance with the provisions of Part I of the Luxembourg law of 20 December 2002 governing undertakings for collective investment. It was renamed BNP Paribas Flexi I on 13 September Investment Manager : Fischer Francis Trees & Watts Inc Management Company : BNP Paribas Investment Partners Luxembourg Regulatory authority : Commission de Surveillance du Secteur Financier (Luxemberg Financial Sector Supervicory Authority) Base Currency US Dollar ( USD ) Fund category/type Feeder Fund/Income & Growth How long should you invest for? Recommended three (3) years or more Indication of short-term risk (low, moderate, high) Moderate 2

5 FUND OBJECTIVE AND POLICY (CONTINUED) When was the Fund launched? Class USD 8 March 2017 Class MYR-Hedged ( MYR-H ) 8 March 2017 Class AUD-Hedged ( AUD-H ) 8 March 2017 Class SGD-Hedged ( SGD-H ) 8 March 2017 What was the size of the Fund as at 30 April 2018? USD22.67 million (43.52 million units) What is the Fund s benchmark? The Fund adheres to the benchmark of the Target Fund for performance comparison. The benchmark of the Target Fund is Barclays Mortgage-Backed Securities ( MBS ) Index for performance measurement. What is the Fund distribution policy? Quarterly, depending on the availability of realised income and/or realised gains and at the Manager s discretion. What was the net income distribution for the financial period from 1 February 2018 to 30 April 2018? There was no distribution made for the financial period from 1 February 2018 to 30 April PERFORMANCE DATA Details of portfolio composition of the Fund for the unaudited financial period are as follows: % Collective investment scheme Cash and other net assets (4.44)

6 PERFORMANCE DATA (CONTINUED) Performance details of the Fund for the unaudited financial period are as follows: NAV (USD Million) - Class AUD-H Class MYR-H Class SGD-H Class USD 1.87 Units in circulation (Million) - Class AUD-H Class MYR-H Class SGD-H Class USD 1.90 NAV per unit (USD) - Class AUD-H Class MYR-H Class SGD-H Class USD to Highest NAV per unit (USD) - Class AUD-H Class MYR-H Class SGD-H Class USD Lowest NAV per unit (USD) - Class AUD-H Class MYR-H Class SGD-H Class USD Total return (%) - Class AUD-H (7.85) - Class MYR-H (1.50) - Class SGD-H (2.34) - Class USD (1.01) Capital growth (%) - Class AUD-H (7.85) - Class MYR-H (1.50) - Class SGD-H (2.34) - Class USD (1.01) Income distribution (%) - Class AUD-H - - Class MYR-H - - Class SGD-H - - Class USD - Management Expense Ratio ("MER") (%) 0.28 Portfolio Turnover Ratio ("PTR") (times) # 1.02 # For the financial period under review, the Fund s PTR for the Fund stood at 1.02 times. 4

7 PERFORMANCE DATA Since inception to % Annual total return - Class AUD-H (0.83) Class MYR-H Class SGD-H Class USD (1.81) 0.78 (Launch date: 8 March 2017) Past performance is not necessarily indicative of future performance and that unit prices and investment returns may go down, as well as up. All performance figures for the financial period have been extracted from Lipper. MARKET REVIEW (1 FEBRUARY 2018 TO 30 APRIL 2018) For the financial period under review, the Barclays MBS Index lost 0.52% in USD terms. In February 2018, US interest rates moved higher as Congress passed a 2018 budget deal which raised the debt ceiling and included USD300 billion in additional spending over 2 years. The minutes of the Federal Open Market Committee's ( FOMC ) January 2018 meeting reflected the Federal Reserve s (the Fed ) thinking that US inflation was on track to reach their targets. The US Fed had been encouraged on the inflation front by stronger economic growth, strength in labor markets and a weaker USD. The US 10-year yields were up 15 basis points ( bps ) on the month to 2.87%. The US Treasury ( UST ) 10-year yields then moved lower in March 2018, driven by increasing equity market volatility and concerns over Trump administration tariffs and trade policy. The 10-year UST yields traded down 13 bps on the month to 2.74%. The yield traded as high as 2.91% following the March meeting of the FOMC where they raised the Fed Funds target rate by 25 bps before UST rallied near month end. 2-year UST yields were higher by 2 bps in March 2018 and the between 10-year and 2-year yield curve flattened by 15 bps. Fixed income risk assets were under pressure during the month. In April 2018, the 10-year UST yields moved higher by 21 bps, moving above 3.00% for the first time since The US 10-year Treasury yields finished the month at 2.95% and the yield curve moved a little flatter with the spread between 2-year and 10-year yields moving from 47 bps to 46 bps. The Standard & Poor s ( S&P ) 500 finished the month marginally positive, following a weaker-thananticipated jobs report early in the month and generally friendlier news on trade wars and tariffs later in the month. Fixed income risk assets performed well during the month. 5

8 FUND PERFORMANCE 3 months to months to Class AUD-H Class MYR-H Class SGD-H Class USD Class AUD-H Class MYR-H Class SGD-H Class USD % % % % % % % % Income Capital (7.85) (1.50) (2.34) (1.01) (3.91) (2.28) Total Return (7.85) (1.50) (2.34) (1.01) (3.91) (2.28) Benchmark (0.52) (0.52) (0.52) (0.52) (1.51) (1.51) (1.51) (1.51) Average Total Return N/A N/A N/A N/A N/A N/A N/A N/A Since inception to Class AUD-H Class MYR-H Class SGD-H Class USD % % % % Income Capital (1.32) (1.52) Total Return (1.32) (1.52) Benchmark Average Total Return N/A N/A N/A N/A For the financial period under review, Class AUD-H, Class MYR-H, Class SGD-H and Class USD lost 7.85%, 1.50%, 2.34% and 1.01% respectively. Meanwhile, the benchmark declined 0.52% over the same period. CLASS AUD-H 6

9 FUND PERFORMANCE (CONTINUED) CLASS MYR-H CLASS SGD-H 7

10 FUND PERFORMANCE (CONTINUED) CLASS USD Changes in NAV CLASS AUD-H Changes % NAV (USD Million) (35.83) NAV/Unit (USD) (8.61) CLASS MYR-H Changes % NAV (USD Million) (24.48) NAV/Unit (USD) (6.32) CLASS SGD-H Changes % NAV (USD Million) (29.51) NAV/Unit (USD) (3.86) 8

11 FUND PERFORMANCE (CONTINUED) Changes in NAV (continued) CLASS USD Changes % NAV (USD Million) (67.92) NAV/Unit (USD) (2.29) For the 6-month period, the Fund s NAV for Class AUD-H, Class MYR-H, Class SGD-H and Class USD fell 35.83%, 24.48%, 29.51% and 67.92% respectively. The Fund s NAV/unit for Class AUD-H, Class MYR-H, Class SGD-H and Class USD also fell by 8.61%, 6.32%, 3.86% and 2.29% respectively. The lower NAV was mainly due to redemptions while the decrease in NAV/unit was due to negative investment performance as partly described in the Market Review section. At the time of reporting, Class SGD-H has the largest total NAV at USD11.30million. The total size for the Fund inclusive of all asset classes stood at USD22.66million. Performance data represents the combined income and capital return as a result of holding units in the Fund for the specified length of time, based on NAV to NAV price. The performance data assumes that all earnings from the Fund are reinvested and are net of management and trustee fees. Past performance is not reflective of future performance and income distributions are not guaranteed. Unit prices and income distributions, if any, may fall and rise. All performance figures for the financial period have been extracted from Lipper. PORTFOLIO STRUCTURE Asset allocation (% of NAV) Collective investment scheme Cash and other net assets (4.44) 1.48 TOTAL The Fund was fully invested during the financial period under review. The negative cash was due to distribution and amount due to broker. MARKET OUTLOOK* The FOMC left the Fed Funds rate unchanged at its 2 May 2018 meeting, but remains on track for a rate hike in June The Fed cited a strengthening labor market and economic activity that has been rising at a moderate rate. The Fed also mentioned that inflation has moved closer to its 2% target. Markets expect the Fed to continue to raise rates gradually with a rate hike in June 2018 and two additional rate hikes later this year. While acknowledging the rise in inflation, there is no sense that the Fed would accelerate the pace of rate hikes. Despite the sharp rise in interest rates in April 2018, the mortgage sector produced a positive 18 bps excess return. Higher mortgage origination rates have led to less refinancing activity and supply. Mortgages continued to outperform credit with the absolute return for the MBS sector in April 2018 at -50 bps versus -93 bps for US investment grade. The year-to-date ( YTD ) excess returns for the MBS and investment grade sectors are -21 bps and -74 bps, respectively. We continue to believe the best days of the corporate credit cycle are behind us, not in front of us. We see growing interest in MBS as fixed income managers look to upgrade the quality and liquidity of bond portfolios. * This market outlook does not constitute an offer, invitation, commitment, advice or recommendation to make a purchase of any investment. The information given in this article represents the views of CIMB-Principal or based on data obtained from sources believed to be reliable by CIMB-Principal. Whilst every care has been taken in preparing this, CIMB-Principal makes no guarantee, representation or warranty and is under no circumstances liable for any loss or damage caused by reliance on, any opinion, advice or statement made in this market outlook. 9

12 INVESTMENT STRATEGY The Fund will continue to remain fully invested in the Target Fund with minimal cash kept for liquidity purposes. UNIT HOLDINGS STATISTICS Breakdown of unit holdings by size as at 30 April 2018 are as follows: CLASS AUD-H Size of unit holdings (units) No. of unit holders No. of units held % of units held (million) 5,000 and below ,001-10, ,001-50, , , ,001 and above Total CLASS MYR-H Size of unit holdings (units) No. of unit holders No. of units held % of units held (million) 5,000 and below ,001-10, ,001-50, , , ,001 and above Total SOFT COMMISSIONS AND REBATES CIMB-Principal Asset Management Berhad (the Manager ) and the Trustee (including their officers) will not retain any form of rebate or soft commission from, or otherwise share in any commission with, any broker in consideration for directing dealings in the investments of the Funds unless the soft commission received is retained in the form of goods and services such as financial wire services and stock quotations system incidental to investment management of the Funds. All dealings with brokers are executed on best available terms. During the financial period under review, the Manager and Trustee did not receive any rebates from the brokers or dealers but have retained soft commission in the form of goods and services such as financial wire services and stock quotations system incidental to investment management of the Funds. 10

13 UNAUDITED STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL PERIOD FROM 1 FEBRUARY 2018 TO 30 APRIL 2018 Note to USD INVESTMENT LOSS Dividend income 209,720 Net loss on financial assets at fair value through profit or loss 8 (458,152) Net loss on derivative assets at fair value through profit or loss 10 (687,553) Net foreign exchange gain 283 Other income 4 20,470 (915,232) EXPENSES Management fee 5 83,869 Trustee s fee 6 3,195 Audit fee 415 Tax agent s fee 220 Other expenses 5,282 92,981 LOSS BEFORE TAXATION (1,008,213) Less : Distribution (1,226,397) NET LOSS BEFORE TAXATION (2,234,610) Taxation 7 - DECREASE IN NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS (2,234,610) Decrease in net assets attributable to unit holders are made up as follows: Realised amount (2,143,998) Unrealised amount (90,612) (2,234,610) The accompanying notes to the financial statements form an integral part of the unaudited financial statements. 11

14 UNAUDITED STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL Audited Note USD USD ASSETS Cash and cash equivalents 9 23,741 1,369,622 Financial assets at fair value through profit or loss 8 23,673,497 35,021,649 Amount due from Manager 500,000 - Amount due from Manager of collective investment scheme - Management fee rebate 8,171 12,769 Other receivable - 1,554 TOTAL ASSETS 24,205,409 36,405,594 LIABILITIES Amount due to Manager of collective investment scheme - Purchase of collective investment scheme - 650,000 Amount due to Manager 610, ,610 Accrued management fee 25,249 37,736 Amount due to Trustee 808 1,208 Derivative liabilities at fair value through profit of loss 10 15,340 9,638 Distribution payable 692,844 - Other payables and accruals 194,084 5,570 TOTAL LIABILITIES (EXCLUDING NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS) 1,538,912 1,311,762 NET ASSET VALUE OF THE FUND 22,666,497 35,093,832 NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS 22,666,497 35,093,832 REPRESENTED BY: FAIR VALUE OF OUTSTANDING UNITS (USD) - Class AUD-H 5,480,423 8,254,260 - Class MYR-H 4,012,118 5,208,893 - Class SGD-H 11,299,757 16,562,002 - Class USD 1,874,199 5,068,677 22,666,497 35,093,832 NUMBER OF UNITS IN CIRCULATION (UNITS) - Class AUD-H 7,738,408 10,216,108 - Class MYR-H 17,917,766 20,270,323 - Class SGD-H 15,964,773 21,941,262 - Class USD 1,903,162 5,095, ,524,109 57,522,863 The accompanying notes to the financial statements form an integral part of the unaudited financial statements 12

15 UNAUDITED STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 2018 (CONTINUED) Audited NET ASSET VALUE PER UNIT (USD) - Class AUD-H Class MYR-H Class SGD-H Class USD NET ASSET VALUE PER UNIT IN RESPECTIVE CURRENCIES - Class AUD-H AUD AUD Class MYR-H MYR RM Class SGD-H SGD SGD Class USD USD USD The accompanying notes to the financial statements form an integral part of the unaudited financial statements. 13

16 UNAUDITED STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS FOR THE FINANCIAL PERIOD FROM 1 FEBRUARY 2018 TO 30 APRIL to USD NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS AT THE BEGINNING OF THE FINANCIAL PERIOD 35,094,832 Movement due to units created and cancelled during the financial period: Creation of units from applications - Class AUD-H 213,772 - Class MYR-H 291,251 - Class SGD-H 27,213 Cancellation of units - Class AUD-H (2,164,117) - Class MYR-H (932,680) - Class SGD-H (4,476,791) - Class USD (3,151,373) 24,901,107 Decrease in net assets attributable to unit holders during the financial period: Loss after taxation (2,234,610) NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS AT THE END OF THE FINANCIAL PERIOD 22,666,497 The accompanying notes to the financial statements form an integral part of the unaudited financial statements. 14

17 UNAUDITED STATEMENT OF CASH FLOWS FOR THE FINANCIAL PERIOD FROM 1 FEBRUARY 2018 TO 30 APRIL to USD CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from disposal of collective investment scheme 10,758,718 Purchase of collective investment scheme (1,615,291) Dividend income received 209,720 Management fee paid 71,382 Trustee s fees paid 2,795 Payments for other fees and expenses (210,002) Net realised foreign exchange loss (40,675) Net realised gain on forward foreign currency contracts (487,057) Other income received 113,799 Net cash generated from operating activities 8,803,389 CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from units created 532,235 Payments for cancellation of units (10,722,463) Net cash used in from financing activities (10,190,228) Net decrease in cash and cash equivalents (1,386,839) Effect of foreign exchange differences 40,958 Cash and cash equivalents at the beginning of the financial period 1,369,622 Cash and cash equivalents at the end of the financial period 23,741 Cash and cash equivalents comprised of: Bank balances 23,741 Cash and cash equivalents at the end of the financial period 23,741 The accompanying notes to the financial statements form an integral part of the unaudited financial statements. 15

18 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL PERIOD FROM 1 FEBRUARY 2018 TO 30 APRIL THE FUND, THE MANAGER AND ITS PRINCIPAL ACTIVITY CIMB-Principal US Mortgage Fund (the Fund ) is governed by Principal Deed dated 8 March 2017 (the Deed ), made between CIMB-Principal Asset Management Berhad (the Manager ) and HSBC (Malaysia) Trustee Berhad (the Trustee ). The Fund is a feeder fund and it invests in a single collective investment scheme, i.e. BNP Paribas Flexi I US Mortgage Fund. The Fund may also invest in Liquid Asset for liquidity purpose. In order to achieve its investment objective, the Fund will invest at least 95% of its NAV in the BNP Paribas Flexi I US Mortgage Fund ( Target Fund ); a UCITS domiciled in Luxembourg and established on 25 September The Fund will also maintain up to 5% of its NAV in Liquid Assets for liquidity purposes. Information on the Target Fund: Company : BNP Paribas Flexi I, an open-ended investment company with variable capital (société d'investissement à capital variable) incorporated on 4 July 2006 under the name FORTIS SOLUTIONS for an indefinite period in accordance with the provisions of Part I of the Luxembourg law of 20 December 2002 governing undertakings for collective investment. It was renamed BNP Paribas Flexi I on 13 September Investment Manager : Fischer Francis Trees & Watts Inc Management Company : BNP Paribas Investment Partners Luxembourg Regulatory authority : Commission de Surveillance du Secteur Financier (Luxemberg Financial Sector Supervicory Authority) All investments are subjected to the Securities Commission Malaysia ( SC ) Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework, SC requirements, the Deeds, except where exemptions or variations have been approved by the SC, internal policies and procedures and the Fund s objective. The Manager, a company incorporated in Malaysia, is jointly owned by CIMB Group and The Principal Financial Group. The principal activities of the Manager are the establishment and management of unit trust funds and fund management activities. 16

19 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CIMB-PRINCIPAL US MORTGAGE FUND The following accounting policies have been used consistently in dealing with items which are considered material in relation to the financial statements: (a) Basis of preparation The financial statements have been prepared in accordance with the provisions of the 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 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 revenues and expenses during the reported period. It also requires the Manager to exercise their judgment in the process of applying the Fund s accounting policies. Although these estimates and judgment are based on the Manager s best knowledge of current events and actions, actual results may differ. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2(m). Standards, amendments to published standards and interpretations to existing standards that are effective: The Fund has applied the following amendments for the first time for the financial period beginning 1 February 2018: MFRS 9 Financial Instruments (effective from 1 January 2018) will replace MFRS 139 Financial Instruments: Recognition and Measurement. The adoption of these amendments did not have any impact on the current financial year or any prior period and is not likely to affect future period. 17

20 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Financial assets and financial liabilities Classification The Fund designates its investment in collective investment scheme as financial assets at fair value through profit or loss at inception. Financial assets are designated at fair value through profit or loss when they are managed and their performance evaluated on a fair value basis. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been included in current assets. The Fund s loans and receivables comprise cash and cash equivalents, amount due from Manager and amount due from Manager of collective investment scheme and other receivable. Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability. The Fund classifies accrued management fee, amount due to Trustee, amount due to manager, amount due to manager - collective investment scheme, distribution payable and other payables and accruals as other financial liabilities. Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade-date, the date on which the Fund commits to purchase or sell the asset. Investments are initially recognised at fair value. 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 financial period which they arise. Collective investment scheme is valued based on the most recent published NAV per unit or share of such collective investment scheme or, if unavailable, the last published price of such unit or share (excluding any sales charge included in such selling price). Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income as part of gross dividend income when the Fund s right to receive payments is established. Loans and receivables and other financial liabilities are subsequently carried at amortised cost using the effective interest method. 18

21 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Financial assets and financial liabilities (continued) Impairment for assets carried at amortised costs For assets carried at amortised cost, the Fund assesses at the end of the reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The asset s carrying amount is reduced and the amount of the loss is recognised in statement of comprehensive income. If 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 financial period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in statement of comprehensive income. When an asset is uncollectible, it is written off against the related allowance account. Such assets are written off after all the necessary procedures have been completed and the amount of the loss has been determined. (c) Income recognition Dividend income is recognised on the ex-dividend date when the right to receive payment is established. Interest income from deposits with licensed financial institutions is recognised on a time proportionate basis using effective interest rate method on an accrual basis. Realised gain or loss on disposal of collective investment scheme is accounted for as the difference between the net disposal proceeds and the carrying amount of collective investment scheme, determined on a weighted average cost basis. 19

22 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d) 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 USD, which is the Fund s functional and presentation currency. Due to mixed factors in determining the functional currency of the Fund, the Manager has used its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions and have determined the functional currency to be in USD primarily due to the following factors: i) Significant portion of the NAV is invested in the form of collective investment scheme denominated in USD. ii) Significant portion of the Fund s expenses are denominated in USD. 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 financial period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in statement of comprehensive income. (e) Management fee rebate Management fee rebate is deemed from the collective investment scheme held by the Fund on an accrual basis to ensure no double charging of management fee. It is accrued daily based on the fair value of collective investment scheme held. (f) Cash and cash equivalents For the purpose of statement of cash flow, cash and cash equivalent comprise bank balances and deposits held in highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (g) Taxation Current tax expense is determined according to Malaysian tax laws at the current rate based upon the taxable profit earned during the financial period. Tax on income from foreign collective investment scheme is based on the tax regime of the respective countries that the Fund invests in. (h) Increase/Decrease in net assets attributable to unit holders Income not distributed is included in net assets attributable to unit holders. 20

23 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i) Amount due to Manager of collective investment scheme (purchase of investment) Amounts due to Manager of collective investment scheme represent payables for collective investments scheme purchased that have been contracted for but not yet settled or delivered on the statement of financial position date. These amounts are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment for amount due to Manager of collective investment scheme. A provision for impairment of amount due from Manager of collective investment scheme is established when there is objective evidence that the Fund will not be able to collect all amounts due from the Manager of collective investment scheme. Significant financial difficulties of the stockbroker, probability that the Manager of collective investment scheme will enter bankruptcy or financial reorganisation, and default in payments are considered indicators that the amount due from Manager of collective investment scheme is impaired. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. (j) Creation and cancellation of units The unit holders contributions to the Fund meet the definition of puttable instruments classified as financial liability under MFRS 132 Financial Instruments: Presentation. The Fund issues cancellable units, in three classes of units, known respectively as the Class AUD-H, Class MYR-H, SGD-H and Class USD, which are cancelled at the unit holder s option. The units are classified as financial liabilities. Cancellable units can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s NAV of respective classes. The outstanding units are carried at the redemption amount that is payable at the date of the statement of financial position if the member exercises the right to put back the unit to the Fund. Units are created and cancelled at the unit holders option at prices based on the Fund s NAV per unit of respective classes at the close of business on the relevant dealing day. The Fund s NAV per unit of respective classes is calculated by dividing the net assets attributable to members of respective classes with the total number of outstanding units of respective classes. 21

24 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (k) Derivative financial instruments A derivative financial instrument is any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. A financial asset is any asset that is cash, a contractual right to receive cash or another financial asset from another enterprise, a contractual right to exchange financial instruments with another enterprise under conditions that are potentially favourable, or an equity instrument of another enterprise. A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset to another enterprise, or to exchange financial instruments with another enterprise under conditions that are potentially unfavorable. The Fund s derivative financial instruments comprise forward foreign exchange contracts. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The fair value of forward foreign exchange contracts is determined using forward exchange rates at the date of statements of financial position, with the resulting value discounted back to present value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and the nature of the item being hedged. Derivatives that do not qualify for hedge accounting are classified as held-fortrading and accounted for in accordance with the accounting policy set out in Note 2(b). (l) Segment information Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments. (m) 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 judgment 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 SC Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework. However, the Manager is of the opinion that in applying these accounting policies, no significant judgment was required. 22

25 3. RISK MANAGEMENT OBJECTIVES AND POLICIES CIMB-PRINCIPAL US MORTGAGE FUND The Fund aims to maximaise total return through investments in one collective investment scheme, which invests primarily in mortgage related securities in the US. The Fund is exposed to a variety of risks which include market risk (inclusive of price risk and currency risk), credit risk and liquidity 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 Deed and SC Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework. (a) Market risk (i) Price risk Price risk is the risk that the fair value of an investment in collective investment scheme will fluctuate because of changes in market prices (other than those arising from currency risk). The value of collective investment scheme may fluctuate according to the activities of individual companies, sector and overall political and economic conditions. Such fluctuation may cause the Fund s NAV and prices of units to fall as well as rise, and income produced by the Fund may also fluctuate. The price risk is managed through diversification and selection of collective investment scheme and other financial instruments within specified limits according to the Deed. (ii) Interest rate risk Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. Interest rate is a general economic indicator that will have an impact on the management of the Fund. The Fund s exposure to fair value interest rate risk arises from investment in money market instruments. The interest rate risk is expected to be minimal as the Fund s investments comprise mainly short term deposits with approved licensed financial institutions. The Fund is not exposed to cash flow interest rate risk as the Fund does not hold any financial instruments at variable interest rate. As at the end of each financial year, the Fund is not exposed to a material level of interest rate risk. (III) Currency risk Currency risk is associated with investments that are quoted and/or priced in foreign currency denomination. Foreign currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The Manager will evaluate the likely directions of a foreign currency versus USD based on considerations of economic fundamentals such as interest rate differentials, balance of payments position, debt levels, and technical chart considerations. 23

26 3. RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) CIMB-PRINCIPAL US MORTGAGE FUND (b) Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligation resulting in financial loss to the Fund. For amount due from Manager, the settlement terms of the proceeds from the creation of units receivable from the Manager are governed by the SC Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework. For amount due from Manager of collective investment scheme, the Fund will invest with an investment management company of the collective investment scheme which is authorised or approved by the relevant regulatory authority in its home jurisdiction. (c) Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in meeting its financial obligations. The Manager manages this risk by maintaining sufficient level of liquid assets to meet anticipated payments and cancellations of the units by unit holders. Liquid assets comprise bank balances and deposits with licensed financial institutions, which are capable of being converted into cash within 7 business days. The Fund s investments in collective investment scheme are realisable which are capable of being converted into cash within 10 business days. This is expected to reduce the risks for the entire portfolio without limiting the Fund s growth potentials. (d) Capital risk management The capital of the Fund is represented by net assets attributable to unit holders of USD24,901,107. The amount of capital can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of unit holders. The Fund s objective when managing capital is to safeguard the Fund s ability to continue as a going concern in order to provide returns to unit holders and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Fund. (e) Fair value estimation Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). The fair value of financial assets traded in active markets (such as trading securities) are based on quoted market prices at the close of trading on the financial period end date. The Fund utilises the last traded market price for financial assets where the last traded market falls within the bid-ask spread. In circumstances where the last traded market price is not within the bid-ask spread, the Manager will determine the point within the bid-ask spread that is most representative of the fair value. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. 24

27 3. RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) CIMB-PRINCIPAL US MORTGAGE FUND (e) Fair value estimation (continued) The fair value of financial assets that are not traded in an active market is determined by using valuation techniques. (i) Fair value hierarchy The table below analyses financial instruments carried at fair value. The different levels have been defined as follows: Quoted prices (unadjusted) in active market for identical assets or liabilities (Level 1) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2) Inputs for the asset and liability that are not based on observable market data (that is, unobservable inputs) (Level 3) The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability. The determination of what constitutes observable requires significant judgment by the Fund. The Fund considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. Level 1 Level 2 Level 3 Total USD USD USD USD Financial assets at fair value through profit or loss: - Collective investment scheme 23,673, ,673,497 Financial liabilities at fair value through profit or loss: - Derivative liabilities - forward foreign currency contracts - (204,432) - (204,432) 25

28 3. RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) CIMB-PRINCIPAL US MORTGAGE FUND (e) Fair value estimation (continued) (i) Fair value hierarchy (continued) Level 1 Level 2 Level 3 Total USD USD USD USD Audited Financial assets at fair value through profit or loss: - Collective investment scheme 35,021, ,021,649 Financial liabilities at fair value through profit or loss: - Derivative liabilities - forward foreign currency contracts - (9,638) - (9,638) Investments whose values are based on quoted market prices in active markets and are therefore classified within Level 1, include collective investment scheme. The Fund does not adjust the quoted prices for these instruments. The Fund s policies on valuation of these financial assets are stated in Note 2(b). (ii) The carrying values of cash and cash equivalents, amount due from manager, amount due from Manager of collective investment scheme, other receivable and all current liabilities are a reasonable approximation of their fair values due to their short term nature. 4. OTHER INCOME Other income represents the Fund s entitlement to management fee rebate from the Manager and Manager of collective investment scheme the Fund invests in. For the financial period ended 30 April 2018, the rebate is recognised at a rate of 0.30% per annum calculated and accrued daily based on the NAV of the collective investment scheme. 5. MANAGEMENT FEE In accordance with the Deed, the Manager is entitled to a maximum management fee of 3.00% per annum for each class, calculated daily based on the NAV of the Fund. For the financial period ended 30 April 2018, the management fee is recognised at a rate of 1.25% per annum for each classes. There will be no further liability to the Manager in respect of management fee other than amounts recognised above. 26

29 6. TRUSTEE S FEE In accordance with the Deed, the Trustee is entitled to a maximum fee of 0.08% per annum, calculated daily based on the NAV of the Fund. The Trustee s fee includes local custodian fees and charges but excludes foreign sub-custodian fees and charges. For the financial period ended 30 April 2018, the Trustee s fee is recognised at a rate of 0.04% per annum for each classes. There will be no further liability to the Trustee in respect of Trustee s fee other than amounts recognised above. 7. TAXATION to USD Tax charged for the financial period: - Current taxation - A numerical reconciliation between the loss before taxation multiplied by the Malaysian statutory income tax rate and tax expense of the Fund is as follows: to USD Loss before taxation (2,234,610) Taxation at Malaysian statutory rate of 24% (536,306) Tax effects of: Investment loss not deductible for tax purposes 219,656 Expenses not deductible for tax purposes 338,092 Restriction on tax deductible expenses for Wholesale Funds (21,442) Taxation - 8. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Audited USD USD Designated at fair value through profit or loss at inception: - Collective investment scheme 23,673,497 35,021, to USD Net loss on financial assets at fair value through profit or loss: - Unrealised fair value loss (458,151) 27

30 8. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (CONTINUED) Name of counter COLLECTIVE INVESTMENT SCHEME Aggregate Market Percentage Quantity cost value of NAV Units USD USD % BNP Paribas Investment Partners Luxembourg SA - BNP Paribas Flexi I - US Mortgage 251,819 24,598,422 23,673, TOTAL COLLECTIVE INVESTMENT SCHEME 251,819 24,598,422 23,673, ACCUMULATED UNREALISED LOSS ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (924,925) TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 23,673, Audited COLLECTIVE INVESTMENT SCHEME BNP Paribas Investment Partners Luxembourg SA - BNP Paribas Flexi I - US Mortgage 366,680 35,820,707 35,021, TOTAL COLLECTIVE INVESTMENT SCHEME 366,680 35,820,707 35,021, ACCUMULATED UNREALISED LOSS ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (799,058) TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 35,021,649 28