RHB DANA ISLAM ANNUAL REPORT RHB Asset Management Sdn Bhd ( X) For the financial year ended 31 March 2018

Transcription

1 RHB DANA ISLAM ANNUAL REPORT 2018 For the financial year ended 31 March 2018 RHB Asset Management Sdn Bhd ( X) Head Office Level 8, Tower 2 & 3, RHB Centre Jalan Tun Razak Kuala Lumpur, Malaysia Tel : Fax :

2 Name, Category and Type GENERAL INFORMATION ABOUT THE FUND Fund Name - RHB Dana Islam Fund Category - Equity fund (Shariah-compliant) Fund type - Growth fund Investment Objective, Policy and Strategy Objective The Fund aims to provide investors with above average capital growth over a medium to long term* period by investing in a carefully selected portfolio of stocks which complies with the Shariah principles. *Note: medium to long term in this context refers to a period of between 3 7 years. Strategy The Fund seeks to achieve its objective by structuring a portfolio as follow: 90% - 98% of Net Asset Value 2% - 10% of Net Asset Value - Investments in Shariah-compliant equity and equity related securities of companies that have good growth potential. - Investments in Shariah-compliant liquid assets comprising of cash and Islamic deposits with financial institutions, Islamic accepted bills, sukuk, Cagamas Sukuk, Government Investment Issues and any other Shariah-compliant instrument capable of being converted into cash within seven (7) days. Subject to the range stipulated above, the asset allocation will be reviewed from time to time depending on the judgement of RHB Islamic International Asset Management Berhad ( the External Investment Manager ) as to the general market and economic conditions. 1

3 Investment Approach Our investment philosophy describes the approach that the investment team will adhere to when constructing a Shariah-compliant equities or sukuk portfolio. The fund managers invest in well-managed companies with strong balance sheets that possess competitive advantages that should enable them to outperform their peers over economic cycles. The fund managers are active investors that make high conviction security selection decisions, but at the same time do not take unnecessary or excessive risks nor take speculative positions. The fund managers seek to outperform their peers and beat their benchmark by buying mispriced or cheap securities. Following our disciplined sell strategy, they would then exit positions when our target price is reached. Concurrently, the fund managers understand the Fund s risk profile and act within the Fund s mandate. 2

4 Investment Approach Whenever a Fund invests in Shariah-compliant equities and/or sukuk, the Manager s investment approach will evolve around the following principles:- Shariah-compliant equities Sukuk 3

5 Performance Benchmark The performance of the Fund is benchmarked against the FTSE Bursa Malaysia EMAS Shariah Index. Permitted Investments This Fund may invest or participate in Shariah-compliant securities trade on the Bursa Malaysia or any other market considered as an eligible market, unlisted Shariah-compliant securities, Islamic collective investment schemes, Islamic financial derivatives, Islamic structured products, Shariah-compliant liquid assets (including Islamic money market instruments and Islamic deposits with any financial institutions), participate in the lending of Shariah-compliant securities that complies with Shariah requirements, and any other Shariah-compliant investments permitted by the SACSC and/or the Shariah adviser from time to time. Consequently, all investments for this Fund are to be designated as Shariah-compliant and in this regard, the Shariah adviser will advise on the selection of investments to ensure compliance with Shariah requirements. Distribution Policy Consistent with the Fund s objective to achieve capital growth, distributions will therefore be of secondary importance. Distributions, if any, after deduction of taxation and expenses, are generally declared annually and will be reinvested. 4

6 MANAGER S REPORT EQUITIES MARKET REVIEW It was a mix period for Malaysian equities as we saw investors turning more cautious as investors move away towards defensive big capitalization stocks from higher growth small capitalization stocks. The FTSE Bursa Malaysia Kuala Lumpur Composite Index ( FBM KLCI ) which is the main index for Malaysia closed the period with +7.09% return. Throughout the year, FBM KLCI reached its lowest point of 1, on 4 th of December 2017 and closed its highest point of 1, on 22 nd March Other main local indices that registered a good run was FTSE Bursa Malaysia Emas Shariah Index with 3.27% whilst FTSE Bursa Malaysia Small Cap Index and FTSE Bursa Malaysia Small Cap Shariah Index registered negative returns of 13.02% and 16.27% respectively. For the FBM KLCI, bulk of the return happened in the first quarter of year 2018 as uncertainties lingers on implementation on President Trump new tax policies, slowing down of earnings revision by consensus and diminishing anticipation of the 14th General Election happening in second half of year Malaysia continues to lag behind its regional peers as the KLCI return of +7.09% was weaker against other regional markets like Vietnam which chalked up the highest return of %, followed by MSCI China with %. Sectors that outperformed for the period for local equity market are; financial sector via Malayan Banking Berhad (+25.89%) and Public Bank Berhad (+23.78%), broad-based consumer via Nestle Malaysia Berhad ( %), Fraser & Neave Holdings Berhad (+37.08%) and QL Resources Berhad (+46.69%). Property counters are mostly the underperformers as they suffered from weak consumer sentiment on big ticket items as well as abundant of supply of unsold inventories. Year 2017 calendar year saw a sizeable foreign fund inflow for Malaysian equities market with Malaysian Ringgit ( MYR ) 10.6 billion net buying versus net selling of MYR 29.7 billion by foreigners in year 2014 to year 2016 period. This is the highest value of foreign net buy within the emerging the Association of Southeast Asian Nations ( ASEAN ), followed by Vietnam and Philippines. This pushes the foreign holdings in Malaysia equities to 23.1% at the end of November 2017 from 22.3% in December However, this is lower compared to 25.2% at the end of May ECONOMIC REVIEW & OUTLOOK In the January 2018 update of the World Economic Outlook, International Monetary Fund ( IMF ) had raised global economic growth forecast to 3.7% for year 2017 and 3.9% for year 2018, compared to 3.6% for year 2017 and 3.7% for year 2018 in the October 2017 report. The positive revision mainly from the broad-based upward 5

7 revision in Asia and Europe which reflects global growth momentum and the expected impact of the recently approved United States ( US ) tax policy changes. The latest update also showed that about 120 economies which accounts for three quarters of world Gross Domestic Product ( GDP ) have seen a pickup in growth compared to previous year. This has been the broadest synchronized global growth since year World trade has shown strong growth in recent months on the back of increased manufacturing output particularly in Asia. Global Purchasing Managers Index ( PMI ) numbers continued to strengthen, with February 2018 reading stood at 54.2 points, which is the best since early year Despite a drop in February s Eurozone s manufacturing PMI of 58.6 points (from 59.6 in January 2018), it still points to robust growth in businesses as it stayed above its long run average of 51.8 points. Similarly, Japan s PMI edged down to 54.1 in February 2018 (from 54.8 in January 2018) slightly above consensus expectations of In the U.S., business environment continues to remain sanguine given the February 2018 Institute for Supply Management ( ISM ) PMI rose to 60.8 points, which is the highest achieved in last 14 years. This signifies a strong expansion phase of manufacturing sector since May 2004, mainly boosted by new business and employment. On the local front, Malaysia economy continued to generate good macroeconomic numbers that forms a strong fundamental base going forward. GDP growth gained stronger momentum in the full year 2017 to record a reading of +5.9% Year-on-Year ( YoY ) (fourth quarter: +6.2% Y-o-Y), higher than market estimate of +5.7% on the back of private sector demand as well as support from external sectors. For year 2018, growth is expected to continue to remain favourable with domestic demand continue to be the key driver of growth. The synchronized uptick in global growth will continue to benefit Malaysia s exports, with positive spill over to the domestic economic activity. Headline inflation is expected to moderate in year 2018, on the back of rising commodity prices offset by stronger Malaysian Ringgit compared to previous year. REVIEW OF FUND PERFORMANCE DURING THE YEAR During the period in review (1st April 2017 to 31st March 2018), the fund was not able to achieve its objective as the total return was -4.66%* compared to its benchmark return of +3.27%*. The underperformance was attributed to the stock selection and sector allocation as 2017 was quite bad for most part of the year for equities except at the tail end of December. Some benchmark stocks had a late run up pushing up benchmark quite instantly and very much to the surprise of many market players. The fund that was largely positioned for growth stocks did not participate with this kind of run up as it was only selected few. These selected stocks however 6

8 succumbed to immediate price correction once it cross over to the new financial year. As we move into 2018, it is expected to be a better year for equity market but not without volatility. We suspect the first half of 2018, market performance will be affected by several external shocks and not to mention Malaysia having the 14th General Election in May On top of that corporate results releases in May, could show a bit of slowdown after good growth recorded in fourth quarter of Nevertheless, we remain to be focus in our attempt to achieve a competitive return to the unitholders through our strategy that focuses on stock picking centric through companies which have sustainable growth and supported by stronger global and local macroeconomic environments. * Source: Lipper Investment Management ( Lipper IM ), 12 April 2018 MARKET OUTLOOK AND STRATEGY We expect the general elections to be held in May In view of this, political stocks may steal the lime light in the first half of the year With US midterm elections scheduled for November 2018, there is increased incentive for President Trump to deliver on campaign pledges. There is therefore more to come. President Trump has ordered the US Trade Representative to propose a list of product tariff increases and to consider further tariffs on goods from China. Malaysia is vulnerable in the event of a protracted trade war. Gross export accounts for approximately 73% of the Malaysian Gross Domestic Product ( GDP ) in Meanwhile, electronics and electrical ( E&E ) goods account for 37% of Malaysia s export. In the event of a full-blown trade war between the US and China, Malaysia would likely be adversely affected, particularly the E&E sector. Through volatile markets it's important to take a long-term perspective and be reminded that market returns are driven by economic and earnings growth over time, and both appear positive, in our view. As for small and medium capitalisation stocks, present broad market weakness presents accumulation opportunity but caution and patience are required. Amid trade war uncertainty and rising interest rate, equity risk premium is unlikely to get any lower. As such, the days of buying high and selling higher on valuation expansion are over. We will continue to focus on fundamentals and valuation. Portfolio wise, we will continue to focus in value investing. Though there are many investing thoughts such as value-oriented, growth-oriented, etc, our value approach is all-encompassing. Investors should pay attention on the ability of a company that can generate earnings growth from new products, new capacity and new markets. We will continue to focus on good quality stocks that have resilient earnings, strong balance sheet and cash flows; and ability to demonstrate clear growth strategy that will benefit the fund in the longer term. 7

9 PERFORMANCE DATA Annual Total Returns Year Ended 31 March % % % % % RHB Dana Islam - Capital Return (8.83) 1.07 (7.99) (3.92) Income Return Total Returns (4.66) (3.92) FTSE Bursa Malaysia EMAS Shariah Index (4.74) (0.18) Year % Average Annual Return 3 Years 5 Years % % 10 Years % RHB Dana Islam (4.66) FTSE Bursa Malaysia EMAS Shariah Index

10 Performance of RHB Dana Islam for the period from 31 March 2008 to 31 March 2018 Cumulative Return Over The Period (%) Source: Lipper IM, 12 April 2018 The abovementioned performance figures are indicative returns based on daily Net Asset Value of a unit (as per Lipper Database) since inception. The calculation of the above returns is based on computation methods of Lipper. Note : Past performance is not necessarily indicative of future performance and unit prices and investment returns may go down, as well as up. The abovementioned performance computations have been adjusted to reflect distribution payments and unit splits wherever applicable. As at 31 March Fund Size Net Asset Value (RM million) 94.42* * Units In Circulation (million) * * Net Asset Value Per Unit (RM) * * 9

11 Year Ended 31 March Historical Data Unit Prices NAV - Highest (RM) * * NAV - Lowest (RM) * * Distribution and Unit Split Gross Distribution Per Unit (sen) Net Distribution Per Unit (sen) Ex date NAV before distribution (cum) NAV after distribution (ex) Gross Distribution Per Unit (sen) Net Distribution Per Unit (sen) Ex date NAV before distribution (cum) NAV after distribution (ex) Unit Split Others Management Expense Ratio (MER) (%) # Portfolio Turnover Ratio (PTR) (times) ## * The figures quoted are ex-distribution # The MER for the financial year is consistent compared with the previous financial year (refer to Note 13). ## The PTR for the financial year was lower compared with the previous financial year due to lesser investment activities during the financial year under review (refer to Note 14). DISTRIBUTION For the financial year under review, the Fund has declared a net distributions of sen per unit, which is equivalent to a net distribution yield of 4.36% based on the average net asset value for the financial year. 10

12 PORTFOLIO STRUCTURE The asset allocations of the Fund as at reporting date was as follows: As at 31 March Sectors Equities % % % Construction Consumer Products Finance Industrial Products Infrastructure Project Companies Plantation Properties Technology Trading/Services Real Estate Investment Trust Liquid assets and other net current assets The asset allocation of the Fund reflects the Manager stance to risk manage the portfolio in the volatile markets. 11

13 BREAKDOWN OF UNIT HOLDINGS BY SIZE Account Holders No. Of Units Held* Size of Holdings No. % ( 000) % 5,000 and below 1, , ,001 to 10, , ,001 to 50,000 1, , ,001 to 500, , ,001 and above , Total 3, , * Excluding Manager s stock SOFT COMMISSION The Fund Manager may only receive soft commission in the form of research and advisory services that assist in the decision-making process relating to the Fund s investments. During the financial year under review, the soft commission received from the brokers had been retained by the Manager as the goods and services provided are of demonstrable benefit to the unitholders. 12

14 RHB DANA ISLAM STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2018 Note RM RM ASSETS Investments 5 85,977,988 81,045,509 Islamic deposits with licensed financial institution 6 4,752,322 7,356,836 Bank balances 6 3,759,922 8,045,235 Amount due from stockbrokers - 2,931,402 Amount due from Manager - 298,179 Dividends receivable 188,529 91,983 Tax recoverable TOTAL ASSETS 94,679,125 99,769,508 LIABILITIES Amount due to stockbrokers - 10,874,508 Amount due to Manager 100,681 - Accrued management fee 132, ,197 Amount due to Trustee 5,283 4,728 Other payables and accruals 20,129 11,325 TOTAL LIABILITIES 258,161 11,008,758 NET ASSET VALUE 94,420,964 88,760,750 EQUITY Unitholders capital 97,851,658 82,443,705 (Accumulated losses)/retained earnings (3,430,694) 6,317,045 94,420,964 88,760,750 UNITS IN CIRCULATION (UNITS) 8 113,198,739 97,007,000 NET ASSET VALUE PER UNIT (EX-DISTRIBUTION*) (RM) * The accompanying notes are an integral part of the financial statements. 13

15 RHB DANA ISLAM STATEMENT OF INCOME AND EXPENSES FOR THE FINANCIAL YEAR ENDED 31 MARCH 2018 Note RM RM (LOSS)/INCOME Dividend income 2,273,331 1,062,659 Profit income from Islamic deposits with licensed financial institutions 133, ,856 Net (loss)/gain on investments 5 (5,737,955) 4,242,846 Net foreign currency exchange loss (180,693) - (3,511,615) 5,498,361 EXPENSES Management fee 9 (1,323,602) (659,372) Trustee s fee 10 (52,944) (26,375) Audit fee (5,350) (5,350) Tax agent s fee (3,200) (4,200) Transaction costs (556,673) (424,099) Other expenses (144,156) (82,577) (2,085,925) (1,201,973) Net (loss)/income before taxation (5,597,540) 4,296,388 Taxation 11 (17,133) (2,751) Net (loss)/income after taxation (5,614,673) 4,293,637 Net (loss)/income after taxation is made up of the following: Realised amount 2,122,092 1,323,905 Unrealised amount (7,736,765) 2,969,732 (5,614,673) 4,293,637 The accompanying notes are an integral part of the financial statements. 14

16 RHB DANA ISLAM STATEMENT OF CHANGES IN NET ASSET VALUE FOR THE FINANCIAL YEAR ENDED 31 MARCH 2018 Unitholders Retained Total net capital earnings asset value RM RM RM Balance as at 1 April ,203,371 2,023,408 9,226,779 Movement in net asset value: Net income after taxation - 4,293,637 4,293,637 Creation of units arising from applications 78,104,811-78,104,811 Cancellation of units (2,864,477) - (2,864,477) Balance as at 31 March ,443,705 6,317,045 88,760,750 Balance as at 1 April ,443,705 6,317,045 88,760,750 Movement in net asset value: Net loss after taxation - (5,614,673) (5,614,673) Creation of units arising from applications 28,434,160-28,434,160 Creation of units arising from distribution 4,133,066-4,133,066 Cancellation of units (17,159,273) - (17,159,273) Distributions (Note 12) - (4,133,066) (4,133,066) Balance as at 31 March ,851,658 (3,430,694) 94,420,964 The accompanying notes are an integral part of the financial statements. 15

17 RHB DANA ISLAM STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 31 MARCH 2018 Note 2018 RM 2017 RM CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from sale of Shariah-compliant investments 90,375,644 35,241,024 Purchase of Shariah-compliant investments (108,603,463) (96,297,196) Dividends received 1,230, ,658 Profit income received from Islamic deposits with licensed financial institutions 133, ,856 Management fee paid (1,309,731) (552,790) Trustee s fee paid (52,389) (22,112) Payment for other fees and expenses (143,902) (92,752) Tax (paid)/refund (17,133) 2,104 Net cash used in operating activities (18,387,247) (60,552,208) CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from units created 28,732,339 78,184,482 Payment for cancellation of units (17,058,592) (2,864,477) Net cash generated from financing activities 11,673,747 75,320,005 Net (decrease)/increase in cash and cash equivalents (6,713,500) 14,767,797 Foreign currency translation differences (176,327) - Cash and cash equivalents at the beginning of the financial year 15,402, ,274 Cash and cash equivalents at the end of the financial year 6 8,512,244 15,402,071 The accompanying notes are an integral part of the financial statements. 16

18 RHB DANA ISLAM NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 MARCH THE FUND, THE MANAGER AND THEIR PRINCIPAL ACTIVITIES RHB Dana Islam (hereinafter referred to as the Fund ) was constituted pursuant to the execution of a Deed dated 11 September 2001 as amended via its First Supplemental Deed dated 24 December 2007, Supplemental Master Deed dated 1 June 2009, Second Supplemental Deed dated 4 September 2013, Third Supplemental Deed dated 2 March 2015 and Fourth Supplemental Deed dated 25 May 2015 (collectively referred to as the Deeds ) between RHB Asset Management Sdn Bhd ( the Manager ) and HSBC (Malaysia) Trustee Berhad ( the Trustee ). The Fund commenced operations on 26 October 2001 and will continue its operations until terminated according to the condition provided in the Deed. The principal activity of the Fund is to invest in Authorised Investments as defined under the Deed, which includes Shariah-compliant securities traded on Bursa Malaysia and short-term Islamic money market instruments. All investments will be subject to the Securities Commission Malaysia s ( SC ) Guidelines on Unit Trust Funds, SC requirements, the Deeds, except where exemptions or variations have been approved by the SC, internal policies and procedures and objective of the Fund. The main objective of the Fund is to provide investors with above average capital growth over a medium to long term period by investing in a carefully selected portfolio of stocks which complies with the Shariah Principles. The Manager is a company incorporated in Malaysia and is a wholly-owned subsidiary of RHB Investment Bank Berhad, effective 6 January Its principal activities include rendering of investment management services, management of unit trust funds, private retirement schemes and provision of investment advisory services. These financial statements were authorised for issue by the Manager on 25 May

19 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparation of the financial statements The financial statements have been prepared under the historical cost convention, as modified by financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss, except as disclosed in the summary of significant accounting policies, and in accordance with Malaysian Financial Reporting Standards ( MFRS ) and International Financial Reporting Standards ( IFRS ). 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 financial year. It also requires the Manager to exercise its judgement in the process of applying the Fund s accounting policies. Although these estimates and judgement are based on the Manager s best knowledge of current events and actions, actual results may differ. (a) The Fund has applied the following amendments for the first time for the financial year beginning on 1 April 2017: Amendments to MFRS 107 Statement of Cash Flows Disclosure Initiative (effective from 1 January 2017) introduce an additional disclosure on changes in liabilities arising from financing activities. The adoption of these amendments did not have any impact on the current year or any prior period and is not likely to affect future periods. 18

20 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.1 Basis of preparation of the financial statements (continued) (b) The new standards and amendments to published standards which are relevant to the Fund but not yet effective and have not been early adopted are as follows: (i) Financial year beginning on/after 1 April 2018 MFRS 9 Financial Instruments (effective from 1 January 2018) will replace MFRS 139 Financial Instruments: Recognition and Measurement. MFRS 9 retains but simplifies the mixed measurement model in MFRS 139 and establishes three primary measurement categories for financial assets: amortised cost, fair value through profit or loss and fair value through other comprehensive income ( OCI ). The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are always measured at fair value through profit or loss with an irrevocable option at inception to present changes in fair value in OCI (provided the instrument is not held for trading). A debt instrument is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and profit. For liabilities, the standard retains most of the MFRS 139 requirements. These include amortised cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than in profit or loss, unless this creates an accounting mismatch. MFRS 9 introduces an expected credit loss model on impairment that replaces the incurred loss impairment model used in MFRS 139. The expected credit loss model is forward-looking and eliminates the need for a trigger event to have occurred before credit losses are recognised. The above standards and amendments to published standards are not expected to have a significant impact on the Fund s financial statements. 19

21 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.2 Financial assets Classification Financial assets are designated as fair value through profit or loss when they are managed and their performance are evaluated on a fair value basis. The Fund designates its investments in quoted Shariah-compliant investments as financial assets at fair value through profit or loss at inception. Financing 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 financing and receivables comprise cash and cash equivalents, amount due from stockbrokers, amount due from Manager and dividend receivable which are all due within 12 months. 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. Subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value. Transaction costs are costs incurred to acquire or dispose financial assets or liabilities at fair value through profit or loss. They include fees and commissions paid to agents, advisors, brokers and dealers. Transaction costs, when incurred, are immediately recognised in the statement of comprehensive income as expenses. 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. 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 profit or loss within net gain on financial assets at fair value through profit or loss in the financial year which they arise. 20

22 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.2 Financial assets (continued) Recognition and measurement (continued) Quoted Shariah-compliant investments is initially recognised at fair value and subsequently re-measured at fair value based on the market price quoted on the relevant stock exchanges at the close of the business on the valuation day, where the close price falls within the bid-ask spread. In circumstances where the close price is not within the bid-ask spread, the Manager will determine the point within the bidask spread that is most representative of the fair value. If a valuation based on the market price does not represent the fair value of the securities, for example during abnormal market conditions or when no market price is available, including in the event of a suspension in the quotation of the securities for a period exceeding 14 days, or such shorter period as agreed by the Trustee, then the securities are valued as determined in good faith by the Manager, based on the methods or bases approved by the Trustee after appropriate technical consultation. Islamic deposits with licensed financial institutions are stated at cost plus accrued profit calculated on the effective profit method over the period from the date of placement to the date of maturity of the respective deposits. Financing and receivables are subsequently carried at amortised cost using the effective profit method. Impairment of financial assets For assets carried at amortised cost, the Fund assesses at the end of the financial year 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. 21

23 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.3 Financial liabilities Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability. Financial liabilities, within the scope of MFRS 139 Financial Instruments: Recognition and Measurement, 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. The Fund s financial liabilities which include amount due to stockbrokers, amount due to Manager, accrued management fee, amount due to Trustee and other payables and accruals are recognised initially at fair value plus directly attributable transaction costs, and subsequently measured at amortised cost using the effective profit method. A financial liability is derecognised when the obligation under the liability is extinguished. Gains and losses are recognised in profit or loss when the liabilities are derecognised, and through the amortisation process. 2.4 Unitholders capital The unitholders contributions to the Fund meet the criteria of the definition of puttable instruments to be classified as equity instruments under MFRS 132 Financial Instruments: Presentation. Those criteria include: the units entitle the holder to a proportionate share of the Fund s net assets value; the units are the most subordinated class and class features are identical; there is no contractual obligations to deliver cash or another financial asset other than the obligation on the Fund to repurchase; and the total expected cash flows from the units over its life are based substantially on the profit or loss of the Fund. The outstanding units are carried at the redemption amount that is payable at each financial year if unitholder exercises the right to put the unit back to the Fund. Units are created and cancelled at prices based on the Fund s net asset value per unit at the time of creation or cancellation. The Fund s net asset value per unit is calculated by dividing the net assets attributable to unitholders with the total number of outstanding units. 22

24 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.5 Distribution Distribution to the Fund s unitholders is accounted for as a deduction from realised reserves. A proposed distribution is recognised as a liability in the period in which it is approved by the Trustee. 2.6 Income recognition Dividend income from quoted Shariah-compliant investments is recognised when the Fund s right to receive payment is established. Profit income from Islamic deposits with licensed financial institutions is recognised on an accrual basis using the effective profit method. Realised gain or loss on sale of quoted Shariah-compliant investments is arrived at after accounting for cost of investments, determined on the weighted average cost method. Net income or loss is the total of income less expenses. 2.7 Taxation Current tax expense is determined according to Malaysian tax laws and includes all taxes based upon the taxable income earned during the financial year. Tax on dividend income from foreign quoted securities is based on the tax regime of the respective countries that the Fund invests in. 2.8 Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise bank balance and Islamic deposits with licensed financial institutions which are subject to an insignificant risk of changes in value. These amounts are recognised initially at fair value and subsequently measured at amortised cost using the effective profit method, less impairment for amounts due from brokers. See Note 2.2 on impairment of financial assets. 23

25 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.9 Amount due from/to stockbrokers Amounts due from and due to stockbrokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the date of the statement of financial position respectively Presentation and functional currency Items included in the financial statements of the Fund are measured using the currency of the primary economic environment in which the Fund operates (the functional currency ). The financial statements are presented in Ringgit Malaysia, which is the Fund s presentation and functional 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 RM primarily due to the following factors: The Fund s cash is denominated in RM for the purpose of making settlement of the creation and cancellation. The Fund s units are denominated in RM. The Fund s expenses are denominated in RM Foreign currency translation 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 period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss Segmental information Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The operating results are regularly reviewed by the Manager and the Investment Committee. The Investment Committee assumes the role of chief operating decision maker, for performance assessment purposes and to make decisions about resources allocated to the investment segment based on the recommendation by the Investment & Security Selection Committee. 24

26 3. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Fund is exposed to a variety of risks, which include market risk, price risk, profit rate risk, currency risk, credit risk, liquidity risk, Shariah specific risk and capital risk. Financial risk management is carried out through internal control processes adopted by the Manager and adherence to the investment restrictions as stipulated in the Securities Commission Malaysia Guidelines on Unit Trust Funds. Market risk Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in profit or currency rates or adverse investors sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labour shortages or increased production costs and competitive conditions within an industry. Equity securities generally have greater price volatility than fixed income securities. The market price of securities owned by a unit trust fund might go down or up, sometimes rapidly or unpredictably. Price risk Price risk is the risk that the fair value of the investments of the Fund will fluctuate because of changes in market prices. The Fund is exposed to equity security price risk for it investments of RM85,977,988 (2017: RM81,045,509) in quoted Shariah-compliant investments. The sensitivity analysis is based on the assumption that the price of the quoted securities investments fluctuate by +/(-) 5% with all other variables held constant, the impact on the net income/loss is +/(-) RM4,298,899 (2017: RM4,052,275). 25

27 3. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Profit rate risk Profit rate risk is the risk that cost or the value of the financial instruments will fluctuate due to changes in market profit rates. The Fund s exposure to the profit rate risk is mainly from short term placements with financial institutions. The Manager overcomes the exposure by way of maintaining Islamic deposits on short-term basis. Therefore, exposure to profit rate fluctuation is minimal. Currency risk Currency risk is associated with financial instruments that are quoted and/or priced in foreign currency denomination. Malaysian based investor should be aware that if the Ringgit Malaysia appreciates against the currencies in which the portfolio of the investment is denominated, this will have an adverse effect on the net asset value of the fund and vice versa. Investors should note any gains or losses arising from the movement of foreign currencies against its home currency may therefore increase or decrease the capital gains of the financial instruments. Nevertheless, investors should realise that currency risk is considered as one of the major risks to financial instruments in foreign assets due to the volatile nature of the foreign exchange market. The sensitivity of the Fund s net asset value attributable to unitholders as at reporting date to changes in foreign exchange movements at the end of each financial year. The analysis is based on the assumption that the foreign exchange rate fluctuates by +/(-) 5%, with all other variables remain constants, is +/(-) RM741,644 (2017: Nil). 26

28 3. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Credit risk Credit risk refers to the possibility that the issuer of a particular investment will not be able to make timely or full payments of principal or income due on that investment. The risk arising from placements of Islamic deposits in licensed financial institutions is managed by ensuring that the Fund will only place deposits in reputable licensed financial institutions.. For amount due from stockbrokers, the settlement terms are governed by the relevant rules and regulations as prescribed by the Bursa Malaysia Securities Berhad ( Bursa Malaysia ).The settlement terms of the proceeds from the creation of units receivable from the Manager are governed by the Securities Commission Guidelines on Unit Trust Funds. The following table sets out the credit risk concentration of the Fund: Cash and cash equivalents Other financial assets* Total 2018 RM RM RM AAA 8,512,244-8,512,244 Other - 188, ,529 8,512, ,529 8,700, AAA 15,402,071-15,402,071 AA2-2,931,402 2,931,402 Other - 390, ,162 15,402,071 3,321,564 18,723,635 * Comprise amount due from stockbrokers, amount due from Manager and dividends receivable. The financial assets of the Fund are neither past due nor impaired. 27

29 3. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in meeting its financial obligations. Liquidity risk exists when particular investments are difficult to sell, possibly preventing a unit trust fund from selling such illiquid securities at an advantageous time or price. Unit trust funds with principal investment strategies that involve securities or securities with substantial market and/or credit risk tend to have the greater exposure to liquidity risk. As part of its risk management, the Manager will attempt to manage the liquidity of the Fund through asset allocation and diversification strategies within the portfolio. The Manager will also conduct constant fundamental research and analysis to forecast future liquidity of its investments. The table below summarises the Fund s financial liabilities into relevant maturity groupings based on the remaining year from the statement of financial position date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows Less than 1 month RM Between 1 month to 1 year RM Amount due to Manager 100,681 - Accrued management fee 132,068 - Amount due to Trustee 5,283 - Other payables and accruals - 20, ,032 20, Amount due to stockbrokers 10,874,508 - Accrued management fee 118,197 - Amount due to Trustee 4,728 - Other payables and accruals - 11,325 10,997,433 11,325 28

30 3. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Shariah specific risk The risk that the investments do not conform to the principle of Shariah may result in those investments being not Shariah-compliant. Should the situation arise, necessary steps shall be taken to dispose of such investments in accordance with the rules of divestments of non Shariah-compliant investments. If this occurs, the Fund could suffer losses from the disposal and thus, adversely affecting the value of the Fund. Capital risk The capital of the Fund is represented by equity consisting of unitholders capital of RM97,851,658 (2017: RM82,443,705) and (accumulated losses)/retained earnings of RM3,430,694 (2017: RM6,317,045). The amount of equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of unitholders. 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 for unitholders and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Fund. 29

31 4. 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 and liabilities traded in an active market (such as publicly traded derivatives and trading securities) are based on quoted market prices at the close of trading on the financial year end date. An active market is a market in which transactions for the assets or liabilities take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The fair value of financial assets that are not traded in an active market is determined by using valuation techniques. The Fund uses a variety of methods and makes assumptions that are based on market conditions existing at each financial year end date. Valuation techniques used for non-standardised financial instruments such as options, currency swaps and other over-the-counter derivatives, include the use of comparable recent transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity-specific inputs. The fair values are based on the following methodologies and assumptions: (i) For bank balances, deposit with a licensed financial institution with maturities less than 1 year, the carrying value is a reasonable estimate of fair value. (ii) The carrying value less impairment of receivables and payables are assumed to approximate their fair values due to their short term nature. 30

32 4. FAIR VALUE ESTIMATION (CONTINUED) Fair value hierarchy The Fund adopted MFRS 13 Fair Value Measurement in respect of disclosures about the degree of reliability of fair value measurement. This requires the Fund to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1: Quoted prices (unadjusted) in active market for identical assets or liabilities Level 2: 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 3: Inputs for the asset and liability that are not based on observable market data (that is, unobservable inputs) The following table analyses within the fair value hierarchy the Fund s financial assets at fair value through profit or loss (by class) measured at fair value: Level 1 Level 2 Level 3 Total RM RM RM RM 2018 Investments: - Quoted Shariahcompliant investments 85,977, ,977,988 Level 1 Level 2 Level 3 Total RM RM RM RM 2017 Investments: - Quoted Shariah-compliant investments 81,045, ,045,509 Investments in active listed equities, i.e. quoted Shariah-compliant investments whose values are based on quoted market prices in active markets are classified within Level 1. 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

33 5. INVESTMENTS RM RM Investments: - Quoted Shariah-compliant investments - local 74,861,402 81,045,509 - Quoted Shariah-compliant investments - foreign 11,116,586-85,977,988 81,045, RM RM Net (loss)/gain on investments comprised: - Net realised gain on investments 1,822,483 1,273,114 - Net unrealised (loss)/gain on changes in fair values (7,560,438) 2,969,732 (5,737,955) 4,242,846 Investments as at 31 March 2018 are as follows : Name of Counter Quantity Cost Fair value % of Net Asset Value RM RM % QUOTED SHARIAH-COMPLIANT INVESTMENTS-LOCAL MALAYSIA Construction Gadang Holdings Bhd 2,050,000 2,464,091 1,886, Gamuda Bhd 620,000 3,060,861 3,211, Muhibbah Engineering (M) Bhd 790,000 2,185,767 2,330, Protasco Bhd 2,519,200 2,767,161 2,393, WCT Bhd 1,300,000 2,201,220 1,703, ,679,100 11,524, Consumer Products Dutch Lady Milk Industries Bhd 32,000 1,823,305 2,192,

34 5. INVESTMENTS (CONTINUED) Investments as at 31 March 2018 are as follow (continued): Name of Counter Quantity Cost Fair value % of Net Asset Value RM RM % QUOTED SHARIAH-COMPLIANT INVESTMENTS-LOCAL (CONTINUED) MALAYSIA Finance BIMB Holdings Bhd 863,100 3,622,792 3,391, Industrial Products ML Global Bhd 1,938,500 2,339,728 2,403, Pantech Group Holdings Bhd 3,000,000 2,087,650 1,695, Petronas Chemicals Group Bhd 340,000 2,462,051 2,808, Supermax Corporation Bhd 900,000 1,956,350 2,277, United U-Li Corporation Bhd* 485,000 2,751, , V.S. Industry Bhd 750,000 1,303,840 1,777, Wellcall Holdings Bhd 935,000 1,472,136 1,299, ,372,926 13,110, Infrastructure Project Companies Time Dotcom Bhd 185,000 1,563,280 1,546, Properties LBS Bina Group Bhd 2,915,000 3,126,502 2,565, * United U-Li Corporation Bhd was re-classified from Shariah non-compliant securities to Shariah compliant securities effective 24 November

35 5. INVESTMENTS (CONTINUED) Investments as at 31 March 2018 are as follows (continued): Name of Counter Quantity Cost Fair value % of Net Asset Value RM RM % QUOTED SHARIAH-COMPLIANT INVESTMENTS-LOCAL (CONTINUED) MALAYSIA Technology Datasonic Group Bhd 2,350,000 2,789,029 2,068, Inari Amertron Bhd 1,005,100 1,875,955 2,764, ,664,984 4,832, Trading/Services AWC Bhd 3,001,200 3,004,555 2,265, Axiata Group Bhd 480,129 2,499,257 2,616, Berjaya Auto Bhd 1,050,000 2,121,210 2,268, Hibiscus Petroleum Bhd 3,100,000 2,132,130 2,542, Hibiscus Petroleum Bhd-WC 620, , IHH Healthcare Bhd 550,000 3,283,810 3,327, KPJ Healthcare Bhd 3,000,000 2,889,000 2,670, Pestech International Bhd 1,767,700 2,940,723 2,810, Prestariang Bhd 978,200 1,763,980 1,252, Sime Darby Bhd 370, , , Taliworks Corporation Bhd 1,420,000 2,185,397 1,171, Telekom Malaysia Bhd 410,000 2,568,129 2,140, Tenaga Nasional Bhd 245,000 3,600,669 3,978, Lotte Chemical Titan Holding Bhd 630,000 3,206,854 3,836, Serba Dinamik Holdings Bhd 1,067,300 1,964,174 3,650, ,136,577 35,699, TOTAL QUOTED SHARIAH- COMPLIANT INVESTMENTS- LOCAL 76,989,466 74,861,