Annual Report and Audited Financial Statements

Transcription

1 Annual Report and Audited Financial Statements Standard Life Investments Liability Solutions ICAV For the financial year ended 30 September 2017 Standard Life Investments

2 Contents Page Directory 2 Background to the ICAV 3-13 Report of the Alternative Investment Fund Manager Directors Report Report of the Depositary 23 Independent Auditors Report to the Shareholders of Standard Life Investments Liability Solutions ICAV Financial Statements: Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Net Attributable to Redeemable Participating Shareholders Notes to the Financial Statements Schedule of Investments (Unaudited) AIFM Regulatory Disclosures (Unaudited) 96 Securities Financing Transactions Regulation Disclosures (Unaudited)

3 Directory Directors Stephen Campbell (British) Paul O Faherty (Irish)* Anne Kershaw (British)* Michael McKenna (Irish) Standard Life Investments Liability Solutions ICAV Registered Office 70 Sir John Rogerson s Quay Dublin 2 Ireland Alternative Investment Fund Manager Standard Life Investments (Mutual Funds) Limited 1 George Street Edinburgh EH2 2LL Scotland Investment Adviser And Distributor Administrator Standard Life Investments Limited Citibank Europe Plc 1 George Street 1 North Wall Quay Edinburgh EH2 2LL Dublin 1 Scotland Ireland Depositary Auditors Citi Depositary Services Ireland Designated Activity Company KPMG^ 1 North Wall Quay Chartered Accountants, Statutory Audit Firm Dublin 1 1 Harbourmaster Place Ireland International Financial Services Centre Dublin 1 Legal Advisers Ireland Matheson 70 Sir John Rogerson s Quay Secretary Dublin 2 Matsack Trust Limited Ireland 70 Sir John Rogerson s Quay Dublin 2 Ireland *Independent non-executive Director ^ KPMG, Chartered Accountant, were appointed as the ICAV's statutory auditor to replace PricewaterhouseCoopers on 22 August

4 Background to the ICAV Structure Standard Life Investments Liability Solutions ICAV (the ICAV ) is an Ireland incorporated collective asset-management vehicle registered on 24 September 2015 under registration number C and constituted as an umbrella fund. The ICAV is a Qualifying Investor Alternative Investment Fund ( QIAIF ) for the purposes of Alternative Investment Fund Managers Directive ( AIFMD ) and has appointed Standard Life Investments (Mutual Funds) Limited to be its Alternative Investment Fund Manager ( AIFM ). The ICAV is authorised and regulated by the Central Bank of Ireland (the Central Bank ) pursuant to the Irish Collective Asset- Management Vehicles Act 2015 and the AIFM Regulations to market solely to Qualifying Investors and Knowledgeable Investors and has been established as an umbrella fund with segregated liability between sub-funds. The ICAV is an umbrella fund, which may comprise different funds (each a Fund ), each with one or more classes of shares. Different classes of shares may be issued from time to time with the prior notification to and clearance of the Central Bank. Each class represents interests in a Fund and may be income classes of shares which are intended to distribute dividends as set out in the prospectus and the relevant supplement. At the financial year end 30 September 2017, the ICAV comprises the Funds and classes with the respective currencies listed below: Fund Share Class Class currency Absolute Return III Fund Z GBP Absolute Return III Nominal Profile Fund D GBP Absolute Return III Real Profile Fund D GBP Absolute Return II Fund Z GBP Absolute Return II Nominal Profile Fund D GBP Absolute Return II Real Profile Fund D GBP Investment Objectives and Policies Absolute Return III Fund The primary objective of the Absolute Return III Fund is to deliver positive absolute return in the form of capital growth over the medium to long term in all market conditions. Standard Life Investments Limited (the Investment Adviser ) has determined the Fund s target exposure to assets seeking capital growth. The Investment Adviser may change the Fund s target exposure to assets seeking capital growth as a consequence of one or all of the following: If the Investment Adviser assesses that the level of unencumbered cash in the Fund is not sufficiently prudent to support the risk exposures in the Fund, the target exposure to assets seeking capital growth in the Fund may be reduced. In these circumstances, Shareholders in the Fund will be provided with information on any reduction in the target exposure prior to implementation of any change. Upon receipt of a collective instruction from all of its Shareholders, and subject to the level of unencumbered cash in the Fund being sufficiently prudent to support the instructed change in exposures in the Fund. An increase or decrease in the Net Asset Value of the Fund. Shares in the Fund can only be held by the Absolute Return III Nominal Profile Fund and the Absolute Return III Real Profile Fund, each a sub-fund of the ICAV managed by the Investment Adviser, unless the Directors subsequently approve the holding of Shares in the Fund by another sub-fund of the ICAV and update the supplement accordingly. The Fund seeks strategies from across the entire global investment universe to exploit market opportunities through active allocation to a diverse range of market positions across the entire investment universe. It uses a combination of traditional assets (such as equities and bonds) and investment strategies based on advanced derivative techniques, resulting in a diversified portfolio. The Fund will invest globally in a diversified portfolio of derivative contracts (including futures, options, swaps, forward currency contracts and other derivatives), interest bearing securities, equities and cash. Additionally, the Fund may invest in other forms of eligible transferable securities, deposits, money market instruments and collective investment schemes and investments of the Fund may or may not be listed on recognised exchanges. Use may also be made of borrowing, efficient portfolio management (including hedging) and stock lending. 3

5 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return III Fund (continued) Examples of strategies that may be used at any time include: An assessment of the performance of one equity market relative to another. Rather than investing in physical securities, the strategy could be implemented through the use of derivatives in the form of futures contracts. An assessment of the value of one currency relative to another. The strategy could involve the sale of the currency considered overvalued and purchase of the currency considered undervalued. Derivatives, in the form of forward foreign exchange contracts, could be used to implement the strategy. An assessment of the direction of interest rates. Derivatives, in the form of interest rate swaps, could be used to position the portfolio such that it could benefit from the future direction of interest rates. The Fund will use derivatives extensively to reduce risk or cost, or to generate additional capital or income at low risk, or to meet its investment objective. In addition, the Fund may make use of repurchase agreements and reverse repurchase agreements. The Fund s use of derivatives is monitored to ensure that the Fund is not exposed to excessive or unintended risks. The Fund can take long and short positions in markets, securities and groups of securities through derivative contracts. Use of derivatives and repurchase agreements will add leverage in the Fund. The Fund intends to use techniques and instruments, including foreign currency exchange transactions, for efficient portfolio management subject to the conditions and limits laid down from time to time in the AIF Rulebook and set out in the Prospectus. Transactions entered into for efficient portfolio management purposes will be entered into for one or more of the following specified aims: the reduction of risk; the reduction of cost or the generation of additional capital or income for the Fund with a level of risk that is consistent with the risk profile of the Fund and the risk diversification rules set out in the AIF Rulebook. The Fund may not invest more than 50% of its net asset value, in aggregate, in collective investment schemes (including exchange traded funds) or in any one collective investment scheme or exchange traded fund. Such collective investment schemes or exchange traded funds may be regulated or unregulated, leveraged or un-leveraged and may be domiciled in any jurisdiction worldwide. When domiciled in unregulated jurisdictions, such collective investment schemes or exchange traded funds will not provide a level of investor protection equivalent to collective investment schemes or exchange traded fund authorised under Irish laws and subject to Irish regulations and conditions. Absolute Return III Nominal Profile Fund The objective of the Absolute Return III Nominal Profile Fund is to deliver an aggregate return through the implementation of two investment approaches: A hedge of nominal interest rate sensitivity which is calibrated to the interest rate sensitivity of a defined set of cash flows (defined as the Target Liability Profile ) and determined using an interest rate swap-derived discount curve. To seek additional capital growth of 6 month LIBOR plus 5% per annum over rolling 3 year periods, gross of fees. Interest Rate Hedge The Fund will seek to achieve its investment objective by investing in instruments and securities to provide similar interest rate sensitivity to the Target Liability Profile, as determined by the Investment Adviser. The Target Liability Profile will be made available to shareholders upon request. The discounted present value of the Target Liability Profile is expected to exceed the net asset value of the Fund at all times. The Fund will use derivatives extensively to meet its investment objective. In addition, the Fund may make use of repurchase agreements and reverse repurchase agreements. The Fund may invest in fixed income or debt securities which may be fixed or floating rate and may include securities that are unrated or rated below investment grade. Such securities may be issued by any government, supra-national or corporate issuer globally. Use of derivatives and repurchase agreements will add leverage in the Fund. Use of derivatives is monitored to ensure that the Fund is not exposed to excessive or unintended risks. The Fund can take long and short positions in markets, securities and groups of securities through derivative contracts (including, without limitation, interest rate swaps, inflation swaps, credit default swaps, currency swaps, asset swaps, total return swaps, interest rate swaptions, futures, options and foreign exchange contracts). 4

6 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return III Nominal Profile Fund (continued) In the normal course of events, the Investment Adviser will maintain the interest rate hedge within tolerance ranges, including a +/- 1-year duration mismatch tolerance, to seek to limit any divergence in returns relative to the Target Liability Profile. The Investment Adviser will typically rebalance the interest rate sensitivity of the Fund towards the sensitivity of the Target Liability Profile prior to it falling outside this tolerance range and in particular if it assesses that there are opportunities to rebalance the hedge efficiently. The Fund may exceed these tolerances from time to time including, but not exclusive to, during a rebalancing event as outlined separately under Cash Management below. The Investment Adviser may invest, without limitation, in instruments which are not directly sensitive to changes in the interest rate swap discount curve used to determine the interest rate sensitivity of the Target Liability Profile. Decisions to invest in such instruments will be based upon a relative long-term assessment of their efficiency. The return of the Fund may therefore differ significantly from the change in the present value of the Target Liability Profile over short to medium term periods. The Investment Adviser will typically consider the tracking error in three components: 1. Strategic positions in hedging instruments for example, investment in gilts instead of interest rate swaps (used to measure the sensitivity of the Target Liability Profile). 2. Mismatches between the sensitivity of the Target Liability Profile and asset portfolio to changes in interest rates at different maturity points of the yield curve. 3. Investment in assets targeting capital growth. The first component is not managed on a tracking error basis because there is no limit on strategic positions in hedging instruments. The Investment Adviser monitors the second and third components in isolation and the annualised observed aggregate tracking error calculated relative to and as a function of the discounted present value of the Target Liability Profile from these components is expected to be below 10% per annum in the normal course of events. Capital Growth The Fund will invest in the Absolute Return III Fund ( LAAR III ) to seek to achieve capital growth. In the normal course of events, the Investment Adviser will maintain the Fund s allocation to LAAR III within exposure tolerance ranges based on the target allocation expected to be required to meet the Fund s objective. The target allocation will vary with changes in the value of the Fund and the target exposure to assets seeking capital growth in LAAR III. The Fund may, in aggregate with all other shareholders of LAAR III, instruct a change to the target exposure to assets seeking capital growth in LAAR III. This instruction may be independent of any subscription or redemption by the Fund for shares in LAAR III. The Fund will only provide such an instruction if it is consistent with the objective and policy of the Fund. The Investment Adviser will typically increase or reduce the allocation to LAAR III prior to it falling outside these tolerance ranges and in particular if it assesses that there are opportunities to change the allocation efficiently. The Fund may exceed these tolerances from time to time including, but not exclusive to, during a rebalancing event as outlined separately under Cash Management below. The capital growth of the Fund will be therefore impacted by both the performance of and differences between the actual and target allocation to LAAR III. The Fund may invest up to 100% of its net asset value, in aggregate, in collective investment schemes (including exchange traded funds). The Fund, other than its investment in LAAR III, will not invest more than 50% of its net asset value in any one collective investment scheme or exchange traded fund. Such collective investment schemes or exchange traded funds may be regulated or unregulated, leveraged or un-leveraged and may be domiciled in any jurisdiction worldwide. When domiciled in unregulated jurisdictions, such collective investment schemes or exchange traded funds will not provide a level of investor protection equivalent to collective investment schemes or exchange traded funds authorised under Irish laws and subject to Irish regulations and conditions. The investments of the Fund may or may not be listed on recognised exchanges. 5

7 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return III Nominal Profile Fund (continued) Cash Management The Fund will seek to maintain adequate, but not excessive, cash to support the leverage in the Fund under a range of potential investment scenarios. A Rebalancing Event may be initiated as outlined in the Prospectus if the Investment Adviser assesses, in its absolute discretion, that such an event is required to maintain adequate but not excessive levels of cash to meet the Fund s objective. The Investment Adviser will initiate a Rebalancing Event when it assesses that the level of unencumbered cash in the Fund is not sufficiently prudent. To make this assessment, the Investment Adviser will analyse multiple stressed historic economic scenarios over multiple time periods (in particular, time periods consistent with the Intra-Rebalancing Period), prevailing market volatility conditions and other relevant factors. The Investment Adviser will also monitor the ratio of the present value of the Target Liability Profile to the Net Asset Value of the Fund. The Investment Adviser will initiate a Rebalancing Event when it assesses that this ratio falls to a level such that the Fund holds unencumbered cash which is materially in excess of that required to meet the Fund s objective. If the Investment Adviser assesses that the Fund requires additional unencumbered cash within an Intra-Rebalancing Period prior to the Rebalancing Dealing Day, the Investment Adviser may reduce risk exposures in the Fund by reducing the interest rate hedge and / or the Fund s allocation to LAAR III outside of the normal tolerances used to manage the Fund. The Investment Adviser will seek to restore the hedge and / or the Fund s allocation to LAAR III to within normal tolerances as soon as practicable following completion of a Rebalancing Event. The Investment Adviser may, in an Intra-Rebalancing Period, terminate a Releveraging Redemption, in full or in part, if it assesses that such action is required to maintain prudent levels of unencumbered cash in the Fund. The Fund may hold cash or invest its assets in instruments such as commercial paper, bankers acceptances, certificates of deposit and government-issued debt issued by OECD member countries or by any supranational entity which are listed or traded on a Recognised Market ( Cash Equivalents ) for liquidity purposes and for the purposes of paying any expenses due. Absolute Return III Real Profile Fund The objective of the Absolute Return III Real Profile Fund is to deliver an aggregate return through the implementation of two investment approaches: A hedge of nominal interest rate and inflation sensitivity which is calibrated to the interest rate and inflation sensitivity of a defined set of cash flows (defined as the Target Liability Profile ) and determined using interest rate and inflation swap-derived discount curves. To seek additional capital growth of 6 month LIBOR plus 5% per annum over rolling 3 year periods, gross of fees. Interest Rate and Inflation Hedge The Fund will seek to achieve its investment objective by investing in instruments and securities to provide similar interest rate and inflation sensitivity to the Target Liability Profile, as determined by the Investment Adviser. The Target Liability Profile will be made available to Shareholders upon request. The discounted present value of the Target Liability Profile is expected to exceed the net asset value of the Fund at all times. The Fund will use derivatives extensively to meet its investment objective. In addition, the Fund may make use of repurchase agreements and reverse repurchase agreements. The Fund may invest in fixed income or debt securities which may be fixed or floating rate and may include securities that are unrated or rated below investment grade. Such securities may be issued by any government, supra-national or corporate issuer globally. Use of derivatives and repurchase agreements will add leverage in the Fund. Use of derivatives is monitored to ensure that the Fund is not exposed to excessive or unintended risks. The Fund can take long and short positions in markets, securities and groups of securities through derivative contracts (including, without limitation, interest rate swaps, inflation swaps, credit default swaps, currency swaps, asset swaps, total return swaps, interest rate swaptions, futures, options and foreign exchange contracts). In the normal course of events, the Investment Adviser will maintain the interest rate and inflation hedge within tolerance ranges, including a +/- 1-year duration mismatch tolerance, to seek to limit any divergence in returns relative to the Target Liability Profile. 6

8 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return III Real Profile Fund (continued) The Investment Adviser will typically rebalance the interest rate and / or inflation sensitivity of the Fund towards the sensitivity of the Target Liability Profile prior to it falling outside this tolerance range and in particular if it assesses that there are opportunities to rebalance the hedge efficiently. The Fund may exceed these tolerances from time to time including, but not exclusive to, during a rebalancing event as outlined separately under Cash Management below. The Investment Adviser may invest, without limitation, in instruments which are not directly sensitive to changes in the interest rate and inflation swap discount curves used to determine the interest rate and inflation sensitivity of the Target Liability Profile. Decisions to invest in such instruments will be based upon a relative long-term assessment of their efficiency. The return of the Fund may therefore differ significantly from the change in the present value of the Target Liability Profile over short to medium term periods. The Investment Adviser will typically consider the tracking error in three components: 1. Strategic positions in hedging instruments for example, investment in gilts instead of interest rate swaps (used to measure the sensitivity of the Target Liability Profile). 2. Mismatches between the sensitivity of the Target Liability Profile and asset portfolio to changes in interest rates and inflation at different maturity points of the yield curve. 3. Investment in assets targeting capital growth. The first component is not managed on a tracking error basis because there is no limit on strategic positions in hedging instruments. The Investment Adviser monitors the second and third components in isolation and the annualised observed aggregate tracking error calculated relative to and as a function of the change in discounted present value of the Target Liability Profile from these components is expected to be below 10% per annum in the normal course of events. Capital Growth The Fund will invest in the Absolute Return III Fund ( LAAR III ) to seek to achieve capital growth. In the normal course of events, the Investment Adviser will maintain the Fund s allocation to LAAR III within exposure tolerance ranges based on the target allocation expected to be required to meet the Fund s objective. The target allocation will vary with changes in the value of the Fund and the target exposure to assets seeking capital growth in LAAR III. The Fund may, in aggregate with all other shareholders of LAAR III, instruct a change to the target exposure to assets seeking capital growth in LAAR III. This instruction may be independent of any subscription or redemption by the Fund for shares in LAAR III. The Fund will only provide such an instruction if it is consistent with the objective and policy of the Fund. The Investment Adviser will typically increase or reduce the allocation to LAAR III prior to it falling outside these tolerance ranges and in particular, if it assesses that there are opportunities to change the allocation efficiently. The Fund may exceed these tolerances from time to time including, but not exclusive to, during a rebalancing event as outlined separately under Cash Management below. The capital growth of the Fund will be therefore impacted by the performance of and differences between the actual and target allocation to LAAR III. The Fund may invest up to 100% of its net asset value, in aggregate, in collective investment schemes (including exchange traded funds). The Fund, other than its investment in LAAR III Fund, will not invest more than 50% of its net asset value in any one collective investment scheme or exchange traded fund. Such collective investment schemes or exchange-traded funds may be regulated or unregulated, leveraged or un-leveraged and may be domiciled in any jurisdiction worldwide. When domiciled in unregulated jurisdictions, such collective investment schemes or exchange-traded funds will not provide a level of investor protection equivalent to collective investment schemes or exchange traded funds authorised under Irish laws and subject to Irish regulations and conditions. The investments of the Fund may or may not be listed on recognised exchanges. 7

9 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return III Real Profile Fund (continued) Cash Management The Fund will seek to maintain adequate, but not excessive, cash to support the leverage in the Fund under a range of potential investment scenarios. A Rebalancing Event may be initiated as outlined in the Prospectus if the Investment Adviser assesses, in its absolute discretion, that such an event is required to maintain adequate but not excessive levels of cash to meet the Fund s objective. The Investment Adviser will initiate a Rebalancing Event when it assesses that the level of unencumbered cash in the Fund is not sufficiently prudent. To make this assessment, the Investment Adviser will analyse multiple stressed historic economic scenarios over multiple time periods (in particular, time periods consistent with the Intra-Rebalancing Period), prevailing market volatility conditions and other relevant factors. The Investment Adviser will also monitor the ratio of the present value of the Target Liability Profile to the Net Asset Value of the Fund. The Investment Adviser will initiate a Rebalancing Event when it assesses that this ratio falls to a level such that the Fund holds unencumbered cash which is materially in excess of that required to meet the Fund s objective. If the Investment Adviser assesses that the Fund requires additional unencumbered cash within an Intra-Rebalancing Period prior to the Rebalancing Dealing Day, the Investment Adviser may reduce risk exposures in the Fund by reducing the interest rate and inflation hedge and / or the Fund s allocation to LAAR III outside of the normal tolerances used to manage the Fund. The Investment Adviser will seek to restore the hedge and / or the Fund s allocation to LAAR III to within normal tolerances as soon as practicable following completion of a Rebalancing Event. The Investment Adviser may, in an Intra-Rebalancing Period, terminate a Releveraging Redemption, in full or in part, if it assesses that such action is required to maintain prudent levels of unencumbered cash in the Fund. The Fund may hold cash or invest its assets in instruments such as commercial paper, bankers acceptances, certificates of deposit and government-issued debt issued by OECD member countries or by any supranational entity which are listed or traded on a Recognised Market ( Cash Equivalents ) for liquidity purposes and for the purposes of paying any expenses due. Absolute Return II Fund The objective of the Absolute Return II Fund is to deliver positive absolute return in the form of capital growth over the medium to long term. The Investment Adviser has determined the Fund s target exposure to assets seeking capital growth. The Investment Adviser may change the Fund s target exposure to assets seeking capital growth as a consequence of one or all of the following: If the Investment Adviser assesses that the level of unencumbered cash in the Fund is not sufficiently prudent to support the risk exposures in the Fund, the target exposure to assets seeking capital growth in the Fund may be reduced. In these circumstances, Shareholders in the Fund will be provided with information on any reduction in the target exposure prior to implementation of any change. Upon receipt of a collective instruction from all of its Shareholders, and subject to the level of unencumbered cash in the Fund being sufficiently prudent to support the instructed change in exposures in the Fund. An increase or decrease in the Net Asset Value of the Fund. Shares in the Fund can only be held by the Absolute Return II Nominal Profile Fund and the Absolute Return II Real Profile Fund, each a sub-fund of the ICAV managed by the Investment Adviser, unless the Directors subsequently approve the holding of Shares in the Fund by another sub-fund of the ICAV and update the supplement accordingly. The Fund is managed with a wide investment remit to exploit market inefficiencies through active allocation to a diverse range of market positions. The Fund seeks strategies from across the entire global fixed income and foreign exchange investment universe, looking for returns through dynamic allocation to investment opportunities in traditional and advanced asset strategies. The Fund combines the investment ideas produced by fixed income and multi-asset teams of the Investment Manager with the aim of producing a portfolio with diversified risks. 8

10 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return II Fund (continued) The Fund uses a combination of traditional assets (such as bonds, money market investments and cash) and investment strategies based on advanced derivative techniques. The Fund will invest globally in a diversified portfolio of derivative contracts (including futures, options, swaps, forward currency contracts and other derivatives). Additionally, the Fund may invest in other forms of eligible transferable securities, interest bearing securities, deposits, money market instruments and collective investment schemes and investments of the Fund may or may not be listed on recognised exchanges. Use may also be made of borrowing, efficient portfolio management (including hedging) and stock lending. Examples of strategies that may be used at any time include: An assessment of the direction of credit quality in one market compared to another. Changes in credit quality can influence the valuation of assets and this strategy would position the portfolio to benefit from such changes. Rather than invest in physical securities, this strategy could be implemented through the use of derivatives in the form of credit default swaps An assessment of the value of one currency relative to another. The strategy could involve the sale of the currency considered overvalued and purchase of the currency considered undervalued. Derivatives, in the form of forward foreign exchange contracts, could be used to implement the strategy. An assessment of the direction of interest rates. Derivatives, in the form of interest rate swaps, could be used to position the portfolio such that it could benefit from the future direction of interest rates. The Fund will use derivatives extensively to reduce risk or cost, or to generate additional capital or income at low risk, or to meet its investment objective. In addition, the Fund may make use of repurchase agreements and reverse repurchase agreements to meet its investment objective. The Fund s use of derivatives is monitored to ensure that the Fund is not exposed to excessive or unintended risks. The Fund can take long and short positions in markets, securities and groups of securities through derivative contracts. Use of derivatives and repurchase agreements will add leverage in the Fund. The Fund intends to use techniques and instruments, including foreign currency exchange transactions, for efficient portfolio management subject to the conditions and limits laid down from time to time in the AIF Rulebook and set out in the Prospectus. Transactions entered into for efficient portfolio management purposes will be entered into for one or more of the following specified aims: the reduction of risk; the reduction of cost or the generation of additional capital or income for the Fund with a level of risk that is consistent with the risk profile of the Fund and the risk diversification rules set out in the AIF Rulebook. The Fund may not invest more than 50% of its NAV, in aggregate, in collective investment schemes (including exchange traded funds) or in any one collective investment scheme or exchange traded fund. Such collective investment schemes or exchange traded funds may be regulated or unregulated, leveraged or un-leveraged and may be domiciled in any jurisdiction worldwide. When domiciled in unregulated jurisdictions, such collective investment schemes or exchange traded funds will not provide a level of investor protection equivalent to collective investment schemes or exchange traded fund authorised under Irish laws and subject to Irish regulations and conditions. Absolute Return II Nominal Profile Fund The objective of the Absolute Return II Nominal Profile Fund is to deliver an aggregate return through the implementation of two investment approaches: a hedge of nominal interest rate sensitivity which is calibrated to the interest rate sensitivity of a defined set of cash flows (defined as the Target Liability Profile ) and determined using an interest rate swap-derived discount curve. to seek additional capital growth of 3 month LIBOR plus 3% per annum over rolling 3 year periods, gross of fees. The Fund will seek to achieve its investment objective by investing in instruments and securities to provide similar interest rate sensitivity to the Target Liability Profile, as determined by the Investment Adviser. The Target Liability Profile will be made available to Shareholders upon request. The discounted present value of the Target Liability Profile is expected to exceed the Net Asset Value of the Fund at all times. The Fund will use derivatives extensively to meet its investment objective. In addition, the Fund may make use of repurchase agreements and reverse repurchase agreements. The Fund may invest in fixed income or debt securities which may be fixed or floating rate and may include securities that are unrated or rated below investment grade. Such securities may be issued by any government, supra-national or corporate issuer globally. 9

11 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return II Nominal Profile Fund (continued) Use of derivatives and repurchase agreements will add leverage in the Fund. Use of derivatives is monitored to ensure that the Fund is not exposed to excessive or unintended risks. The Fund can take long and short positions in markets, securities and groups of securities through derivative contracts (including, without limitation, interest rate swaps, inflation swaps, credit default swaps, currency swaps, asset swaps, total return swaps, interest rate swaptions, futures, options and foreign exchange contracts). In the normal course of events, the Investment Adviser will maintain the interest rate hedge within tolerance ranges, including a +/- 1-year duration mismatch tolerance, to seek to limit any divergence in returns relative to the Target Liability Profile. The Investment Adviser will typically rebalance the interest rate sensitivity of the Fund towards the sensitivity of the Target Liability Profile prior to it falling outside this tolerance range and in particular if it assesses that there are opportunities to rebalance the hedge efficiently. The Fund may exceed these tolerances from time to time including, but not exclusive to, during a Rebalancing Event as outlined separately under Cash Management below. The Investment Adviser may invest, without limitation, in instruments which are not directly sensitive to changes in the interest rate swap discount curve used to determine the interest rate sensitivity of the Target Liability Profile. Decisions to invest in such instruments will be based upon a relative long-term assessment of their efficiency. The return of the Fund may therefore differ significantly from the change in the present value of the Target Liability Profile over short to medium term periods. The Investment Adviser will typically consider the tracking error in three components: 1. strategic positions in hedging instruments for example, investment in gilts instead of interest rate swaps (used to measure the sensitivity of the Target Liability Profile). 2. mismatches between the sensitivity of the Target Liability Profile and asset portfolio to changes in interest rates at different maturity points of the yield curve. 3. investment in assets targeting capital growth. The first component is not managed on a tracking error basis because there is no limit on strategic positions in hedging instruments. The Investment Adviser monitors the second and third components in isolation and the annualised observed aggregate tracking error calculated relative to and as a function of the discounted present value of the Target Liability Profile from these components is expected to be below 6.5% per annum in the normal course of events. Capital Growth The Fund will invest in the Absolute Return II Fund ( LAAR II ) to seek to achieve capital growth. In the normal course of events, the Investment Adviser will maintain the Fund s allocation to LAAR II within exposure tolerance ranges based on the target allocation expected to be required to meet the Fund s objective. The target allocation will vary with changes in the value of the Fund and the target exposure to assets seeking capital growth in LAAR II. The Fund may, in aggregate with all other shareholders of LAAR II, instruct a change to the target exposure to assets seeking capital growth in LAAR II. This instruction may be independent of any subscription or redemption by the Fund for Shares in LAAR II. The Fund will only provide such an instruction if it is consistent with the objective and policy of the Fund. The Investment Adviser will typically increase or reduce the allocation to LAAR II prior to it falling outside these tolerance ranges and in particular if it assesses that there are opportunities to change the allocation efficiently. The Fund may exceed these tolerances from time to time including, but not exclusive to, during a Rebalancing Event as outlined separately under Cash Management below. The capital growth of the Fund will be therefore impacted by both the performance of and differences between the actual and target allocation to LAAR II. The Fund may invest up to 100% of its NAV, in aggregate, in collective investment schemes (including exchange traded funds). The Fund, other than its investment in Absolute Return II Fund, will not invest more than 50% of its NAV in any one collective investment scheme or exchange traded fund. Such collective investment schemes or exchange traded funds may be regulated or unregulated, leveraged or un-leveraged and may be domiciled in any jurisdiction worldwide. When domiciled in unregulated jurisdictions, such collective investment schemes or exchange traded funds will not provide a level of investor protection equivalent to collective investment schemes or exchange traded funds authorised under Irish laws and subject to Irish regulations and conditions. The investments of the Fund may or may not be listed on recognised exchanges. 10

12 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return II Nominal Profile Fund (continued) Cash Management The Fund will seek to maintain adequate, but not excessive, cash to support the leverage in the Fund under a range of potential investment scenarios. A Rebalancing Event may be initiated as outlined in the Prospectus if the Investment Adviser assesses, in its absolute discretion, that such an event is required to maintain adequate but not excessive levels of cash to meet the Fund s objective. The Investment Adviser will initiate a Rebalancing Event when it assesses that the level of unencumbered cash in the Fund is not sufficiently prudent. To make this assessment, the Investment Adviser will analyse multiple stressed historic economic scenarios over multiple time periods (in particular, time periods consistent with the Intra-Rebalancing Period), prevailing market volatility conditions and other relevant factors. The Investment Adviser will also monitor the ratio of the present value of the Target Liability Profile to the Net Asset Value of the Fund. The Investment Adviser will initiate a Rebalancing Event when it assesses that this ratio falls to a level such that the Fund holds unencumbered cash which is materially in excess of that required to meet the Fund s objective. If the Investment Adviser assesses that the Fund requires additional unencumbered cash within an Intra-Rebalancing Period prior to the Rebalancing Dealing Day, the Investment Adviser may reduce risk exposures in the Fund by reducing the interest rate hedge and / or the Fund s allocation to LAAR II outside of the normal tolerances used to manage the Fund. The Investment Adviser will seek to restore the hedge and / or the Fund s allocation to LAAR II to within normal tolerances as soon as practicable following completion of a Rebalancing Event. The Investment Adviser may, in an Intra-Rebalancing Period, terminate a Releveraging Redemption, in full or in part, if it assesses that such action is required to maintain prudent levels of unencumbered cash in the Fund. The Fund may hold cash or invest its assets in instruments such as commercial paper, bankers acceptances, certificates of deposit and government-issued debt issued by OECD member countries or by any supranational entity which are listed or traded on a Recognised Market ( Cash Equivalents ) for liquidity purposes and for the purposes of paying any expenses due. Absolute Return II Real Profile Fund The objective of the Absolute Return II Real Profile Fund is to deliver an aggregate return through the implementation of two investment approaches: a hedge of nominal interest rate and inflation sensitivity which is calibrated to the interest rate and inflation sensitivity of a defined set of cash flows (defined as the Target Liability Profile ) and determined using interest rate and inflation swap-derived discount curves. to seek additional capital growth of 3 month LIBOR plus 3% per annum over rolling 3 year periods, gross of fees. The Fund will seek to achieve its investment objective by investing in instruments and securities to provide similar interest rate and inflation sensitivity to the Target Liability Profile, as determined by the Investment Adviser. The Target Liability Profile will be made available to Shareholders upon request. The discounted present value of the Target Liability Profile is expected to exceed the Net Asset Value of the Fund at all times. The Fund will use derivatives extensively to meet its investment objective. In addition, the Fund may make use of repurchase agreements and reverse repurchase agreements. The Fund may invest in fixed income or debt securities which may be fixed or floating rate and may include securities that are unrated or rated below investment grade. Such securities may be issued by any government, supra-national or corporate issuer globally. Use of derivatives and repurchase agreements will add leverage in the Fund. Use of derivatives is monitored to ensure that the Fund is not exposed to excessive or unintended risks. The Fund can take long and short positions in markets, securities and groups of securities through derivative contracts (including, without limitation, interest rate swaps, inflation swaps, credit default swaps, currency swaps, asset swaps, total return swaps, interest rate swaptions, futures, options and foreign exchange contracts). In the normal course of events, the Investment Adviser will maintain the interest rate and inflation hedge within tolerance ranges to seek to limit any divergence in returns relative to the Target Liability Profile. Primary tolerance ranges will be +/- 1-year duration mismatches. 11

13 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return II Real Profile Fund (continued) The Investment Adviser will typically rebalance the interest rate and / or inflation sensitivity of the Fund towards the sensitivity of the Target Liability Profile prior to it falling outside this tolerance range and in particular if it assesses that there are opportunities to rebalance the hedge efficiently. The Fund may exceed these tolerances from time to time including, but not exclusive to, during a Rebalancing Event as outlined separately under Cash Management below. The Investment Adviser may invest, without limitation, in instruments which are not directly sensitive to changes in the interest rate and inflation swap discount curves used to determine the interest rate and inflation sensitivity of the Target Liability Profile. Decisions to invest in such instruments will be based upon a relative long-term assessment of their efficiency. The return of the Fund may therefore differ significantly from the change in the present value of the Target Liability Profile over short to medium term periods. The Investment Adviser will typically consider the tracking error in three components: 1. strategic positions in hedging instruments for example, investment in gilts instead of interest rate swaps (used to measure the sensitivity of the Target Liability Profile) 2. mismatches between the sensitivity of the Target Liability Profile and asset portfolio to changes in interest rates and inflation at different maturity points of the yield curve 3. investment in assets targeting capital growth. The first component is not managed on a tracking error basis because there is no limit on strategic positions in hedging instruments. The Investment Adviser monitors the second and third components in isolation and the annualised observed aggregate tracking error relative to the Target Liability Profile from these components is expected to be below 6.5% per annum in the normal course of events. Capital Growth The Fund will invest in the Absolute Return II Fund ( LAAR II ) to seek to achieve capital growth. In the normal course of events, the Investment Adviser will maintain the Fund s allocation to LAAR II within exposure tolerance ranges based on the target allocation expected to be required to meet the Fund s objective. The target allocation will vary with changes in the value of the Fund and the target exposure to assets seeking capital growth in LAAR II. The Fund may, in aggregate with all other shareholders of LAAR II, instruct a change to the target exposure to assets seeking capital growth in LAAR II. This instruction may be independent of any subscription or redemption by the Fund for Shares in LAAR II. The Fund will only provide such an instruction if it is consistent with the objective and policy of the Fund. The Investment Adviser will typically increase or reduce the allocation to LAAR II prior to it falling outside these tolerance ranges and in particular if it assesses that there are opportunities to change the allocation efficiently. The Fund may exceed these tolerances from time to time including, but not exclusive to, during a Rebalancing Event as outlined separately under Cash Management below. The capital growth of the Fund will be therefore impacted by the performance of and differences between the actual and target allocation to LAAR II. The Fund may invest up to 100% of its NAV, in aggregate, in collective investment schemes (including exchange traded funds). The Fund, other than its investment in Absolute Return II Fund, will not invest more than 50% of its NAV in any one collective investment scheme or exchange traded fund. Such collective investment schemes or exchange traded funds may be regulated or unregulated, leveraged or un-leveraged and may be domiciled in any jurisdiction worldwide. When domiciled in unregulated jurisdictions, such collective investment schemes or exchange traded funds will not provide a level of investor protection equivalent to collective investment schemes or exchange traded funds authorised under Irish laws and subject to Irish regulations and conditions. The investments of the Fund may or may not be listed on recognised exchanges. 12

14 Background to the ICAV (continued) Investment Objectives and Policies (continued) Absolute Return II Real Profile Fund (continued) Cash Management The Fund will seek to maintain adequate, but not excessive, cash to support the leverage in the Fund under a range of potential investment scenarios. A Rebalancing Event may be initiated as outlined in the Prospectus if the Investment Adviser assesses, in its absolute discretion, that such an event is required to maintain adequate but not excessive levels of cash to meet the Fund s objective. The Investment Adviser will initiate a Rebalancing Event when it assesses that the level of unencumbered cash in the Fund is not sufficiently prudent. To make this assessment, the Investment Adviser will analyse multiple stressed historic economic scenarios over multiple time periods (in particular, time periods consistent with the Intra-Rebalancing Period), prevailing market volatility conditions and other relevant factors. The Investment Adviser will also monitor the ratio of the present value of the Target Liability Profile to the Net Asset Value of the Fund. The Investment Adviser will initiate a Rebalancing Event when it assesses that this ratio falls to a level such that the Fund holds unencumbered cash which is materially in excess of that required to meet the Fund s objective. If the Investment Adviser assesses that the Fund requires additional unencumbered cash within an Intra-Rebalancing Period prior to the Rebalancing Dealing Day, the Investment Adviser may reduce risk exposures in the Fund by reducing the interest rate and inflation hedge and / or the Fund s allocation to LAAR II outside of the normal tolerances used to manage the Fund. The Investment Adviser will seek to restore the hedge and / or the Fund s allocation to LAAR II to within normal tolerances as soon as practicable following completion of a Rebalancing Event. The Investment Adviser may, in an Intra-Rebalancing Period, terminate a Releveraging Redemption, in full or in part, if it assesses that such action is required to maintain prudent levels of unencumbered cash in the Fund. The Fund may hold cash or invest its assets in instruments such as commercial paper, bankers acceptances, certificates of deposit and government-issued debt issued by OECD member countries or by any supranational entity which are listed or traded on a Recognised Market ( Cash Equivalents ) for liquidity purposes and for the purposes of paying any expenses due. 13