Schroder Dynamic Allocation Fund. Semi-Annual Report & Financial Statements

Transcription

1 Schroder Dynamic Allocation Fund Semi-Annual Report & Financial Statements December 2011

2 SCHRODER DYNAMIC ALLOCATION FUND (a sub-fund of Schroder Advantage Series) Constituted under a Trust Deed in the Republic of Singapore on 26 January 2004 COMMENTARY The Schroder Dynamic Allocation Fund returned 4.1% for the six months up to 31 Dec 2011*. The Fund aims to generate potential annual payouts and potential capital growth, by combining exposure to global fixed income instruments and money market instruments and a dynamic allocation strategy linked to the performance of three groups of global equity markets, namely developed markets, emerging markets and China markets. *Source: Morningstar, S, bid to bid, net dividends reinvested. December

3 Statement of Total Return Note 31 Dec Dec 2010 Income Interest on deposits with banks 11 2,628 3,030 Less : Expenses Management fees , ,550 Trustee fees 11 4,587 8,787 Valuation fees 11 2,293 4,394 Custodian fees 11 1,506 2,962 Registration fees 2,415 2,269 Audit fees 6,188 9,174 Others 8,867 5, , ,805 Net loss (183,767) (337,775) Net realised gain on bonds 18,308 43,383 Net change in fair value of bonds 360 1,230 Net realised gain on swap contracts 1,004,493 2,028,263 Net change in fair value of swap contracts 89,584 (1,849,958) Net realised loss on financial derivatives (10) (26) Net foreign exchange gain 6 34 Net gain on investments 1,112, ,926 Total return/(deficit) for the period 928,974 (114,849) 2

4 Balance Sheet As at 31 December 2011 (Unaudited) Notes 31 Dec Jun 2011 ASSETS Portfolio of investments 12,965,106 16,875,462 Bank balances 5,11 5,642,515 4,254,994 Sales awaiting settlement Other receivables 6 15,202 21,849 Total assets 18,622,823 21,153,090 LIABILITIES Purchases awaiting settlement 1,996,856 - Other payables 7 354, ,629 Net assets attributable to unitholders 8 16,271,040 20,679,461 Total liabilities 18,622,823 21,153,090 3

5 Portfolio Statement As at 31 December 2011 (Unaudited) Primary by Geography Quoted DEBT SECURITIES Nominal value at 31 Dec 2011 Fair value at 31 Dec 2011 Percentage of total net assets attributable to unitholders at 31 Dec 2011 % Singapore Rated AAA Series 91 5 Jan ,000,000 1,999, Series Jan ,000,000 2,999, Series Mar ,000,000 1,998, Series Mar ,000,000 1,998, Series Mar ,000,000 1,998, Series 91 5 Apr ,000,000 1,998, ,992,

6 Portfolio Statement As at 31 December 2011 (Unaudited) Primary by Geography (continued) Quoted TOTAL RETURN SWAP Nominal value at 31 Dec 2011 Fair value at 31 Dec 2011 Percentage of total net assets attributable to unitholders at 31 Dec 2011 % United Kingdom UBS AG, London Branch (Notional amount : 16,057,000 ; Due on 20 Mar 2014) (27,744) (0.17) Portfolio of investments 12,965, Other net assets 3,305, Net assets attributable to unitholders 16,271,

7 Portfolio Statement As at 31 December 2011 (Unaudited) Primary by Geography (continued) Summary Quoted Percentage of total net assets attributable to unitholders at 31 Dec 2011 % Percentage of total net assets attributable to unitholders at 30 Jun 2011 % Singapore United Kingdom (0.17) (0.57) Portfolio of investments Other net assets Net assets attributable to unitholders Secondary by Industry Fair value at 31 Dec 2011 Percentage of total net assets attributable to unitholders at 31 Dec 2011 % Percentage of total net assets attributable to unitholders at 30 Jun 2011 % Government 12,992, Total return swap (27,744) (0.17) (0.57) Portfolio of investments 12,965, Other net assets 3,305, Net assets attributable to unitholders 16,271,

8 These notes form an integral part of and should be read in conjunction with the accompanying financial statements. 1. General Schroder Dynamic Allocation Fund (the Fund ) is a subfund of Schroder Advantage Series, a Singapore umbrella fund constituted by a Deed of Trust dated 26 January 2004 (and as amended, restated and supplemented from time to time) (thereafter referred to as Trust Deed ). The Trust Deed is governed in accordance with the laws of the Republic of Singapore. The Manager of the Fund is Schroder Investment Management (Singapore) Ltd and the Trustee is HSBC Institutional Trust Services (Singapore) Limited. The Fund, which was launched on 7 January 2008, invests in short-term cash or floating rate bonds and/or money market instruments, or other securities or funds which aim to generate similar money market returns, and one or more total return swaps ( Swaps ) with financial institutions that have a minimum long-term issuer rating of A by Standard & Poor s or equivalent (including such sub-categories or gradations therein). The Fund s objective is to generate potential annual payouts and potential capital growth through exposure to global fixed income and a dynamic allocation strategy linked to the performance of global equity markets. 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, and in accordance with the recommendations of Statement of Recommended Accounting Practice 7 Reporting Framework for Unit Trusts ( RAP 7 ) issued by the Institute of Certified Public Accountants of Singapore. The financial statements are prepared in Singapore dollars, which is the functional currency of the Fund. (b) Recognition of income Interest income on deposits is recognised on a time proportion basis using the effective interest method. 7

9 2. Significant accounting policies (continued) (c) Investments Investments are classified as financial assets held at fair value through profit or loss. Purchases of investments are recognised on trade date. Investments are recorded at fair value on initial recognition, and subsequently carried at fair value. The fair value of investments in debt securities is based on quoted market prices by the market makers at the balance sheet date. The quoted market price used is the current bid price. Accrued interest or discount or premium on debt securities at the balance sheet date are included in the fair value of debt securities. Interest income on debt securities is presented within net realised gain or loss on investments on the Statement of Total Return. The fair value of the total return swap is as set out in Note 2(e). Net changes in fair value of investments are included in the Statement of Total Return in the period in which they arise. Investments are derecognised on the trade date of disposal. The resultant realised gains and losses on the sales of investments are taken up in the Statement of Total Return. (d) Foreign currency translation Foreign currency transactions during the period are translated into Singapore dollars at the rates of exchange ruling on the transaction dates. Foreign currency monetary assets and liabilities are translated into Singapore dollars at the rates of exchange ruling at the balance sheet date. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period end exchange rates of foreign currency monetary assets and liabilities, are taken to the Statement of Total Return. 8

10 2. Significant accounting policies (continued) (e) Derivative financial instruments Derivatives are recognised at fair value on the date in which a derivative contract is entered into and are subsequently re-measured at their fair values. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and options pricing models, as appropriate. A derivative is carried as an asset when its fair value is positive, and as a liability when its fair value is negative. Subsequent changes in the fair value of any derivative instrument are recognised immediately in the Statement of Total Return. Realised and unrealised gains and losses from changes in fair values of financial derivatives held for protection or enhancement of investments are taken to the Statement of Total Return as gains or losses on investments. Such gains or losses on financial derivatives held for generating or protecting income are taken to the Statement of Total Return as income gains or losses. 3. Income tax The Fund is a Designated Unit Trust and, therefore, the following income is exempted from tax in accordance with section 35(12) and (12A) of the Income Tax Act (Cap 134): (a) gains or profits derived from Singapore or elsewhere from the disposal of securities; (b) interest (other than interest for which tax has been deducted under section 45 of the Income Tax Act); (c) dividends derived from outside Singapore and received in Singapore; (d) gains or profits derived from foreign exchange transactions, transactions in futures contracts, transactions in interest rate or currency forwards, swaps or options contracts and transactions in forwards, swaps or options contracts relating to any securities or financial index; and (e) distributions from foreign unit trusts derived from outside Singapore and received in Singapore. 9

11 4. Total return swap The Fund has entered into a total return swap denominated in SGD with the objective of providing the relevant exposures required to meet its investment objective. The exposure obtained via the swap aims to extract returns on global fixed income instruments and three groups of equity markets (the Underlying Portfolio ) based on a quantitative allocation approach (the Dynamic Allocation Strategy ). On a monthly basis, the Fund receives from the swap counterparty a payment equal to the performance of the global fixed income instruments and three groups of equity markets (if the Dynamic Allocation Strategy suggests gaining exposure to the equity markets) and in return, pays the swap counterparty a floating rate, being SGD SIBOR rate of interest plus a spread. The exposure to global fixed income instruments is achieved by reference to the performance of one or more bond funds or indices. 5. Bank balances 31 Dec Jun 2011 Bank balances comprise: Current accounts 1,034, ,847 Fixed deposits 4,607,988 3,450,147 5,642,515 4,254,994 The fixed deposits with banks have an average maturity of 39 days (30 June 2011: 4 days) from the balance sheet date and the weighted average effective interest rate as at 31 December 2011 was 0.30% per annum (30 June 2011: 0.18% per annum). 6. Other receivables 31 Dec Jun 2011 Interest receivable Refund of GST 15,049 21,781 15,202 21,849 10

12 7. Other payables 31 Dec Jun 2011 Amount payable for cancellation of units 279, ,694 Accrued management fees 49,268 64,546 Accrued trustee fees Accrued valuation fees Other accrued expenses 25,313 18, , , Net assets attributable to unitholders 31 Dec Jun 2011 At the beginning of the financial period/year 20,679,461 36,502,458 Operations Change in net assets attributable to unitholders resulting from operations 928,974 (1,641,846) Unitholders contributions/ (withdrawals) Creation of units ,406 Cancellation of units (5,338,155) (14,604,557) Change in net assets attributable to unitholders resulting from net creation and cancellation of units (5,337,395) (14,181,151) Total decrease in net assets attributable to unitholders (4,408,421) (15,822,997) At the end of the financial period/year 16,271,040 20,679,461 Units in issue (note 9) 16,946,783 22,648,596 Net assets attributable to unitholders per unit

13 9. Units in issue 31 Dec 2011 Units 30 Jun 2011 Units At the beginning of the financial period/year 22,648,596 37,104,130 Created ,147 Cancelled (5,702,649) (14,888,681) At the end of the financial period/year 16,946,783 22,648, Financial risk management The Fund s activities expose it to a variety of risks including but not limited to market risk (including price risk, interest rate risk and currency risk), liquidity risk and credit risk. The overall responsibility for the management of the Fund s financial risks lies with the Manager whom, among other things, will regularly assess the economic condition and monitor changes in market outlook. The data used and assumptions made in the sensitivity analyses below may not reflect actual market conditions, nor is it representative of any potential future market conditions. The sensitivity analyses can be complex and the disclosures made here are not exhaustive. The market exposures change regularly and the assumptions made below may not be representative of the risk taken throughout the period. The sensitivity analyses below should not be solely relied upon by investors in their investment decision making. (a) Market risk Market risk is the risk of potential adverse changes to the value of financial instruments because of changes in market conditions such as interest rate and currency rate movements and volatility in security prices. The Fund aims to extract returns through its holdings of money market instruments and a Total Return Swap as described in Note 4 and is exposed to market risks arising from the financial instruments held. The Fund s investment objectives are also discussed in Note 1. 12

14 10. Financial risk management (continued) (a) Market risk (continued) The Fund s investments are monitored by the Manager on a regular basis so as to assess changes in fundamentals and valuation. The Manager adopts an informal internal valuation process for monitoring the price provided by the counterparty for the swap. Although the Manager conducts detailed analysis before making investment decisions, events beyond reasonable control of the Manager could affect the prices of the underlying investments and hence the net asset value of the Fund. The Fund s exposure to market risk are discussed below: (i) Price risk The Fund s investment in the total return swap is subject to price risk due to market fluctuations in the performance of the Underlying Portfolio. The table below summarises the potential impact of increases/decreases in the Fund s investment in the total return swap on the Fund s net assets attributable to unitholders at 31 December 2011 and 30 June The analysis is based on the estimated effect on the fair value of the total return swap from a reasonable possible change in the performance of the Underlying Portfolio, using the Manager s internal valuation model, with all other variables held constant. This represents management s best estimate of a reasonable possible change having regard to the historical performance of the Underlying Portfolio. Swap Reasonable possible change % Dec Jun 2011 Impact on net assets Reasonable attributable to possible unitholders change % 2,890,260 (2,729,690) Impact on net assets attributable to unitholders 2,786,805 (2,786,805) 13

15 10. Financial risk management (continued) (a) Market risk (continued) (ii) Interest rate risk The Fund s interest-bearing financial instruments expose it to risks associated with the effect of fluctuations in the prevailing levels of market interest rates on the value of these financial instruments and therefore the financial position and cash flows of the Fund. The Manager will regularly assess the economic condition, monitor changes in interest rates outlook, and invest in debt securities with different maturity profiles and may use derivatives to manage the Fund s interest rate risk. The table below summarises the Fund s exposure to interest rate risk. They include the Fund s trading assets and liabilities at fair value, categorised by the earlier of contractual re-pricing or maturity dates. Assets As at 31 December 2011 Noninterest Up to 1 year bearing Total Portfolio of investments 12,965,106-12,965,106 Bank balances 5,642,515-5,642,515 Other receivables - 15,202 15,202 Total assets 18,607,621 15,202 18,622,823 Liabilities Purchases awaiting settlement - 1,996,856 1,996,856 Other payables - 354, ,927 Net assets attributable to unitholders - 16,271,040 16,271,040 Total liabilities - 18,622,823 18,622,823 14

16 10. Financial risk management (continued) (a) Market risk (continued) (ii) Interest rate risk (continued) Assets Up to 1 year As at 30 June 2011 Noninterest bearing Total Portfolio of investments 16,875,462-16,875,462 Bank balances 4,254,994-4,254,994 Sales awaiting settlement Other receivables - 21,849 21,849 Total assets 21,130,456 22,634 21,153,090 Liabilities Other payables - 473, ,629 Net assets attributable to unitholders - 20,679,461 20,679,461 Total liabilities - 21,153,090 21,153,090 15

17 10. Financial risk management (continued) (a) Market risk (continued) (ii) Interest rate risk (continued) The table below summarises the potential impact of increases/decreases in each of the Fund s reference interest rates on the Fund s net assets attributable to unitholders as at 31 December 2011 and 30 June The analysis is based on the assumption that each of the Fund s reference interest rates increases/decreases by a reasonable possible shift, with all other variables held constant, and that the fair value of the Fund s investments in debt securities moves inversely to the interest rate changes. This represents management s best estimate of a reasonable possible shift in each of the reference interest rates, having regard to their historical movement. Reasonable possible change bps 31 Dec Jun 2011 Impact on net assets Reasonable attributable to possible unitholders change bps Impact on net assets attributable to unitholders Debt securities 20 4, ,658 (iii) Currency risk The majority of the Fund s financial assets and liabilities are denominated in Singapore dollars. Consequently, the Fund is not subject to significant amounts of risk due to fluctuations in the prevailing levels of foreign currency rates and therefore no currency risk sensitivity analysis is presented. 16

18 10. Financial risk management (continued) (b) Liquidity risk The Fund s liquidity risk arises mainly from redemptions of units. The Fund invests the majority of its assets in investments that are traded in an active market. However, liquidity may be poor in certain segments of the Asian bond markets (e.g. selective corporate bonds), particularly in times of risk aversion. Therefore, the Manager considers liquidity as one of the key risks in Asian fixed income investing. Given this, at all stages of the investment process, the Manager takes into account liquidity and its impact on the overall portfolio and emphasises diversification across the portfolio s credit exposures. The Fund has the ability to borrow in the short-term for the purposes of meeting redemptions and short-term bridging requirements. To ensure continuity of funding, dedicated personnel are responsible for monitoring the Fund s liquidity position on a daily basis to ensure that sufficient cash resources and liquid assets are available to meet liabilities as and when they fall due. Units are redeemable at the holder s option. However, the Manager also has the option to limit redemption requests to 10% of the total number of units then in issue on each dealing day, with the approval of the Trustee. 17

19 10. Financial risk management (continued) (b) Liquidity risk (continued) The table below analyses the Fund s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Balances due within 12 months approximate their carrying values as the impact of discounting is not significant. As at 31 December 2011 Due on demand Less than 3 months Total Purchases awaiting settlement - 1,996,856 1,996,856 Other payables - 354, ,927 Net assets attributable to unitholders 16,271,040-16,271, Due on demand As at 30 June 2011 Less than 3 months Total Other payables - 473, ,629 Net assets attributable to unitholders 20,679,461-20,679,461 (c) Credit risk The Fund takes on exposure to credit risk, which is the risk that an issuer or counterparty will be unable to meet their financial obligations, such as payments of principal and/or interest on an instrument or payments on the Swaps. In addition, an issuer may suffer adverse changes in its financial condition that could lower the credit quality of the instrument. A change in the credit rating of the instrument can also affect the instrument s liquidity and make it more difficult to sell. The Fund invests in investment grade debt securities as rated by Standard & Poor s or Moody s and/or in unrated Singapore-domiciled corporate bonds which are deemed investment grade internally by the Manager. The Fund also invests in one or more total return swaps with counterparties that have a minimum long-term issuer rating of A by Standard & Poor s or equivalent at the inception of such Swaps. An analysis of the credit ratings of the Fund s investments has been disclosed in the Portfolio Statement.

20 10. Financial risk management (continued) (c) Credit risk (continued) The Fund limits the exposure to credit risk by transacting the majority of its securities and contractual commitment activities with counterparties and banks with high credit ratings and that the Manager considers to be well established. The Fund s exposure to credit risk also arises from its bank balances and assets held with custodians and counterparties. The table below summarises the credit rating of banks, custodians and counterparties with whom the Fund s assets are held as at 31 December 2011 and 30 June As at 31 December 2011 Credit rating Source of credit rating Bank & Custodian The Hongkong and Shanghai Banking Corporation Limited B+ Moody s Bank Australia & New Zealand Banking Group Ltd B- Moody s Oversea-Chinese Banking Corporation Limited B Moody s Standard Chartered Bank B- Moody s Counterparty UBS AG As at 30 June 2011 A Credit rating Standard & Poor s Source of credit rating Bank & Custodian The Hongkong and Shanghai Banking Corporation Limited B+ Moody s Bank Oversea-Chinese Banking Corporation Limited B Moody s Counterparty UBS AG A+ Standard & Poor s The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets. 19

21 10. Financial risk management (continued) (d) Capital management The Fund s capital is represented by the net assets attributable to unitholders. The Fund strives to invest the subscriptions of units in investments that meet the Fund s investment objectives while maintaining sufficient liquidity to meet unitholder redemptions. 11. Related party disclosure The Manager of the Fund is Schroder Investment Management (Singapore) Ltd. The Trustee is HSBC Institutional Trust Services (Singapore) Limited, a subsidiary of the HSBC Group. The management fees paid to the Manager; trustee fees, valuation fees and custodian fees charged by the HSBC Group are shown in the Statement of Total Return. There was no interest earned on deposits with the HSBC Group for the period (31 December 2010: Nil). As at 31 December 2011, the Fund maintained with the HSBC Group, the following bank balances: 31 Dec Jun 2011 Current accounts 1,034, , Financial ratios 31 Dec Dec 2010 Expense ratio % 2.00% Turnover ratio % % 1 The expense ratio is computed in accordance with the revised IMAS guidelines on disclosure of expense ratios dated 25 May Brokerage and other transaction costs, interest expense, foreign exchange gains/losses, front or back end loads arising from the purchase or sale of other funds, tax deducted at source or arising on income received and dividends paid to unitholders are not included in the expense ratio. The Fund does not pay performance fees. 2 The turnover ratio is calculated in accordance with the formulae stated in the Code on Collective Investment Schemes. 20

22 REPORT TO UNITHOLDERS 31 December 2011 The following is a report on the Schroder Dynamic Allocation Fund (the Fund ): 1. For the composition of investments of the Fund as at 31 December 2011, refer to the Portfolio Statement on pages 4 to The Fund has the following exposure to derivatives as at 31 December 2011: Percentage of total net assets attributable to Fair value unitholders % Total return swap (27,744) (0.17) The net gain on derivative contracts realised during the period 1 July 2011 to 31 December 2011 amounted to S1,004,483. The net gain on outstanding derivative contracts marked to market as at 31 December 2011 amounted to S89, The Fund was not invested in other unit trusts, mutual funds or collective investment schemes as at 31 December The Fund did not have any borrowings as at 31 December The amount of subscriptions and redemptions during the period 1 July 2011 to 31 December 2011 were as follows: Subscriptions 760 Redemptions 5,338,155 21

23 REPORT TO UNITHOLDERS 31 December Holdings of the Fund as at 31 December 2011: Percentage of total net assets attributable to Fair value unitholders % Series Jan ,999, Series 91 5 Jan ,999, Series Mar ,998, Series Mar ,998, Series Mar ,998, Series 91 5 Apr ,998, Total return swap (27,744) (0.17) 22

24 REPORT TO UNITHOLDERS 31 December 2011 Holdings of the Fund as at 31 December 2010: Percentage of total net assets attributable to Fair value unitholders % Series Mar ,995, Series 91 6 Jan ,000, Series Jan ,999, Series Mar ,997, Series Mar ,996, Series Feb ,999, Series Mar ,998, Total return swap (859,345) (2.88) 7. Expense Ratio 1 January 2011 to 31 December % 1 January 2010 to 31 December % Brokerage and other transaction costs, interest expense, foreign exchange gains/losses, front or back end loads arising from the purchase or sale of other funds, tax deducted at source or arising out of income received and dividends paid to unitholders are not included in the expense ratio. The Fund does not pay performance fees. 8. Turnover of Portfolio 1 July 2011 to 31 December % 1 July 2010 to 31 December % 23

25 REPORT TO UNITHOLDERS 31 December Soft Dollar arrangements and other fees received: Schroders has entered into soft commission arrangements with selected brokers where it obtains services from third parties. These services relate essentially to research and price information, performance measurement, portfolio valuations and market analyses, all of which are believed to be helpful in the overall discharge of Schroders duties to clients. As such services generally benefit all of Schroders clients in terms of input into the investment decision making process, the soft credits utilised are not allocated on a specific client basis. Schroders further confirms that trades were executed on the best available terms and there was no churning of trades. 10. For related party transactions, refer to note 11 in the Notes to the Financial Statements. 11. Performance of Fund for periods ended 31 December mths 6 mths 1 yr 3 yrs* Since Inception* # Fund 0.1% 4.1% 1.8% 5.4% 1.9% * Returns of more than 1 year are annualised # Since inception figures from 21 March 2008 Source: Morningstar, S, bid to bid, net dividends reinvested. 24

26 Manager Schroder Investment Management (Singapore) Ltd 65 Chulia Street #46-00 OCBC Centre Singapore Reg. No H Trustee HSBC Institutional Trust Services (Singapore) Limited 21 Collyer Quay #14-01 HSBC Building Singapore 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