United Global Telecoms Fund

Transcription

1 United Global Telecoms Fund Annual Report for the financial year ended 31 st December 2013

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3 MANAGER UOB Asset Management Ltd Registered Address: 80 Raffles Place UOB Plaza Singapore Company Registration No. : Z OPERATIONS ADDRESS 80 Raffles Place #06-00, UOB Plaza 2 Singapore Tel: DIRECTORS OF UOB ASSET MANAGEMENT Terence Ong Sea Eng Cheo Chai Hong Thio Boon Kiat TRUSTEE / REGISTRAR HSBC Institutional Trust Services (Singapore) Limited 21 Collyer Quay #10-02, HSBC Building Singapore CUSTODIAN State Street Bank and Trust Company State Street Financial Center One Lincoln Street Boston, Massachusetts United States of America AUDITORS PricewaterhouseCoopers LLP 8 Cross Street #17-00, PWC Building Singapore SOLICITORS TO THE MANAGER Allen & Gledhill LLP One Marina Boulevard #28-00 Singapore SOLICITORS TO THE TRUSTEE Shook Lin & Bok LLP 1 Robinson Road #18-00, AIA Tower Singapore

4 A) Fund Performance Fund Performance/ Benchmark Returns 3 mth % Growth 6 mth % Growth 1 yr % Growth 3 yr Ann Comp Ret 5 yr Ann Comp Ret 10 yr Ann Comp Ret Since Inception 16 August 1999 Ann Comp Ret United Global Telecoms Fund Benchmark Source: Lipper, a Thomson Reuters Company. Note: The performance returns of the Fund are in Singapore dollars based on a NAV-to-NAV basis with net dividends reinvested. The benchmark of the Fund: MSCI ACWI Telecoms. For the year ended 31 December 2013, the net asset of the Fund rose 19.3% against an increase of 27.7% in the benchmark MSCI AC World Telecom Index (in Singapore dollar terms). The Fund underperformed during the period mainly due to the negative impact from our under-allocation and securities selection in Europe. However, this was partially mitigated by positive contribution of securities selection in US. In terms of stock selection, top contributors to the Fund included Vodafone Group, Baidu Inc and Comcast Corp. Key detractors were PT XL Axiata, Empresa Nacional De Telecom and Koninklikje KPN NV. As at end December 2013, the Fund had the following regional asset allocation: US (36.2%), UK (13.6%), China (8.3%), Japan (8.1%), Sweden (7.8%), South Africa (3.5%), Others (21.4%) and the remainder in cash (1.1%). In terms of sub-sector allocation, our Fund had an 80.7% weight in telecom service providers, 11.3% weight in the cable & satellite operators, 6.9% weight in internet communication firms, with the remainder (1.1%) in cash. Economic and Market Review The telecom sector enjoyed a strong rally in 2013, mainly attributable to strong performance from Europe and Japan. On the other hand, the US and other parts of Asia detracted from overall sector performance. In terms of regions, operating trends of telecom operators in Europe continued to deteriorate in the year, underpinned by a combination of mandatory interconnection rate cuts, weak macro conditions and strong pricing competition. Despite the weak fundamentals, share prices of European telecoms rebounded strongly since late June. The bullishness was a result of increased merger and acquisition activities, increasing expectations of better economic conditions, and a more investment-friendly regulatory environment. 2

5 In September 2013, the European Commission unveiled its plans to create a single European telecoms market to foster industry growth and job creation. A key negative element of the new proposal to the telecom operators is the abolition of the lucrative mobile roaming charges. On the other hand, the proposal seeks imposition of stable prices for copper network access and no imposition of price regulation on access to fibre network. These initiatives will provide incentives for network operators to upgrade and expand their network. The US telecom sector had a lacklustre performance in the year as a result of slowing wireless revenue growth and weak wireline operations. Smaller players have launched several aggressive initiatives to gain wireless subscriber market share, triggering bigger carriers to launch new financing plans and cut pricing. Weak wireline spending was attributed to reduced spending by government-related entities and enterprise businesses, partially mitigated by robust consumer sales of fibre-based broadband services. The Japan telecom sector was the best performer during the year, thanks to the new policies introduced by the Abe government. Telecom stocks in other parts of Asia registered mixed profit performance, and as a whole ended the year as one of the worst performers relative to other regions. Non-telecom operators in the Fund strongly outperformed the global telecom services sector in the year. The strong performance of Comcast and DirecTV was in part due to their positive subscriber growth. Google and Baidu were also notable outperformers, owing to their robust traditional advertising business segment and solid mobile traffic revenue growth momentum. Outlook and Fund Strategy Although current valuation is far less compelling when compared to the beginning of 2013, we see pockets of opportunities within the telecom sector. In view of the better macro outlook and lower incremental impact on mobile interconnection rate cuts in Europe, we expect earnings of network operators to stabilise in the second half of However, we believe that expectations of modest earnings recovery have been largely priced in and valuations remain stretched. Against this backdrop, we remain highly selective in our stock selection. We are generally cautious in the US telecommunication sector. We expect wireless competition to intensify in view of the improving operating positions of the smaller competitors and maturing smartphone penetration. We also believe that the potential for further in-market consolidation is slim due to the pro-competition stance adopted by the new Federal Communications Commission chairman. We have turned more positive on Japan in view of their rising domestic and overseas growth opportunities. In other parts of Asia, we see specific investment opportunities in Emerging Asia telecom operators with strong earnings growth prospects and attractive valuation. In summary, the Fund s enduring focus is to invest in firms with superior networks or technologies, compete in a favourable competitive and regulatory environment and have a sustainable competitive edge. We will maintain a fair holding of stable high dividend yielding developed market telecom names and strategically invest in emerging market telecom operators and cable/satellite operators that provide both growth and defensive characteristics, but only at valuations deemed reasonable. 3

6 B) Investments at fair value and as a percentage of NAV as at 31 December 2013 under review classified by i) Country Fair Value (S$) % of NAV Australia 474, Canada 260, Chile 222, China 2,099, France 844, Germany 821, Indonesia 80, Japan 2,059, Mexico 737, Netherlands 295, Norway 722, South Africa 889, Spain 720, Sweden 1,977, Switzerland 267, United Kingdom 3,459, United States 9,201, Portfolio of investments 25,136, Other net assets 274, Total 25,411, ii) Industry Consumer Discretionary 2,866, Information Technology 1,761, Telecommunication Services 20,508, Portfolio of investments 25,136, Other net assets 274, Total 25,411, iii) Asset Class Equities 25,136, Other net assets 274, Total 25,411, iv) Credit rating of debt securities N/A 4

7 C) Top Ten Holdings The top 10 holdings as at 31 December 2013 and 31 December largest holdings at 31 December 2013 Percentage of total net assets attributable to Fair Value unitholders (S$) % AT & T INC 3,551, VODAFONE GROUP PLC 2,666, VERIZON COMMUNICATIONS INC 2,419, COMCAST CORPORATION - CLASS A 1,843, MILLICOM INTERNATIONAL CELLULAR SA-SDR 1,662, SOFTBANK CORP 1,414, CHINA MOBILE LIMITED 1,073, BAIDU INC ADR 898, MTN GROUP LIMITED 889, GOOGLE INC - CLASS A 863, largest holdings at 31 December 2012 Percentage of total net assets attributable to Fair Value unitholders (S$) % DIRECTV, LLC 1,777, CHINA MOBILE LIMITED 1,763, VODAFONE GROUP PLC 1,649, COMCAST CORPORATION - CLASS A 1,620, AMERICA MOVIL- ADR SERIES L 1,526, MTN GROUP LIMITED 1,508, MILLICOM INTERNATIONAL CELLULAR SA-SDR 1,394, BAIDU INC ADR 1,225, TELENOR ASA 1,106, EUTELSAT COMMUNICATIONS 1,090,

8 D) Exposure to derivatives i) Fair value of derivative contracts and as a percentage of NAV as at 31 December 2013 N/A ii) Net gains/(losses) on derivative contracts realised during the financial year ended 31 December 2013 N/A iii) Net gains/(losses) on outstanding derivative contracts marked to market as at 31 December 2013 N/A E) Amount and percentage of net asset value (NAV) invested in other schemes as at 31 December 2013 N/A F) Amount and percentage of borrowings to net asset value (NAV) as at 31 December 2013 N/A G) Amount of redemptions and subscriptions for the financial year ended 31 December 2013 Total amount of redemptions SGD 4,259,145 Total amount of subscriptions SGD 823,362 H) The amount and terms of related-party transactions for the financial year ended 31 December 2013 i) As at 31 December 2013 the Fund maintained current accounts with the United Overseas Bank Limited as follows: Bank balances SGD 30,980 ii) Purchase/holdings of UOBAM unit trusts by UOB or its affiliated companies as at 31 December 2013 N/A iii) Investment in Initial Public Offerings managed by UOB Group. N/A iv) As at 31 December 2013 there was no brokerage income earned by UOB Kay Hian Pte Ltd. 6

9 I) Expense ratios 31 December % 31 December % Note: The expense ratio has been computed based on the guidelines laid down by the Investment Management Association of Singapore ( IMAS ). The calculation of the expense ratio at 31 December 2013 was based on total operating expenses of $481,844 (2012: $520,642) divided by the average net asset value of $23,918,901 (2012: $26,084,722) for the year. The total operating expenses do not include (where applicable) brokerage and other transactions costs, performance fee, interest expense, distribution paid out to unitholders, foreign exchange gains/losses, front or back end loads arising from the purchase or sale of other funds and tax deducted at source or arising out of income received. The Fund does not pay any performance fee. The average net asset value is based on the daily balances. J) Turnover ratios 31 December % 31 December % Note: The portfolio turnover ratio is calculated in accordance with the formula stated in the Code on Collective Investment Schemes. The calculation of the portfolio turnover ratio was based on the lower of the total value of purchases or sales of the underlying investments, being purchases of $12,371,627 (2012: purchases of $8,856,199) divided by the average daily net asset value of $23,918,901 (2012: $26,084,722). K) Any material information that will adversely impact the valuation of the scheme such as contingent liabilities of open contracts N/A L) For schemes which invest more than 30% of their deposited property in another scheme, the following key information on the second-mentioned scheme ( the underlying scheme ) 1 should be disclosed as well i) top 10 holdings at fair value and as percentage of NAV as at 31 December 2013 and 31 December 2012 N/A ii) expense ratios for the financial year ended 31 December 2013 and 31 December 2012 N/A iii) turnover ratios for the financial year ended 31 December 2013 and 31 December 2012 N/A 1 where the underlying scheme is managed by a foreign manager which belongs to the same group of companies as, or has a formal arrangement or investment agreement with, the Singapore manager, the above information should be disclosed on the underlying scheme. In other cases, such information on the underlying scheme should be disclosed only if it is readily available to the Singapore manager. 7

10 M) Soft dollar commissions/arrangements UOB Asset Management has entered into soft dollars arrangements with selected brokers from whom products and services are received from third parties. The products and services relate essentially to computer hardware and software to the extent that they are used to support the investment decision making process, research and advisory services, economic and political analyses, portfolio analyses including performance measurements, market analyses, data and quotation services, all of which are believed to be helpful in the overall discharge of UOB Asset Management s duties to clients. As such services generally benefit all of UOB Asset Management s clients in terms of input into the investment decision making process, the soft credits utilised are not allocated on a specific client basis. The Manager confirms that trades were executed on a best execution basis and there was no churning of trades. 8

11 REPORT OF THE TRUSTEE The Trustee is under a duty to take into custody and hold the assets of United Global Telecoms Fund (the Fund ) in trust for the unitholders. In accordance with the Securities and Futures Act (Cap. 289), its subsidiary legislation and the Code on Collective Investment Schemes, the Trustee shall monitor the activities of the Manager for compliance with the limitations imposed on the investment and borrowing powers as set out in the Trust Deed in each annual accounting year and report thereon to unitholders in an annual report. To the best knowledge of the Trustee, the Manager has, in all material respects, managed the Fund during the year covered by these financial statements, set out on pages 12 to 33, in accordance with the limitations imposed on the investment and borrowing powers set out in the Trust Deed. For and on behalf of the Trustee HSBC INSTITUTIONAL TRUST SERVICES (SINGAPORE) LIMITED Authorised signatory 24 March

12 STATEMENT BY THE MANAGER In the opinion of the directors of UOB Asset Management Ltd, the accompanying financial statements set out on pages 12 to 33, comprising the Statement of Total Return, Statement of Financial Position, Statement of Movements of Unitholders Funds, Statement of Portfolio and Notes to the Financial Statements are drawn up so as to present fairly, in all material respects, the financial position of United Global Telecoms Fund (the Fund ) as at 31 December 2013, and the total return and changes in unitholders funds for the year then ended in accordance with the recommendations of Statement of Recommended Accounting Practice 7 Reporting Framework for Unit Trusts issued by the Institute of Singapore Chartered Accountants (formerly known as the Institute of Certified Public Accountants of Singapore). At the date of this statement, there are reasonable grounds to believe that the Fund will be able to meet its financial obligations as and when they materialise. For and on behalf of the Manager UOB ASSET MANAGEMENT LTD THIO BOON KIAT Authorised signatory 24 March

13 INDEPENDENT AUDITOR S REPORT TO THE UNITHOLDERS OF UNITED GLOBAL TELECOMS FUND We have audited the accompanying financial statements of United Global Telecoms Fund (the Fund ), which comprise the Statement of Financial Position and Statement of Portfolio as at 31 December 2013, the Statement of Total Return and Statement of Movements of Unitholders Funds for the year then ended, and a summary of significant accounting policies and other explanatory information, as set out on pages 12 to 33. Manager s Responsibility for the Financial Statements The Fund s Manager (the Manager ) is responsible for the preparation and fair presentation of these financial statements in accordance with the recommendations of Statement of Recommended Accounting Practice 7 Reporting Framework for Unit Trusts issued by the Institute of Singapore Chartered Accountants (formerly known as the Institute of Certified Public Accountants of Singapore), and for such internal control as the Manager determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Singapore Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Fund s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Manager, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as at 31 December 2013 and the total return for the year then ended in accordance with the recommendations of Statement of Recommended Accounting Practice 7 Reporting Framework for Unit Trusts issued by the Institute of Singapore Chartered Accountants. PricewaterhouseCoopers LLP Public Accountants and Chartered Accountants Singapore, 24 March

14 STATEMENT OF TOTAL RETURN For the financial year ended 31 December Note $ $ Income Dividends 698, ,601 Interest , ,612 Less: Expenses Management fee 8 359, ,322 Trustee fee 8 9,575 10,462 Audit fee 16,300 14,800 Registrar fee 8 15,000 15,000 Valuation fee 8 29,922 32,694 Custody fee 16,667 17,102 Interest expenses Transaction cost* 67,691 - Other expenses 37,567 40, , ,096 Net income 146, ,516 Net gains or losses on value of investments Net gain on investments 4,310,098 1,767,057 Net foreign exchange loss (30,559) (17,970) 4,279,539 1,749,087 Total return for the year before income tax 4,425,585 2,067,603 Less: Income tax 3 (121,040) (140,857) Total return for the year 4,304,545 1,926,746 * The Fund has adopted the recommendations of the Statement of Recommended Accounting Practice 7 Reporting Framework for Unit Trusts ( RAP7 ) issued by the Institute of Singapore Chartered Accountants (formerly known as the Institute of Certified Public Accountants of Singapore) in June 2012 for the financial year beginning 1 January In accordance with the RAP7, all expenses relating to the purchase and sale of financial instruments are charged against income. As a transitional provision in the first year of application, reclassification of comparative figures is not required. The accompanying notes form an integral part of these financial statements. 12

15 STATEMENT OF FINANCIAL POSITION As at 31 December Note $ $ ASSETS Portfolio of investments 25,136,647 23,872,898 Receivables 4 94,592 40,962 Cash and bank balances 360, ,501 Total Assets 25,591,247 24,737,361 LIABILITIES Payables 5 179, ,861 Total Liabilities 179, ,861 EQUITY Net assets attributable to unitholders 6 25,411,262 24,542,500 The accompanying notes form an integral part of these financial statements. 13

16 STATEMENT OF MOVEMENTS OF UNITHOLDERS FUNDS For the financial year ended 31 December Note $ $ Net assets attributable to unitholders at the beginning of the financial year 24,542,500 27,197,418 Operations Change in net assets attributable to unitholders resulting from operations 4,304,545 1,926,746 Unitholders contributions/(withdrawals) Creation of units 823,362 64,783 Cancellation of units (4,259,145) (4,646,447) Change in net assets attributable to unitholders resulting from net creation and cancellation of units (3,435,783) (4,581,664) Total increase/(decrease) in net assets attributable to unitholders 868,762 (2,654,918) Net assets attributable to unitholders at the end of the financial year 6 25,411,262 24,542,500 The accompanying notes form an integral part of these financial statements. 14

17 STATEMENT OF PORTFOLIO As at 31 December 2013 By Geography - Primary Quoted Equities Percentage of total net assets attributable to Holdings at Fair value at unitholders at 31 December 31 December 31 December $ % AUSTRALIA TELSTRA CORP 80, , CANADA TELUS CORPORATION 6, , CHILE EMPRESA NACIONAL DE TELECOM 13, , CHINA BAIDU INC ADR 4, , CHINA MOBILE LIMITED 82,000 1,073, CHINA TELECOM CORP LTD 200, , TOTAL CHINA 2,099, FRANCE ORANGE SA 22, , VIVENDI SA 15, , TOTAL FRANCE 844, GERMANY DEUTSCHE TELEKOM REG 38, , INDONESIA PT XL AXIATA TBK 150,000 80, JAPAN KDDI CORP 8, , SOFTBANK CORP 12,800 1,414, TOTAL JAPAN 2,059, The accompanying notes form an integral part of these financial statements. 15

18 STATEMENT OF PORTFOLIO As at 31 December 2013 By Geography - Primary (continued) Quoted Equities Percentage of total net assets attributable to Holdings at Fair value at unitholders at 31 December 31 December 31 December $ % MEXICO AMERICA MOVIL- ADR SERIES L 25, , NETHERLANDS KONINKLIKJE KPN NV 40, , ZIGGO NV 2, , TOTAL NETHERLANDS 295, NORWAY TELENOR ASA 24, , SOUTH AFRICA MTN GROUP LIMITED 34, , SPAIN TELEFONICA SA 35, , SWEDEN MILLICOM INTERNATIONAL CELLULAR SA-SDR 13,200 1,662, TELIASONERA AB 30, , TOTAL SWEDEN 1,977, SWITZERLAND SWISSCOM AG- REG , UNITED KINGDOM BT GROUP PLC 100, , VODAFONE GROUP PLC 538,000 2,666, TOTAL UNITED KINGDOM 3,459, The accompanying notes form an integral part of these financial statements. 16

19 STATEMENT OF PORTFOLIO As at 31 December 2013 By Geography - Primary (continued) Quoted Equities Percentage of total net assets attributable to Holdings at Fair value at unitholders at 31 December 31 December 31 December $ % UNITED STATES AT & T INC 80,000 3,551, COMCAST CORPORATION - CLASS A 28,100 1,843, DIRECTV, LLC 6, , GOOGLE INC - CLASS A , VERIZON COMMUNICATIONS INC 39,000 2,419, TOTAL UNITED STATES 9,201, Portfolio of investments 25,136, Other net assets 274, Net assets attributable to unitholders 25,411, The accompanying notes form an integral part of these financial statements. 17

20 STATEMENT OF PORTFOLIO As at 31 December 2013 By Geography - Primary (Summary) Quoted Equities Percentage of Percentage of total net assets total net assets attributable to attributable to unitholders at unitholders at 31 December 31 December % % Australia Canada Chile China France Germany Hong Kong Indonesia Japan Mexico Netherlands Norway South Africa Spain Sweden Switzerland United Kingdom United States Portfolio of investments Other net assets Net assets attributable to unitholders The accompanying notes form an integral part of these financial statements. 18

21 STATEMENT OF PORTFOLIO As at 31 December 2013 By Industry - Secondary Quoted Equities Percentage of Percentage of total net assets total net assets attributable to attributable to Fair value at unitholders at unitholders at 31 December 31 December 31 December $ % % Consumer Discretionary 2,866, Financials Information Technology 1,761, Telecommunication Services 20,508, Portfolio of investments 25,136, Other net assets 274, Net assets attributable to unitholders 25,411, The accompanying notes form an integral part of these financial statements. 19

22 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December 2013 These notes form an integral part of and should be read in conjunction with the accompanying financial statements. 1. General United Global Telecoms Fund (the Fund ) is a unit trust constituted by a Trust Deed dated 28 June 1999 between UOB Asset Management Ltd (the Manager ) and HSBC Institutional Trust Services (Singapore) Limited (the Trustee ). The Deed is governed by the laws of the Republic of Singapore. The investment objective of the Fund is to achieve long-term capital appreciation by investing mainly in securities of companies engaged in the development, production or distribution of communications services or communications technology in any part of the world. Subscriptions and redemptions of the units are denominated in Singapore Dollars. 2. Significant accounting policies (a) Basis of preparation The financial statements have been prepared under the historical cost convention, modified by the revaluation of financial assets at fair value through profit or loss. The Fund has adopted the recommendations of Recommended Accounting Practice 7 Reporting Framework for Unit Trusts issued by the Institute of Singapore Chartered Accountants (formerly known as the Institute of Certified Public Accountants of Singapore) in June 2012 ( RAP7 ) for the financial year beginning 1 January The adoption of the revised RAP7 did not result in substantial changes to the Fund s accounting policies and had no material effect on the amounts reported for the current or prior financial years except as disclosed below. (i) Classification of net assets attributable to unitholders RAP7 recommends that a unit trust should classify its units on initial recognition as equity and present a Statement of Movement in Unitholders Funds summarising the movements in the value of the Fund. Previously, the Fund had classified its units as liabilities and presented the movements in value in the Notes to the Financial Statements in accordance with the existing framework issued in May On the adoption of revised RAP7, the Fund has reclassified its units from liabilities to equity. Consequently, the Fund s distributions will no longer be classified as a finance cost in the Statement of Total Return, but will be recorded as a dividend in the Statement of Movement in Unitholders Funds. The reclassification has been applied retrospectively. 20

23 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Significant accounting policies (continued) (a) Basis of preparation (continued) (ii) Transaction costs RAP7 recommends that transaction costs, including all expenses relating to the purchase and sale of financial instruments, should be charged against income. Previously, the Fund had capitalised such expenses and recognised realised gains/losses on a net basis. As the changes have been implemented prospectively, no adjustments were necessary to any of the amounts previously recognised in the financial statements. (iii) Financial instruments: fair value measurement RAP7 recommends disclosures and presentation of financial instruments in accordance with Singapore Financial Reporting Standard 107 Financial Instruments: Disclosures ( FRS107 ) wherever possible. Apart from enhanced disclosures to present fair value measurements by level of a fair value measurement hierarchy, the Fund has previously presented disclosures of its financial instruments in accordance with FRS 107 voluntarily. The adoption of this recommendation results in additional disclosures but does not have an impact on the accounting policies and measurement bases of the Fund. In addition to the adoption of the revised RAP7, the Fund has adopted FRS 113 Fair value measurement which is effective for annual periods beginning on or after 1 January The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across FRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within FRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bidask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund s Prospectus for the calculation of its per share trading value for subscriptions and redemptions. In the prior year, the Fund utilised bid and ask prices for its listed financial assets and liabilities in accordance with FRS 39. The change in valuation inputs is considered to be a change in estimate in accordance with FRS 8 and is applied prospectively. 21

24 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Significant accounting policies (continued) (a) Basis of preparation (continued) (iv) Reconciliation of net assets attributable to unitholders per unit for issuing/redeeming units and per financial statements The application of different valuation and accounting policies may result in differences between pricing net asset values and accounting net asset values. Where the difference is considered material, RAP7 further recommends that a reconciliation of the net assets attributable to unitholders per unit for issuing/redeeming units at the financial year end date and the net assets attributable to unitholders per unit per the financial statements should be presented in the Notes to the Financial Statements. The adoption of this recommendation results in additional disclosures but does not have an impact on the accounting policies and measurement bases of the Fund. (b) Recognition of income Dividend income is recognised when the right to receive payment is established. Interest income is recognised on a time proportion basis using the effective interest method. (c) Investments Investments are classified as financial assets at fair value through profit or loss. (i) Initial recognition Purchase of investments are recognised on the trade date. Investments are recorded at fair value on initial recognition. (ii) Subsequent measurement Investments are subsequently carried at fair value. Net change in fair value on investments are included in the Statement of Total Return in the year in which they arise. (iii) Derecognition Investments are derecognised on the trade date of disposal. The resultant realised gains and losses on the sales of investments are computed on the basis of the difference between the weighted average cost and selling price gross of transaction costs, and are taken up in the Statement of Total Return. (d) Basis of valuation of investments The fair value of financial assets and liabilities traded in active markets is based on quoted market prices at the close of trading on the reporting date. Prior to 1 January 2013, the quoted market price used for investments held by the Fund was the current bid price. On adoption of FRS 113 Fair value measurement, the Fund changed its fair valuation input to utilise the last traded market price for both financial assets and financial liabilities where the last traded price falls within the bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, the Manager will determine the point within the bid-ask spread that is most representative of fair value. 22

25 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Significant accounting policies (continued) (e) Foreign currency translation (i) Functional and presentation currency The Fund s investors are mainly from Singapore with the subscriptions and redemptions of the units denominated in Singapore dollars. The performance of the Fund is measured and reported to the investors in Singapore dollars. The Manager considers the Singapore dollars as the currency of the primary economic environment in which the Fund operates. The financial statements are presented in Singapore dollars, which is the Fund s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Total Return. Translation differences on non-monetary financial assets and liabilities such as equities are also recognised in the Statement of Total Return within the fair value net gain or loss. (f) Expenses charged to the Fund All direct expenses relating to the Fund are charged directly to the Statement of Total Return. In addition, certain expenses shared by all unit trusts managed by the Manager are allocated to each Fund based on the respective Fund s net asset value. (g) Financial derivatives Financial derivatives including forwards and swaps are entered into for the purposes of efficient portfolio management, tactical asset allocation or specific hedging of financial assets held as determined by the Manager and in accordance with the provision of the Trust Deed and the Code on Collective Investment Schemes. Financial derivatives outstanding on the balance sheet date are valued at the forward rate or at the current market prices using the mark-to-market method, as applicable, and the resultant gains and losses are taken up in the Statement of Total Return. (h) Distribution The Manager has the absolute discretion to determine whether a distribution is to be made. In such an event, an appropriate amount will be transferred to a distribution account to be paid out on the distribution date. The amount shall not be treated a part of the property of the Fund. 23

26 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Income tax $ $ Overseas income tax 121, ,857 The Fund was granted the status of a Designated Unit Trust ( DUT ) in Singapore and, therefore, the following income is not taxable in accordance with Section 35(12) of the Income Tax Act (Cap 134) including: (i) gains or profits derived from Singapore or elsewhere from the disposal of securities; (ii) interest (other than interest for which tax has been deducted under Section 45 of the Singapore Income Tax Act); and (iii) dividends derived from outside Singapore and received in Singapore. The overseas income tax represents tax withheld on foreign sourced income. 4. Receivables $ $ Amounts receivable for creation of units 41,000 1,098 Dividend receivable 53,592 39,864 94,592 40, Payables $ $ Amounts payable for cancellation of units 56,019 71,583 Amount due to Manager 101, ,212 Amount due to Trustee 2,462 2,515 Other creditors and accrued expenses 20,050 18, , ,861 24

27 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Units in issue During the year ended 31 December 2013 and 2012, the number of units issued, redeemed and outstanding were as follows: Units at the beginning of the year 34,804,474 41,442,835 Units created 1,032,220 91,953 Units cancelled (5,687,215) (6,730,314) Units at the end of the year 30,149,479 34,804,474 Net assets attributable to unitholders ($) 25,411,262 24,542,500 Net asset value per unit ($) For subscriptions and redemptions and for various fee calculations as well as for reporting purpose, investments are stated at the last traded price on the valuation day for the purpose of determining net asset value per unit. Prior to 1 January 2013, for reporting purpose the investments were valued at the relevant bid market prices as at the reporting date. The effect of bid market prices in the net assets attributable to unitholders per unit was as follows: $ $ Net assets attributable to unitholders per financial statements Effect of adopting bid prices at fair value Net assets attributable to unitholders for issuing/redeeming

28 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Financial risk management The Fund s activities expose it to a variety of financial risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Fund s overall risk management programme seeks to minimise potential adverse effects on the Fund s financial performance. The Fund may use financial futures contracts, financial options contracts and/or currency forward contracts subject to the terms of the Prospectus to moderate certain risk exposures. Specific guidelines on exposures to individual securities and certain industries are in place for the Fund at any time as part of the overall financial risk management to reduce the Fund s risk exposures. The Fund s assets principally consist of financial instruments such as equity investments and cash. They are held in accordance with the published investment policies of the Fund. The allocation of assets between the various types of investments is determined by the Manager to achieve their investment objectives. (a) Market risk Market risk is the risk of loss arising from uncertainty concerning movements in market prices and rates, including observable variables such as interest rates, credit spreads, exchange rates, and others that may be only indirectly observable such as volatilities and correlations. Market risk includes such factors as changes in economic environment, consumption pattern and investor s expectation etc. which may have significant impact on the value of the investments. The Fund s investments are substantially dependent on changes in market prices. The Fund s investments are monitored by the Manager on a regular basis so as to assess changes in fundamentals and valuation. Although the Manager makes reasonable efforts in the choice of investments, events beyond reasonable control of the Manager could affect the prices of the underlying investments and hence the asset value of the Fund. Guidelines are set to reduce the Fund s risk exposures to market volatility such as diversifying the portfolio by investing across various geographies, alternatively, the Fund may be hedged using derivative strategies. (i) Foreign exchange risk The Fund has securities denominated in currencies other than Singapore dollars and it may be affected favourably or unfavourably by exchange rate regulations or changes in the exchange rates between the Singapore dollars and such other currencies. The Manager may at his discretion, implement a currency management strategy either to reduce currency volatility or to hedge the currency exposures of the Fund. 26

29 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Financial risk management (continued) (a) Market risk (continued) (i) Foreign exchange risk (continued) The table below summarises the Fund s exposure to foreign currencies as of the end of the financial year. As at 31 December 2013 SGD USD GBP EUR Others Total $ $ $ $ $ $ Assets Portfolio of investments - 10,837,425 3,459,776 2,682,718 8,156,728 25,136,647 Receivables 41,000 4,843 46,824-1,925 94,592 Cash and bank balances 291,483 68, ,008 Total Assets 332,483 10,910,679 3,506,698 2,682,718 8,158,669 25,591,247 Liabilities Payables 179, ,985 Total Liabilities 179, ,985 Net currency exposure 152,498 10,910,679 3,506,698 2,682,718 8,158,669 As at 31 December 2012 SGD USD HKD EUR Others Total $ $ $ $ $ $ Assets Portfolio of investments - 9,783,934 3,504,832 2,486,908 8,097,224 23,872,898 Receivables 1,098 4, ,931 40,962 Cash and bank balances 611,405 15, , ,501 Total Assets 612,503 9,804,404 3,504,832 2,683,360 8,132,262 24,737,361 Liabilities Payables 194, ,861 Total Liabilities 194, ,861 Net currency exposure 417,642 9,804,404 3,504,832 2,683,360 8,132,262 27

30 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Financial risk management (continued) (a) Market risk (continued) (i) Foreign exchange risk (continued) Investments, which is the significant item in the Statement of Financial Position is exposed to currency risk and other price risk. The other price risk sensitivity analysis includes the impact of currency risk on non-monetary investments. The Fund s net financial assets comprise significantly non-monetary investments, hence currency risk sensitivity analysis has not been performed on the remaining financial assets. (ii) Price risk Price risk is the risk of potential adverse changes to the value of financial investments because of changes in market conditions and volatility in security prices. The table below summarises the impact of increases/decreases from the Fund s underlying investments in equities on the Fund s net assets attributable to unitholders at 31 December 2013 and The analysis is based on the assumption that the index components within the benchmark increased/decreased by a reasonable possible shift, with all other variables held constant and that the fair value of the Fund s investments moved according to the historical correlation with the index Benchmark component Net impact to Net impact to net assets net assets attributable attributable to unitholders to unitholders $ % $ % MSCI ACWI Telecoms 5,127, ,204, (iii) Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. Other than cash balances, the Fund s financial assets and liabilities are largely non-interest bearing. Hence, the Fund is not subjected to significant risk due to fluctuations in the prevailing levels of market interest rates. 28

31 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Financial risk management (continued) (b) Liquidity risk The Fund is exposed to daily cash redemptions and disbursements for the settlements of purchases. The Manager therefore ensures that the Fund maintains sufficient cash and cash equivalents and that it is able to obtain cash from the sale of investments held to meet its liquidity requirements. Reasonable efforts will be taken to invest in securities which are traded in a relatively active market and which can be readily disposed of. The Fund s investments in listed securities are considered to be readily realisable as they are listed on established regional stock exchanges. The table below analyses the Fund s financial liabilities into relevant maturity groupings based on the remaining period at the Statement of Financial Position date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. As at 31 December 2013 Less than 3 months $ Payables 179,985 As at 31 December 2012 Less than 3 months $ Payables 194,861 (c) Credit risk The Fund takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. The Fund s credit risk is concentrated on cash and bank balances, and amounts or securities receivable on the sale and purchase of investments respectively. In order to mitigate exposure to credit risk, all transactions in listed securities are settled/paid for upon delivery and transacted with approved counterparties using an approved list of brokers that are regularly assessed and updated by the Manager. 29

32 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Financial risk management (continued) (c) Credit risk (continued) The table below summarises the credit rating of banks and custodians in which the Fund s assets are held as at 31 December 2013 and The credit ratings are based on the Bank Financial Strength ratings published by the rating agency. As at 31 December 2013 Credit rating Source of credit rating Bank State Street Bank & Trust Co. B- Moody s United Overseas Bank Limited B Moody s Custodian State Street Bank & Trust Co. B- Moody s As at 31 December 2012 Credit rating Source of credit rating Bank State Street Bank & Trust Co. B Moody s United Overseas Bank Limited B Moody s Custodian State Street Bank & Trust Co. B Moody s The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets. (d) Capital management The Fund s capital is represented by the net assets attributable to unitholders. The Fund strives to invest the subscriptions of redeemable participating units in investments that meet the Fund s investment objectives while maintaining sufficient liquidity to meet unitholder redemptions. 30

33 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Financial risk management (continued) (e) Fair value estimation The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and trading securities) are based on quoted market prices at the close of trading on the reporting date. Prior to 1 January 2013, the quoted market price used for financial assets held by the Fund was the bid price on reporting date; the appropriate quoted market price for financial liabilities was the asking price on reporting date. On 1 January 2013, the Fund adopted FRS 113, Fair value measurement and changed its valuation basis for financial assets and liabilities, based on quoted prices in an active market, to last traded market prices. The Fund classifies 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: Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1). Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). The following table analyses within the fair value hierarchy the Fund s financial assets and liabilities (by class) measured at fair value at 31 December 2013 and 2012: As at 31 December 2013 Level 1 Level 2 Level 3 Total $ $ $ $ Assets Financial assets at fair value through profit or loss - Quoted equities 25,136, ,136,647 As at 31 December 2012 Level 1 Level 2 Level 3 Total $ $ $ $ Assets Financial assets at fair value through profit or loss - Quoted equities 23,872, ,872,898 Investments whose values are based on quoted market prices in active markets, and therefore classified within level 1, comprise active listed equities. The Fund does not adjust the quoted price for these instruments. 31

34 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December Financial risk management (continued) (e) Fair value estimation (continued) Except for cash and cash equivalents which are classified as level 1, the Fund s assets and liabilities not measured at fair value at 31 December 2013 and 2012 have been classified as level 2. The carrying amounts of these assets and liabilities approximate their fair values as at the Statement of Financial Position date. 8. Related party transactions (a) The Manager and the Trustee of the Fund are UOB Asset Management Ltd and HSBC Institutional Trust Services (Singapore) Limited respectively. UOB Asset Management Ltd is a subsidiary of United Overseas Bank Limited and HSBC Institutional Trust Services (Singapore) Limited is a subsidiary of HSBC Holdings Plc. Management and valuation fees are paid to the Manager, while trustee fee is paid to the Trustee and the registrar fee is paid to HSBC Institutional Trust Services (Singapore) Limited, a subsidiary of HSBC Holdings Plc. These fees paid or payable by the Fund shown in the Statement of Total Return and in the respective Notes to the Financial Statements are on terms set out in the Trust Deed. All other related party transactions are shown elsewhere in the financial statements. (b) As at the end of the financial year, the Fund maintained the following account with a related party: $ $ United Overseas Bank Limited Bank balances 30,980 43,359 (c) The following transactions took place during the financial year between the Fund and United Overseas Bank Limited at terms agreed between the parties: $ $ Bank charges