annual REPORT For the Financial Year Ended 30 April 2016

Transcription

1 Kenanga Principal Protected Income II Fund annual REPORT For the Financial Year Ended 30 April 2016

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3 KENANGA PRINCIPAL PROTECTED INCOME II FUND Contents Page Corporate Directory ii Directory of Manager s Offices iii Fund Information 1-2 Manager s Report 3-6 Fund Performance 7-8 Trustee s Report 9 Independent Auditor s Report Statement by the Manager 12 Financial Statement 13-31

4 CORPORATE DIRECTORY Manager: Kenanga Investors Berhad (Company No P) Registered Office Kenanga Investors Berhad (KIB) 8th Floor, Kenanga International, Jalan Sultan Ismail, Kuala Lumpur, Malaysia. Tel: Fax: Business Office Suite 12.02, 12th Floor, Kenanga International, Jalan Sultan Ismail, Kuala Lumpur, Malaysia. Tel: Fax: Website: Board of Directors Datuk Syed Ahmad Alwee Alsree (Chairman) Syed Zafilen Syed Alwee (Independent Director) Peter John Rayner (Independent Director) Imran Devindran bin Abdullah (Independent Director) Dato Bruce Kho Yaw Huat Ismitz Matthew De Alwis Investment Committee Dato Bruce Kho Yaw Huat (Chairman) Syed Zafilen Syed Alwee (Independent Member) Peter John Rayner (Independent Member) Imran Devindran bin Abdullah (Independent Member) Ismitz Matthew De Alwis Company Secretary: Norliza Abd Samad (MAICSA ) 9th Floor, Kenanga International, Jalan Sultan Ismail, Kuala Lumpur, Malaysia. Tel: Fax: Trustee: RHB TRUSTEES BERHAD (formerly known as OSK Trustees Berhad) (Company No U) Registered Office Level 10, Tower One RHB Centre Jalan Tun Razak Kuala Lumpur Tel: Fax: Business Office 6th Floor, Plaza OSK Jalan Ampang Kuala Lumpur Tel: Fax: / Website: Auditor: Ernst & Young Level 23A, Menara Milenium, Jalan Damanlela, Pusat Bandar Damansara, Kuala Lumpur. Tel: Fax: Tax Adviser: Ernst & Young Tax Consultants Sdn Bhd Level 23A, Menara Milenium, Jalan Damanlela, Pusat Bandar Damansara, Kuala Lumpur. Tel: Fax: Membership: Federation of Investment Managers Malaysia (FIMM) , 6th Floor, Wisma Tune, 19, Lorong Dungun, Damansara Heights, Kuala Lumpur, Malaysia. Tel: Fax: Website: ii Kenanga Principal Protected Income II Fund Annual Report

5 DIRECTORY OF MANAGER S OFFICES Regional Branch Offices : Kuala Lumpur Suite 12.02, 12th Floor, Kenanga International Jalan Sultan Ismail, Kuala Lumpur, Malaysia Tel: Fax: Melaka No. 25-1, Jalan Kota Laksamana 2/17 Taman Kota Laksamana, Seksyen Melaka Tel: Fax: Klang No. 12, Jalan Batai Laut 3, Taman Intan Klang, Selangor Darul Ehsan Tel: / Fax: Penang 5.04, 5th Floor, Menara Boustead Penang 39, Jalan Sultan Ahmad Shah Penang. Tel : / Fax : Seremban 2nd Floor, No. 1D-2, Jalan Tuanku Munawir Seremban, Negeri Sembilan Tel : Fax : Johor Bahru Lot 11.03, 11th Floor, Menara MSC Cyberport No. 5, Jalan Bukit Meldrum Johor Bahru, Johor Tel: / 4798 Fax: Kuching 1st Floor, No 71, Lot 7 Lot 10900, Jalan Tun Jugah Kuching, Sarawak Tel: Fax: Kota Kinabalu A-03-11, 3rd Floor Block A, Warisan Square Jalan Tun Fuad Stephens Kota Kinabalu, Sabah Tel: / Fax: Ipoh Suite 1, 2nd Floor, 63, Persiaran Greenhill, Ipoh, Perak, Malaysia Tel: / 7570 Fax: Miri 2nd Floor, Lot 1264, Centre Point Commercial Centre, Jalan Melayu, Miri, Sarawak Tel: Fax: Kenanga Principal Protected Income II Fund Annual Report iii

6 1. FUND INFORMATION 1.1 Fund Name Kenanga Principal Protected Income II Fund (KPPI II F or the Fund) 1.2 Fund Category / Type Wholesale Money Market / Income 1.3 Investment Objective The Fund aims to provide investors a regular stream of income from the short-term money market returns by placing its funds in bank placements and deposits. 1.4 Investment Strategy The Fund seeks to achieve its objective by placing its funds in bank placements and deposits. In order to enhance the returns of the Fund, an active management process will be adopted, including active management of the maturities of the Fund s holdings, continuous monitoring of the prevailing interest rate environment and to actively seek out the best rates available for the Fund. 1.5 Asset Allocation Bank placements and deposits: Up to 100%. 1.6 Duration The Fund is an open-ended fund and hence does not have a termination date. 1.7 Performance Benchmark Maybank Overnight Repo Rate. 1.8 Distribution Policy Income will be paid daily on a best effort basis, if any. Income paid (if any) will be reinvested into the Fund. 1.9 Breakdown of unit holdings of KPPI II F as at 30 April 2016 Size of holdings No. of unit holders No. of units held 5,000 and below 0 0 5,001 10, ,001 50, , , ,001 and above 1 32,814,151 Total 1 32,814,151 1 Kenanga Principal Protected Income II Fund Annual Report

7 1.10 Risk Consideration Fund management company risk Credit risk Unit trust funds are managed by the Fund Management Company. The expertise, experience and investment process of the investment team would affect the performance of the fund. Poor management of a unit trust fund may jeopardize the investment of each investor. A unit trust fund could lose money if the issuer or guarantor of a fixed income security, or the counterpart to a derivatives contract, redemption agreement or a loan of portfolio securities, is unable or unwilling to make timely principal and/or interest/profit payments, or to otherwise honour its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings. Risk of non-compliance The operations and administrations of the funds by the Fund Management Company or its delegates are governed by the Deed, all applicable laws and regulations or internal policies and procedures. Non-adherence may result in tarnished reputation, limited business opportunities and reduced expansion potential for the Fund Management Company. Unitholder investment goals may also be affected should the Fund Management Company not adhere to the investment mandate. Loan financing risk The inherent risk of investing with borrowed money, which includes the ability for you to service the loan repayments and the effect of increase in interest rates on the loan repayments and your ability to provide additional collateral should wholesale fund prices fall beyond a certain level. Liquidity risk Liquidity risk stems from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize loss. This may lead to a possibility that the Fund not being able to unwind its positions which may result in the Fund not obtaining a fair price or true bid on the market. The lack of liquidity could also bring about instability in market prices, hence the NAV of the Fund. This risk is managed by investing only in short-term money market and deposit-based instruments. Interest rate risk This risk refers to the effect of interest rate changes on the market value of a fixed income portfolio. In the event of rising interest rates, prices of fixed income securities such as debentures will decrease and vice versa. The risk is mitigated by investing only in short-term money market and deposit-based instruments that are not subject to valuation risk. Market risk Market risk refers to fluctuations in market values of investments that affect the entire market. Economic and political uncertainties represent some sources of market risks because they affect the entire market and cannot be avoided through diversification. Inflation risk Inflation reduces the purchasing power of money. Therefore, in a high inflationary environment, there is possibility that income from debt securities may not be able to keep up with inflation. Counterparty risk Counterparty risk occurs when a financial institution that has entered into a securities trade defaults on its obligations under the agreement. A fund may encounter unit price volatility due to this risk arising. Kenanga Principal Protected Income II Fund Annual Report 2

8 2. MANAGER S REPORT 2.1 Explanation on whether the Fund has achieved its investment objective. The Fund has achieved its investment objective of aiming to provide investors a regular stream of income from the short-term money market returns by placing its funds in bank placements and deposits. 2.2 Comparison between the fund s performance and the performance of the benchmark Performance Chart Since Launch (20/05/ /04/2016) Kenanga Principal Protected Income II Fund vs Maybank Overnight Repo Rate Source: Lipper 2.3 Investment strategies and policies employed during the financial year under review During the financial year under review, the Fund seeks to achieve its objective by placing its funds in bank placements and deposits. In order to enhance the returns of the Fund, an active management process was adopted, including active management of the maturities of the Fund s holdings, continuous monitoring of the prevailing interest rate environment and to actively seek out the best rates available for the Fund. 2.4 The Fund's asset allocation as at 30 April 2016 and comparison with the previous financial year Asset 30 April April 2015 Short term deposits and cash 100.0% 100.0% 3 Kenanga Principal Protected Income II Fund Annual Report

9 2.5 Fund performance and volatility analysis Period under review Kenanga Principal Protected Income II Fund 3.00% Maybank Overnight Rate 2.02% Source: Lipper The Fund outperformed its benchmark return due to higher rates obtained from selected financial institutions. 2.6 Money Market Review Malaysia s balance of risks in 2015 was skewed towards growth disappointment and fiscal slippage on plunging oil prices against uptick in inflation. Upward inflation trajectory remains contained in spite of weaker currency due to waning domestic demand and benign global commodity prices. The economy was caught in domestic and external cross-currents stemming from reduced oil-related activity, lower domestic demand and tighter fiscal spending. Upward pressure on KLIBOR started to become visible in August 2015 after hitting a low of 3.69% in May 2015 in response to high loan-to-deposit ratio and easing of excess liquidity in the system. Banking deposits were growing at the slowest pace in more than a decade as retail funds flee to higher yielding assets as well as new liquidity coverage ratio requirements. Banks are chasing after cheap deposits to balance out the loan-to-deposit ratio (LDR) with some offering fixed deposit rates as high as 4.5% p.a. for a 12-month tenure on a promotional basis on average 100 bps higher than the rates displayed on the boards. Competition has also kicked up a notch ahead of a 2019 deadline to comply with Basel III capital requirement. On 16 December, Fitch Ratings downgraded its outlook on Malaysia s banking system for 2016 to negative based on a weaker forecast on earnings and asset quality. While Bank Negara Malaysia (BNM) held the Overnight Policy Rate (OPR) at 3.25%, there were stern warnings of risk to growth going forward. However, the central bank cut the statutory reserve requirement (SRR) by 50 basis points to 3.5%, freeing an estimated RM6.1 billion into the banking system s liquidity and triggered speculations on the possibility of further reductions. The SRR ratio, which hit a low of 1% in March 2009, had stayed at that level until March Reflecting latest macro conditions of weak global growth, depreciation pressure on Ringgit Malaysia and slump in oil prices, Prime Minister presented a revised fiscal budget for 2016 as it maintained target fiscal deficit 3.1% of GDP and ensuring debt not to exceed the target of 55% of GDP. Kenanga Principal Protected Income II Fund Annual Report 4

10 Money Market Outlook As long as global bond yields are low more than 50% of global fixed income yields of 1% or lower, of which a sizeable portion now offers negative yields, it will continue to drive capital into higher yielding and longer duration of fixed income segment. Accommodative monetary policy will provide further support to local currency fixed income markets. Malaysia s headline inflation rate is also likely to remain low and broadly at or below central bank s target level for 2016 given that food and energy constitute most of the CPI baskets. Key risk to this view is the return of inflation, which will erode real returns and impact from broad deposit slowdown over tighter credit supply, which will give rise to further expectations of increasing non-performing loans. Valuation wise, Ringgit Malaysia still has some leeway to strengthen. Bank Negara is also unlikely to intervene to smoothing the recent RM s gains partly given its deep under-valuation and the need to rebuild foreign exchange reserve position. Along with this, swap market in Malaysia is pricing for further monetary easing over the next 12 months and liquidity improvement prospects in the banking system evidently from decline in loans-to-deposit ratio to 88% in February against 89% in January 2016 and 88.7% in December, are supportive of long term money market rates. 2.7 Income Distribution For the financial year under review, the Fund has declared the following income distributions: Gross/Net distribution per unit (sen) Ex-NAV per unit (RM) June July August September October November December January February March April * Ex price will be maintained at RM1.000 after each distribution. 5 Kenanga Principal Protected Income II Fund Annual Report

11 2.8 Details of any unit split exercise The Fund did not carry out any unit split exercise during the financial year under review. 2.9 Significant changes in the state of affair of the Fund during the financial year There are no significant changes in the state of affair of the Fund during the financial year and up until the date of the manager s report, not otherwise disclosed in the financial statements Circumstances that materially affect any interests of the unitholders During the financial year under review, there are no circumstances that materially affect any interests of the unitholders Rebates & Soft commissions Any rebates received are channeled back to the Fund. On the other hand, commissions received from the stockbrokers for goods and services such as technical analysis software, fundamental database, financial wire services, stock quotation system and portfolio management software incidental to investment management of the Fund shall be retained by the Manager. For the financial year under review, the Manager did not receive any rebates or commissions from stockbrokers. Kenanga Principal Protected Income II Fund Annual Report 6

12 3. FUND PERFORMANCE 3.1 Details of portfolio composition of Kenanga Principal Protected Income Fund II ( the Fund ) for the last three financial years as at 30 April are as follow: a. Distribution among industry sectors and category of investments: FY FY FY % % % Short term deposits and cash Kenanga Principal Protected Income II Fund Annual Report Note: The above mentioned percentages are based on total investment market value plus cash. b. Distribution among markets The Fund invests in short term deposits and cash only. 3.2 Performance details of the Fund for last 3 financial years ended 30 April are as follows: FY 2016 FY 2015 FY 2014 Net asset value ("NAV") (RM Million) Units in circulation (Million) NAV per unit (RM) Highest NAV per unit (RM) Lowest NAV per unit (RM) Total return (%) Capital growth (%) Income growth (%) Gross distribution (RM) 1,677, ,842 Net distribution (RM) 1,677, ,842 Management expense ratio ( MER ) (%) Portfolio turnover ratio ( PTR ) (times) Note: Total return is the actual return of the Fund for the respective financial years, computed based on actual income distribution. MER is computed based on the total fees and expenses incurred by the Fund divided by the average fund size calculated on a daily basis. PTR is computed based on the average of the total acquisitions and total disposals of investment securities of the Fund divided by the average fund size calculated on a daily basis. 1. MER is higher against previous financial year due to no investment made during the previous financial year under review. 2. PTR is higher against previous financial year due to no investment made during the previous financial year under review.

13 3.3 Average total return of the Fund Kenanga Principal Protected Income II Fund 1 Year 3 Years 5 Years 30 Apr Apr Apr Apr Apr Apr % 1.41% 1.89% Maybank Overnight Rate 2.02% 1.97% 1.94% Source: Lipper 3.4 Annual total return of the Fund Kenanga Principal Protected Income II Fund Maybank Overnight Rate Period under review 1 Year 1 Year 1 Year 1 Year 30 Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr % 0.00% 1.24% 2.54% 2.44% 2.02% 1.97% 1.82% 1.82% 1.72% Source: Lipper Investors are reminded that past performance is not necessarily indicative of future performance. Unit prices and investment returns may fluctuate. Kenanga Principal Protected Income II Fund Annual Report 8

14 4. TRUSTEE S REPORT TO THE UNITHOLDER OF KENANGA PRINCIPAL PROTECTED INCOME II FUND We have acted as Trustee of Kenanga Principal Protected Income II Fund ( the Fund ) for the financial year ended 30 April In our opinion and to the best of our knowledge, Kenanga Investors Berhad, the Manager, has operated and managed the Fund in accordance with the following:- (a) Limitations imposed on the investment powers of the Manager and the Trustee under the Deed, the Securities Commission Malaysia s Guidelines on Unlisted Capital Market Products Under The Lodge and Launch Framework, the Capital Markets and Services Act 2007 and other applicable laws; (b) Valuation/pricing is carried out in accordance with the Deed and any regulatory requirements; (c) Creation and cancellation of units are carried out in accordance with the Deed and relevant regulatory requirements; and (d) The distribution of returns by the Fund is tied to and reflects the investment objective of the Fund. For and on behalf of RHB TRUSTEES BERHAD (Company No. : U) TONY CHIENG SIONG UNG Director Kuala Lumpur 27 June Kenanga Principal Protected Income II Fund Annual Report

15 5. INDEPENDENT AUDITORS REPORT TO THE UNITHOLDER OF KENANGA PRINCIPAL PROTECTED INCOME II FUND Report on the financial statements We have audited the financial statements of Kenanga Principal Protected Income Fund II ( the Fund ), which comprise the statement of financial position as at 30 April 2016 and the statement of comprehensive income, statement of changes in net asset value and statement of cash flows for the financial year then ended, and a summary of significant accounting policies and other explanatory information, as set out on pages 13 to 31. Manager s and Trustee s responsibility for the financial statements and fair presentation The Manager of the Fund is responsible for the preparation of financial statements so as to give a true and fair view in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. The Manager is also responsible 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. The Trustee is responsible for ensuring that the Manager maintains proper accounting and other records as are necessary to enable true and fair presentation of these financial statements. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with approved standards on auditing in Malaysia. 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 our judgment, including the assessment of risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Fund s preparation of financial statements that give a true and fair view 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 the 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. Kenanga Principal Protected Income II Fund Annual Report 10

16 5. INDEPENDENT AUDITORS REPORT TO THE UNITHOLDER OF KENANGA PRINCIPAL PROTECTED INCOME II FUND (CONTD.) Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Fund as at 30 April 2016 and of its financial performance, changes in net asset value and cash flows for the financial year then ended in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. Other matters This report is made solely to the unitholder of the Fund, as a body, and for no other purpose. We do not assume responsibility to any other person for the content of this report. Ernst & Young AF: 0039 Chartered Accountants Chan Hooi Lam No. 2844/02/18(J) Chartered Accountant Kuala Lumpur, Malaysia 27 June Kenanga Principal Protected Income II Fund Annual Report

17 6. STATEMENT BY THE MANAGER I, Ismitz Matthew De Alwis, being a director of Kenanga Investors Berhad, do hereby state that, in the opinion of the Manager, the accompanying statement of financial position as at 30 April 2016 and the related statement of comprehensive income, statement of changes in net asset value and statement of cash flows for the financial year ended 30 April 2016 together with notes thereto, are drawn up in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards so as to give a true and fair view of the financial position of Kenanga Principal Protected Income Fund II as at 30 April 2016 and of its financial performance and cash flows for the financial year then ended and comply with the requirements of the Deed. For and on behalf of the Manager Kenanga Investors Berhad Ismitz Matthew De Alwis Executive Director/Chief Executive Officer Kuala Lumpur, Malaysia 27 June 2016 Kenanga Principal Protected Income II Fund Annual Report 12

18 7. FINANCIAL STATEMENT 7.1 STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 30 APRIL 2016 INVESTMENT INCOME Note RM RM Interest income 1,844,710 - EXPENSES Manager's fee 4 142,362 - Trustee's fee 5 4,745 - Auditors' remuneration 5,000 - Tax agent's fee 4,000 - Administration expenses 11, ,289 - NET INCOME BEFORE TAX 1,677,421 - Income tax NET INCOME AFTER TAX, REPRESENTING TOTAL COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR 1,677,421 - Net income after tax is made up as follows: Realised gain 1,677,421 - Distributions for the financial year: Net distribution 7 1,677,421 - Gross/Net distribution per unit (sen): The accompanying notes form an integral part of the financial statements. 13 Kenanga Principal Protected Income II Fund Annual Report

19 7.2 STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 2016 Note RM RM INVESTMENT Short term deposits 8 32,812,299 - OTHER ASSETS Other receivable 9 18,005 - Cash at bank 7, , TOTAL ASSETS 32,837, LIABILITIES Amount due to Manager 8, Amount due to Trustee 4,211 - Other payables 10 11,038 - TOTAL LIABILITIES 23, EQUITY Unitholders' contribution 32,814,151 - NET ASSET VALUE ( NAV ) ATTRIBUTABLE TO UNITHOLDERS 11 32,814,151 - TOTAL EQUITY AND LIABILITIES 32,837, NUMBER OF UNITS IN CIRCULATION 11(a) 32,814,151 - NET ASSET VALUE PER UNIT EX DISTRIBUTION (RM) The accompanying notes form an integral part of the financial statements. Kenanga Principal Protected Income II Fund Annual Report 14

20 7.3 STATEMENT OF CHANGES IN NET ASSET VALUE FOR THE FINANCIAL YEAR ENDED 30 APRIL 2016 Note Unitholders Retained Total contribution earnings NAV RM RM RM 2016 At beginning of the financial year Total comprehensive income - 1,677,421 1,677,421 Creation of units 11(a) 103,136, ,136,730 Cancellation of units 11(a) (72,000,000) - (72,000,000) Distributions 7 - (1,677,421) (1,677,421) Reinvestment of income distributed 11(a) 1,677,421-1,677,421 At end of the financial year 32,814,151-32,814, At beginning/end of the financial year The accompanying notes form an integral part of the financial statements. 15 Kenanga Principal Protected Income II Fund Annual Report

21 7.4 STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 30 APRIL 2016 CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES Note RM RM Proceeds from the maturity of investments 456,331,589 - Interest from deposits received 1,826,705 - Auditors remuneration paid - (2,984) Trustee s fee paid (534) - Payment for other fees and expenses (9,144) (15) Manager s fee paid (135,270) - Purchase of investments (481,500,888) - Net cash used in operating and investing activities (23,487,542) (2,999) CASH FLOWS FROM FINANCING ACTIVITIES Cash received from units created 103,136,730 - Cash paid on units cancelled (72,000,000) - Net cash generated from financing activities 31,136,730 - NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 7,649,188 (2,999) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE FINANCIAL YEAR 988 3,987 CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL YEAR 7,650, Cash and cash equivalents comprise: Cash at bank 7, Short term deposits 8 7,643,000-7,650, The accompanying notes form an integral part of the financial statements. Kenanga Principal Protected Income II Fund Annual Report 16

22 7.5 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 30 APRIL THE FUND, THE MANAGER AND THEIR PRINCIPAL ACTIVITIES Kenanga Principal Protected Income Fund II ("the Fund") was constituted pursuant to the executed Deed dated 29 October 2008 (collectively, together with deeds supplemental thereto, referred to as "the Deed") between the Manager, Kenanga Funds Berhad and RHB Trustee Berhad ("the Trustee"). The Fund commenced operations on 20 May 2009 and will continue to be in operation until terminated as provided under Part 12 of the Deed. Pursuant to the executed Second Supplemental Deed dated 23 May 2013 between Kenanga Investors Berhad and RHB Trustees Berhad, Kenanga Investors Berhad was appointed as the Manager of the Fund with effect from 8 June Kenanga Investors Berhad is a wholly-owned subsidiary of Kenanga Investment Bank Berhad, which in turn is a wholly-owned subsidiary of K & N Kenanga Holdings Berhad that is listed on the Main Market of Bursa Malaysia Securities Berhad. All of these companies are incorporated in Malaysia. The principal place of business of the Manager is Suite 12.02, 12th Floor, Kenanga International, Jalan Sultan Ismail, Kuala Lumpur. The Fund seeks to provide qualified investors a regular stream of income from the short term money market returns by placing its fund in bank placements and deposits. The financial statements were authorised for issue by the Chief Executive Officer of the Manager on 27 June FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Fund is exposed to a variety of risks including market risk (which includes interest rate risk), credit risk and liquidity risk. Whilst these are the most important types of financial risks inherent in each type of financial instruments, the Manager and the Trustee would like to highlight that this list does not purport to constitute an exhaustive list of all the risks inherent in an investment in the Fund. The Fund has an approved set of investment guidelines and policies as well as internal controls which sets out its overall business strategies to manage these risks to optimise returns and preserve capital for the unitholders, consistent with the long term objectives of the Fund. a. Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk includes interest rate risk. Market risk arises when the value of the investments fluctuates in response to the activities of individual companies, general market or economic conditions. It stems from the fact that there are economy-wide perils, which threaten all businesses. Hence, investors are exposed to market uncertainties. Fluctuation in the investment s price caused by uncertainties in the economic, political and social environment will affect the NAV of the Fund. 17 Kenanga Principal Protected Income II Fund Annual Report

23 2. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTD.) a. Market Risk (Contd.) The Manager manages the risk of unfavourable changes in prices by cautious review of the investments and continuous monitoring of their performance and risk profiles. i. Interest rate risk Interest rate risk refers to how the changes in the interest rate environment would affect the valuation of the Fund s investments. Rates offered by the financial institutions will fluctuate according to the Overnight Policy Rate determined by Bank Negara Malaysia and this has direct correlation with the Fund s investments in deposits. The Fund is not exposed to significant interest rate risk as its deposits are short term in nature and have fixed interest rates. Interest rate risk exposure The following table analyses the Fund s interest rate risk exposure. The Fund s assets and liabilities are disclosed at fair value and categorised by the earlier of contractual re-pricing or maturity dates. Weighted Up to 1 year Nonexposure to interest rate movement Total average effective interest rate* RM RM RM % 2016 Assets Short term deposits 32,812,299-32,812, Other assets - 25,181 25,181 32,812,299 25,181 32,837,480 Liabilities Other liabilities - 23,329 23,329 Total interest rate sensitivity gap 32,812,299 1,852 32,814,151 Kenanga Principal Protected Income II Fund Annual Report 18

24 2. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTD.) a. Market Risk (Contd.) i. Interest rate risk (Contd.) Interest rate risk exposure (Contd.) Weighted Up to 1 year Nonexposure to interest rate movement Total average effective interest rate* RM RM RM % 2015 Asset Other asset Liability Other liability Total interest rate sensitivity gap * Computed based on assets with exposure to interest rate movement. b. Credit Risk Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss to the Fund by failing to discharge an obligation. The Manager manages the credit risk by undertaking credit evaluation to minimise such risk. i. Credit risk exposure As at the reporting date, the Fund s maximum exposure to credit risk is represented by the carrying amount of each class of financial asset recognised in the statement of financial position. ii. Financial assets that are either past due or impaired As at the reporting date, there are no financial assets that are either past due or impaired. 19 Kenanga Principal Protected Income II Fund Annual Report

25 2. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTD.) b. Credit Risk (Contd.) iii. Credit quality of financial assets The Fund invests in deposits with financial institutions licensed under the Financial Services Act 2013 and Islamic Financial Services Act The following table analyses the licensed financial institutions by rating category: Short term deposits Percentage of total short term deposits Percentage of NAV % % % % Rating P c. Liquidity Risk Liquidity risk is defined as the risk that the Fund will encounter difficulty in meeting obligations associated with financial liabilities that are to be settled by delivering cash or another financial asset. Exposure to liquidity risk arises because of the possibility that the Fund could be required to pay its liabilities or cancel its units earlier than expected. The Fund is exposed to cancellation of its units on a regular basis. Units sold to unitholders by the Manager are cancellable at the unitholder s option based on the Fund s NAV per unit at the time of cancellation calculated in accordance with the Deed. The liquid assets comprise cash, deposits with licensed financial institutions and other instruments, which are capable of being converted into cash within 7 days. The following table analyses the maturity profile of the Fund s financial assets and financial liabilities in order to provide a complete view of the Fund s contractual commitments and liquidity. Up to 1 year Note RM RM Assets 32,812,299 - Short term deposits 25, Other assets (i) 32,837, Liabilities Other liabilities (ii) 23, Equity (iii) 32,814,151 - Liquidity gap - - Kenanga Principal Protected Income II Fund Annual Report 20

26 2. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTD.) c. Liquidity Risk (Contd.) (i) Financial assets For the Fund s investment and other assets, the analysis into maturity groupings is based on the remaining period from the end of the reporting period to the contractual maturity date or if earlier, the expected date on which the assets will be realised. (ii) Financial liabilities The maturity grouping is based on the remaining period from the end of the reporting period to the contractual maturity date or if earlier, the date on which liabilities will be settled. When the counterparty has a choice of when the amount is paid, the liability is allocated to the earliest period in which the Fund can be required to pay. (iii) Equity As the unitholders can request for redemption of their units, they have been categorised as having a maturity of up to 1 year. 21 Kenanga Principal Protected Income II Fund Annual Report

27 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basic of Accounting The financial statements of the Fund have been prepared in accordance with Malaysian Financial Reporting Standards ( MFRS ) as issued by Malaysian Accounting Standards Board ( MASB ) and International Financial Reporting Standards ( IFRS ) issued by International Accounting Standards Board ( IASB ). The accounting policies adopted are consistent with those of the previous financial period except for the adoption of the new and amended MFRS and IC Interpretations which became effective for the Fund on 1 May The adoption of the new and amended MFRS and IC Interpretations did not have any significant impact on the financial position or performance of the Fund. The financial statements have been prepared on the historical cost basis except as disclosed in the accounting policies below. b. Standards and Amendments Issued But Not Yet Effective As at the reporting date, the following Standards and Amendments that have been issued by MASB will be effective for the Fund in future financial periods. The Fund intends to adopt the relevant standards when they become effective. Description Effective for financial period beginning on or after Amendments to MFRS contained in the documents entitled Annual Improvements to MFRSs Cycle 1 January 2016 MFRS 14: Regulatory Deferral Accounts 1 January 2016 Amendments to MFRS 10, MFRS 12 and MFRS 128: Investment Entities: Applying the Consolidation Exception 1 January 2016 Amendments to MFRS 11: Accounting for Acquisitions of Interests in Joint Operations 1 January 2016 Amendments to MFRS 101: Disclosure Initiative 1 January 2016 Amendments to MFRS 116 and MFRS 138: Clarification of Acceptable Methods of Depreciation and Amortisation 1 January 2016 Amendments to MFRS 116 and MFRS 141: Agriculture: Bearer Plants 1 January 2016 Amendments to MFRS 127: Equity Method in Separate Financial Statements 1 January 2016 MFRS 9: Financial Instruments 1 January 2018 MFRS 15: Revenue from Contracts with Customers 1 January 2018 MFRS 16: Leases 1 January 2019 Amendments to MFRS 10 and MFRS 128: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture To be announced by MASB Kenanga Principal Protected Income II Fund Annual Report 22

28 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD.) b. Standards and Amendments Issued But Not Yet Effective (Contd.) The Fund will adopt the above pronouncements when they become effective in the respective financial periods. These pronouncements are not expected to have any significant impact to the financial statements of the Fund upon their initial application, other than MFRS 9. MFRS 9 replaces MFRS 139 on the following requirements: classification and measurement of financial assets and financial liabilities as defined in MFRS 139, impairment methodology and hedge accounting. The Fund is in the process of making an assessment of the impact of this Standard. c. Financial Assets Financial assets are recognised in the statement of financial position when, and only when, the Fund becomes a party to the contractual provisions of the financial instruments. When financial assets are recognised initially, they are measured at fair value, plus, in the case of financial assets not at fair value through profit and loss ("FVTPL"), directly attributable transaction costs. The Fund determines the classification of its financial assets at initial recognition. i. Receivables Financial assets with fixed or determinable payments that are not quoted in an active market are classified as receivables. Subsequent to initial recognition, receivables are measured at amortised cost using the effective interest method. Gain or loss is recognised in profit or loss when the receivable is derecognised or impaired, and through the amortisation process. A financial asset is derecognised when the contractual right to receive cash flows from the asset has expired. On derecognition of a financial asset, the difference between the carrying amount and the sum of the consideration received is recognised in profit or loss. d. Impairment of Financial Assets The Fund assesses at each reporting date whether there is any objective evidence that a financial asset is impaired. To determine whether there is objective evidence that an impairment loss on financial assets has been incurred, the Fund considers factors such as the probability of insolvency or significant financial difficulties of the debtor and default or significant delay in payments. 23 Kenanga Principal Protected Income II Fund Annual Report

29 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD.) d. Impairment of Financial Assets (Contd.) If any such evidence exists, the amount of impairment loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the financial asset s original effective interest rate. The impairment loss is recognised in profit or loss. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets, with the exception of receivables, where the carrying amount is reduced through the use of an allowance account. When a receivable becomes uncollectible, it is written off against the allowance account. If, in a subsequent year, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent that the carrying amount of the assets does not exceed its amortised cost at the reversal date. The amount of reversal is recognised in profit or loss. e. Income Income is recognised to the extent that it is probable that the economic benefits will flow to the Fund and the income can be reliably measured. Income is measured at the fair value of consideration received or receivable. Interest income is recognised using the effective interest method on an accrual basis. f. Cash and Cash Equivalents For the purposes of the statement of cash flows, cash and cash equivalents include cash at bank and short term deposits with licensed financial institutions. g. Income Tax Income tax on the profit or loss for the financial year comprises current tax. Current tax is the expected amount of income taxes payable in respect of the taxable profit for the financial year. As no temporary differences have been identified, no deferred tax has been recognised. h. 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 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 are classified as other financial liabilities. The Fund s financial liabilities are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Kenanga Principal Protected Income II Fund Annual Report 24

30 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD.) h. Financial Liabilities (Contd.) 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. i. Unitholder s Contribution NAV Attributable to Unitholder The unitholder s contribution to the Fund is classified as equity instruments. Distribution equalisation represents the average amount of undistributed net income included in the creation or cancellation price of units. This amount is either refunded to unitholder by way of distribution and/or adjusted accordingly when units are released back to the Trustee. j. Functional and Presentation Currency 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 ( RM ), which is also the Fund s functional currency. k. Distribution Distributions are at the discretion of the Manager. A distribution to the Fund s unitholder is accounted for as a deduction from retained earnings. l. Significant Accounting Judgments and Estimates The preparation of financial statements requires the use of certain accounting estimates and exercise of judgment. Estimates and judgments are continually evaluated and are based on past experience, reasonable expectations of future events and other factors. i. Critical judgments made in applying accounting policies There are no major judgments made by the Manager in applying the Fund's accounting policies. ii. Key sources of estimation uncertainty There are no key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. 25 Kenanga Principal Protected Income II Fund Annual Report

31 4. MANAGER'S FEE The Manager s fee is computed on daily basis at a rate not less than 0.5% per annum and not exceeding 3.0% per annum of the NAV of the Fund as provided under Division 13.1 of the Deed. The Manager is currently charging Manager s fee of 0.30% per annum of the NAV of the Fund (2015: nil). 5. TRUSTEE'S FEE Trustee s fee is calculated on a daily basis at a rate not exceeding 0.20% per annum of the NAV of the Fund as provided under Division 13.2 of the Deed. The Trustee s fee is currently computed at 0.01% per annum of the NAV of the Fund (2015: nil). 6. INCOME TAX Income tax is calculated at the Malaysian statutory tax rate of 24% (2015: 25%) of the estimated assessable income for the financial year. Income tax is calculated on investment income less partial deduction for permitted expenses as provided for under Section 63B of the Income Tax Act, A reconciliation of income tax expense applicable to net income before tax at the statutory income tax rate to income tax expense at the effective income tax rate of the Fund is as follows: RM RM Net income before tax 1,677,421 - Tax at Malaysian statutory tax rate of 24% (2015: 25%) 402,581 - Tax effect of: Income not subject to tax (442,730) - Expenses not deductible for tax purposes 4,449 - Restriction on tax deductible expenses for unit trust fund 35,700 - Income tax for the financial year - - Kenanga Principal Protected Income II Fund Annual Report 26

32 7. DISTRIBUTIONS Distributions to unitholders for the current financial year were made on the following months: RM RM Distribution on: June 19,507 - July 303,224 - August 301,748 - September 188,337 - October 164,833 - November 165,301 - December 147,239 - January 104,203 - February 94,745 - March 95,835 - April 92,449-1,677,421 - Distributions to unitholders are from the followings sources: RM RM Interest income 1,844,710 - Less: Expenses (167,289) - 1,677,421 - Gross/Net distribution per unit (sen) SHORT TERM DEPOSITS Short term deposits are held with licensed financial institutions in Malaysia at the prevailing interest rates RM RM Short term deposits (tenure: more than 7 days) 25,169,299 - Short term deposits (tenure: 7 days or less) 7,643,000-32,812, OTHER RECEIVABLE RM RM Interest receivable from short term deposits 18, Kenanga Principal Protected Income II Fund Annual Report

33 10. OTHER PAYABLES RM RM Accrual for auditors remuneration 5,000 - Accrual for tax agent s fees 4,000 - Provision for printing and other expenses 2,038-11, NET ASSET VALUE ATTRIBUTABLE TO UNITHOLDERS NAV attributed to unitholders is represented by: Note RM RM Unitholders contribution (a) 32,814,151 - (a) Unitholders contribution No. of units RM No. of units RM At beginning of the financial year Add: Creation of units 103,136, ,136, Less: Cancellation of units (72,000,000) (72,000,000) - - Reinvestment of income distributed 1,677,421 1,677, At end of the financial year 32,814,151 32,814, The number of units legally or beneficially held by the Manager, Kenanga Investors Berhad, and parties related to the Manager as at 30 April 2016 were nil (2015: nil). 12. PORTFOLIO TURNOVER RATIO ("PTR") PTR for the financial year is 8.31 times (2015: nil). PTR is the ratio of average sum of acquisitions and disposals of investments of the Fund for the financial year to the average NAV of the Fund, calculated on a daily basis. Kenanga Principal Protected Income II Fund Annual Report 28

34 13. MANAGEMENT EXPENSE RATIO ("MER") MER for the financial year is 0.35% (2015: nil). MER is the ratio of the sum of annualised fees and recovered expenses of the Fund expressed as a percentage of the Fund s average NAV, calculated on a daily basis. 14. TRANSACTIONS WITH LICENSED FINANCIAL INSTITUTIONS Transaction Percentage of value total RM % Public Bank Berhad 1,582,044, Kenanga Investment Bank Berhad* 180,282, Alliance Bank Malaysia Berhad 80,636, Bank Islam Malaysia Berhad 80,419, Hong Leong Bank Berhad 80,357, OCBC Bank (Malaysia) Berhad 60,206, ,063,946, * Kenanga Investment Bank Berhad is a related party of Kenanga Investors Berhad. The above transaction values are in respect of short term deposits. Transactions in short term deposits do not involve any commission or brokerage fees. The directors of the Manager are of the opinion that the transactions with the related party have been entered into in the normal course of business and have been established on terms and conditions that are not materially different from that obtainable in transactions with unrelated parties. The Manager is of the opinion that the above dealings have been transacted on an arm s length basis. 15. SEGMENTAL REPORTING Business and Geographical Segment In accordance with the objective of the Fund, the Fund can invest up to 100% of its NAV in short term deposits. As the Fund invests only in short term deposits and all of the Fund s investments are located in Malaysia, the Fund does not have separate identifiable business and geographical segments. 29 Kenanga Principal Protected Income II Fund Annual Report

35 16. FINANCIAL INSTRUMENTS a. Classification of financial instruments The Fund s financial assets and financial liabilities are measured on an ongoing basis at either fair value or at amortised cost based on their respective classification. The significant accounting policies in Note 3 describe how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the financial assets and liabilities of the Fund in the statement of financial position by the class of financial instruments to which they are assigned and therefore by the measurement basis. Financial Receivables liabilities Total RM RM RM 2016 Assets Short term deposits 32,812,299-32,812,299 Other receivable 18,005-18,005 Cash at bank 7,176-7,176 32,837,480-32,837,480 Liabilities Amount due to Manager - 8,080 8,080 Amount due to Trustee - 4,211 4,211 Other payables - 11,038 11,038-23,329 23, Asset Cash at bank Liability Amount due to Manager b. Financial instruments not carried at fair value and whose carrying amounts are reasonable approximations of fair value The carrying amounts of the Fund s other financial assets and liabilities are not carried at fair value but approximate fair values due to the relatively short term maturity of these financial instruments. Kenanga Principal Protected Income II Fund Annual Report 30