TEMPLETON ASIAN BOND FUND

Transcription

1 Unaudited Quarterly Report 31 December 2017 TEMPLETON ASIAN BOND FUND

2 UNAUDITED QUARTERLY REPORT I. GENERAL INFORMATION ABOUT THE FUND II. III. MANAGER S REPORT STATEMENT BY THE MANAGER AND UNAUDITED FINANCIAL STATEMENTS FOR THE FINANCIAL PERIOD FROM 1 OCTOBER 2017 TO 31 DECEMBER 2017

3 I. GENERAL INFORMATION ABOUT THE FUND Launch and Commencement Date The Templen Asian Bond Fund (the Fund ) was launched on 5 February 2013 and commenced its operations on 19 February Fund Name, Category, Type Fund Name Templen Asian Bond Fund Fund Category Wholesale Feeder Fund (Fixed Income) Fund Type Growth and Income Investment Objective, Policy and Strategy The Fund is a feeder fund. The Fund aims achieve tal investment returns by investing in a single collective investment scheme i.e. the Franklin Templen Investment Funds Templen Asian Bond Fund (the Target Fund ) which is denominated in United States Dollar (USD) and domiciled in Luxembourg. The Manager will monir the investment objective of the Target Fund ensure that it is consistent with the investment objective of the Fund. As the primary investment of the Fund i.e. the Target Fund, is denominated in USD, the Manager intends employ hedging reduce the Fund s exposure foreign exchange fluctuations. The hedging ols that the Manager may utilise include but are not limited foreign exchange forwards. The Target Fund seeks achieve its objective by investing principally in a portfolio of fixed and floating rate debt securities and debt obligations issued by government and government-related issuers and/or corporate entities located throughout Asia. The Target Fund may also purchase debt obligations issued by supranational entities organised or supported by several national governments, such as the International Bank for Reconstruction and Development or the European Investment Bank. The Target Fund may also utilise financial derivative instruments for hedging, efficient portfolio management and/or investment purposes. These financial derivative instruments may be dealt on either regulated markets or over-the-counter, and may include, inter alia, swaps (such as credit default swaps or fixed income related tal return swaps), forwards and cross forwards, futures contracts (including those on government securities), as well as options. The asset allocation of the Fund will be as follows: Minimum 95% of the NAV of the Fund be invested in the Target Fund; and Up 5% of the NAV of the Fund in cash and/or other liquid assets. Fund Distribution Policy In line with the distribution policy of the Target Fund, it is intended that the Fund will distribute income at least once a year, subject availability of income. 1

4 II. MANAGER S REPORT MARKET REVIEW In Japan, industrial production (IP) expanded for two consecutive months; in November by 0.6% month-on-month (m/m) and in Ocber by 0.5% m/m. Consumption was stronger in November with retail sales growing 1.9% m/m and household spending increasing 1.7% year-on-year (y/y). Gross domestic product (GDP) for the third quarter (Q3) of 2017 was revised up 0.6% quarter on-quarter (q/q) seasonally adjusted (sa) growth from the previous preliminary figure of 0.3% q/q sa. Core consumer price index (CPI) inflation (ex-fresh food) increased 0.9% y/y from 0.8% y/y as fresh food became less deflationary. However, core-core inflation (ex-fresh food & energy) was still relatively muted at 0.3% y/y in November. The Bank of Japan (BOJ) kept its current monetary policy in place. The Japanese yen depreciated 0.13% against the US dollar (USD) in December and 0.08% during the fourth quarter (Q4) of In South Korea, IP improved in November but only marginally, expanding 0.2% m/m, after contracting 1.5% in Ocber. Exports decelerated slightly 8.9% y/y growth in December from 9.5% y/y growth in November. The Bank of Korea raised the base rate by 25 basis points (bps) 1.5%, as expected. There was one dissenter who opposed the rate cut. The South Korean won appreciated 1.85% against the US dollar in December and 7.30% during Q4. In China, IP increased by 6.1% while fixed asset investment expanded by 7.2% y/y. CPI rose by 1.7% y/y due lower food prices. Producer price index increased by 5.8% y/y. Total social financing reached 1.6 trillion yuan in November and new yuan loans was 1.1 trillion. In Chinese yuan terms, the trade surplus edged up in November billion. Exports increased by 10.3% y/y while imports grew by 15.6% y/y. Foreign reserves edged up USD3.21 trillion while headline reserves increased by USD10.5 billion. The People s Bank of China kept the policy rate unchanged at 4.35%. The Chinese yuan appreciated 1.63% against the US dollar in December and 2.26% during Q4. In India, IP growth slowed in Ocber 2.2% y/y from 4.1% y/y in September, as demand shock lingered from the goods and service tax reform. GDP accelerated in Q3 6.3% y/y growth, up from 5.7% y/y growth in the second quarter (Q2) of The current account deficit improved USD7.2 billion in Q3 from USD14.3 billion in Q2 on lower gold imports. Moody s upgraded India s bond rating Baa2 from Baa3 on continued economic reforms. The Reserve Bank of India kept the policy rate unchanged at 6.0%. The Indian rupee appreciated 1.02% against the US dollar in December and 2.30% during Q4. In Indonesia, purchasing managers index in November edged up 50.4 from 50.1 in Ocber. CPI in November rose by 3.3% y/y while core expanded by 3.1% y/y. The trade surplus narrowed USD127 million November. Exports grew by 13.2% y/y while imports expanded by 19.6% y/y. REVIEW OF THE TARGET FUND PERFORMANCE DURING THE PERIOD For the quarter, the Target Fund s positive absolute performance was primarily attributable currency positions. Interest-rate strategies had a largely neutral effect on absolute results. On a relative basis, the Target Fund s underperformance of its benchmark index was primarily due currency positions. Interest rate strategies contributed relative results. Currency Analysis Amongst currencies, positions in South Asia (the Indian rupee) contributed absolute performance. The Target Fund s net-negative position in the Japanese yen had a largely neutral effect on absolute results. On a relative basis, underweighted currency positions in East Asia (the Chinese yuan) and Southeast Asia (the Malaysian ringgit) detracted from relative performance. The Target Fund s underweighted position in the Japanese yen had a largely neutral effect on relative results. 2

5 MANAGER S REPORT (CONTINUED) Duration Analysis The Target Fund maintained a defensive approach regarding interest rates. Select duration exposures in multiple regions detracted from absolute performance, while select duration exposures in Southeast Asia (Indonesia) contributed. On a relative basis, select duration exposures in multiple regions contributed relative results. Credit Analysis The Target Fund does not have credit exposures. MARKET OUTLOOK We expect US Treasury (UST) yields rise and the US dollar strengthen as the Federal Reserve (Fed) moves wards tightening policy while US inflation pressures pick up. The Fed s balance sheet unwinding is likely put additional upward pressure on yields, in our view. Several major buyers of USTs have pulled back from the UST market in recent years, including foreign governments and central banks in Asia, notably the People s Bank of China. Major oil producing countries have also pulled back, becoming net borrowers instead of net lenders as they were when oil prices were above USD100 per barrel. The Fed will now be added that list of diminishing demand, as it unwinds its UST and mortgage-backed security positions. Although the Fed s credibility came in question when it backtracked on projected rate hikes in 2016, we expect it remain on course with balance sheet unwinding and rate moves in The Fed has indicated intentions hike rates three times in 2018 and move wards a policy rate of 2.75% in Markets have appeared focus on the speed and extent of rate hikes from the Fed, but not placed enough attention on the effect of the Fed s balance sheet unwinding, an unprecedented course of action. It could theoretically go smoothly with few disruptions, but in practicality we think that is unlikely. Uncertainties in the markets would likely put further pressure on bond valuations, in our view. Invesrs who are holding longer duration exposures are taking on a lot of asymmetric risk, in our opinion, particularly in an environment of economic resilience and growing inflation pressures. On the whole, we continue expect inflation pressures rise with resilience in the US economy and exceptionally strong US labour markets. We have seen wage pressures pick up in specific pockets of the economy, and we expect those pressures accelerate. Policy constraints on immigration have also been pressuring wages in various labour secrs. Additionally, financial secr deregulation has the potential accelerate credit activity, stimulate investment and accelerate the velocity of money, which would further drive inflation. Fiscal expansion could similarly add inflation dynamics. Overall, our expectations for rising inflation are not dependent on a specific policy adjustment (nor are they dependent on commodity prices); rather they reflect all of the already-existing facrs combined with the potential for supplemental policy facrs. We see preconditions for rising inflation over the next couple years, which should pressure yields higher. In the major developed economies, we anticipate continued monetary accommodation and low rates in Japan and the eurozone while rates rise in the US those increasing rate differentials should depreciate the yen and euro against the US dollar, in our opinion. Japan now has its monetary policies in a good place essentially allow the Fed do the work of depreciating the yen for them. During much of 2016, no matter what the BOJ did, the Fed s actions (or lack of action) determined the rate differentials and the currency valuations. When the Fed lowered expectations for rate hikes in March 2016, that move essentially washed out the effectiveness of any easing policies from the BOJ. The same can now be true in the reverse the BOJ does not have change its current policy stance get the depreciation it seeks if the Fed now raises rates at a more meaningful pace. Additionally, the BOJ is nowhere close a stage where it can taper its Quantitative Easing (QE) programme, as Japan continues battle deflation. Thus ongoing QE is expected for quite some time. 3

6 MANAGER S REPORT (CONTINUED) Despite the eurozone being in a cyclical upswing, we continue have a negative view on the euro not only because of ongoing monetary accommodation, but also because of populist risks. European Central Bank (ECB) President Mario Draghi has indicated a desire eventually normalise rates but has also said that the eurozone continues need monetary accommodation. Eurozone optimism surged during the summer months but appeared inconsistent with the unresolved structural and political risks within the union, in our view. Angela Merkel s election vicry in September 2017 came with new uncertainties around forming a coalition. Additionally, the farright movement polled at its highest level in several generations. Merkel s efforts form a coalition were unsuccessful in 2017, increasing the political uncertainty for Europe. Overall, we continue see ongoing risks the political cohesion across Europe as populist movements continue influence the political discourse. We have recently focused on countries that are less externally vulnerable and more domestically driven, and that have demonstrated their resilience potential increases in trade costs. Select emerging markets that have higher rate environments and domestically oriented economies are likely fare better in a rising-rate environment than countries with low yields and more externally driven economies, in our view. In Asia, we currently prefer countries with strong domestic drivers that are less leveraged China, such as India and Indonesia, while we have moved away from economies that are more externally dependent, such as Malaysia. China s economy remains in a soft landing, but ongoing rebalancing is needed for the long term. The near-term picture looks fairly stable, in our assessment, but we have concerns for two or three years down the road as China s pace of growth now depends on almost five times as much credit generate one unit of GDP as it ok in the surge of post-global financial crisis growth, starting in The Chinese authorities appear aware of this, but it remains be seen if they can effectively manage a slowdown in credit. We have seen a number of policies wind down, but we do not expect a hard landing at this point. However, if China has not reduced its credit dependence in a couple years and we get an exogenous shock, such as a recession in the US, then China s ability intervene stimulate its economy will be substantially less effective than it was during the last US recession. These risks warrant ongoing moniring, but the near-term picture appears support a continued moderation in growth and not a hard landing. PORTFOLIO POSITIONING OF THE TARGET FUND During the quarter, we remained positioned in a number of emerging markets, with notable localcurrency duration exposures in Indonesia and India, and notable currency exposures the Indonesian rupiah and Indian rupee. We adjusted specific positions during 2017, including exiting our local-currency exposure in Malaysia in September. We continued hold net-negative position in the Japanese yen based on our expectations for widening rate differentials with the US as the US Federal Reserve (Fed) tightens policy while the BOJ continues with monetary accommodation. The short positions in the Japanese yen represents a directional view on the currency, as well as hedges against broad strengthening of the US dollar. We also continued hold net-negative positioning in the Australian dollar based on the Reserve Bank of Australia s continued leanings wards accommodative rates, and as a partial hedge against potential economic risks in China as well as broad-based beta risk across emerging markets. We also remained positioned for rising yields by maintaining low overall portfolio duration and holding negative duration exposure US Treasuries (USTs) through interest-rate swaps. 4

7 MANAGER S REPORT (CONTINUED) CUMULATIVE RETURNS AS OF 31 DEC 2017 Templen Asian Bond Fund (the Fund ) Franklin Templen Investment Funds Templen Asian Bond Fund (the Target Fund ) Cusm Templen Asian Bond Index Currency 3 Months 1 Year 3 Years Since Commencement (19 February 2013) MYR 0.45% 2.26% -6.86% -7.96% USD 1.86% 6.82% 1.53% 2.89% USD 2.11% 11.65% 13.34% 11.30% 5

8 III. STATEMENT BY THE MANAGER AND UNAUDITED FINANCIAL STATEMENTS CONTENTS PAGE(S) UNAUDITED STATEMENT OF FINANCIAL POSITION 1 UNAUDITED STATEMENT OF COMPREHENSIVE INCOME 2 UNAUDITED STATEMENT OF CHANGES IN EQUITY 3 UNAUDITED STATEMENT OF CASH FLOWS 4 NOTES TO THE UNAUDITED FINANCIAL STATEMENTS 5-9 STATEMENT BY THE MANAGER 10

9 UNAUDITED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER Dec Sep 2017 Note RM RM CURRENT ASSETS Financial assets at fair value through profit or loss 1 1,064,081 1,219,274 Cash and cash equivalents 2 36,730 33,907 TOTAL ASSETS 1,100,811 1,253,181 CURRENT LIABILITIES Accrued management fee 3 1,334 1,493 Accrued trustee fee 4 1,621 1,568 Other payables and accruals 29,969 26,045 TOTAL LIABILITIES 32,924 29,106 NET ASSET VALUE OF THE FUND 5 1,067,887 1,224,075 EQUITY Unit holders' capital 2,241,095 2,401,994 Accumulated losses (1,173,208) (1,177,919) NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS 1,067,887 1,224,075 NUMBER OF UNITS IN CIRCULATION 5 1,160, ,335, NET ASSET VALUE PER UNIT (RM) The accompanying notes form an integral part of these financial statements. 1

10 UNAUDITED STATEMENT OF COMPREHENSIVE INCOME 1 Oct Oct Dec Dec 2016 Note RM RM INVESTMENT INCOME Interest income Net gain from financial assets at fair value through profit or loss 1 18,893 53,992 19,111 54,213 EXPENSES Management fee 3 4,062 5,826 Trustee fee 4 4,810 4,810 Audit fee 2,190 2,191 Professional fee 1,349 1,349 Cusdian fee Printing fee 1,580 2,016 14,400 16,252 NET INCOME BEFORE TAXATION 4,711 37,961 Taxation - - INCREASE IN NET ASSETS ATTRIBUTABLE TO UNIT HOLDERS 4,711 37,961 Net income after taxation and tal comprehensive income comprises the following: Realised amount 33,760 (124,607) Unrealised amount (29,049) 162,568 4,711 37,961 The accompanying notes form an integral part of these financial statements. 2

11 UNAUDITED STATEMENT OF CHANGES IN EQUITY Unit holders' Accumulated capital losses Total RM RM RM Balance as at 1 Ocber ,401,994 (1,177,919) 1,224,075 Movement in unit holders' capital: - Creation of units 39,686-39,686 - Cancellation of units (200,585) - (200,585) Total comprehensive income for the financial year - 4,711 4,711 Balance as at 31 December ,241,095 (1,173,208) 1,067,887 Balance as at 1 Ocber ,781,223 (1,243,374) 1,537,849 Total comprehensive income for the financial year - 37,961 37,961 Balance as at 31 December ,781,223 (1,205,413) 1,575,810 The accompanying notes form an integral part of these financial statements. 3

12 UNAUDITED STATEMENT OF CASH FLOWS 1 Oct Oct Dec Dec 2016 Note RM RM CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from sales of investments 246,073 17,855 Purchase of investments (71,987) - Interest income received Management fee paid (4,221) (5,720) Trustee fee paid (4,757) (4,753) Cusdian fee paid (409) (60) Printing fee paid (1,195) - Net cash generated from operating activities 163,722 7,543 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from creation of units 39,686 - Payments for cancellation of units (200,585) - Net cash used in financing activities (160,899) - NET INCREASE IN CASH AND CASH EQUIVALENTS 2,823 7,543 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE FINANCIAL PERIOD 33,907 31,893 CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL PERIOD 2 36,730 39,436 The accompanying notes form an integral part of these financial statements. 4

13 NOTES TO THE UNAUDITED FINANCIAL STATEMENTS 1. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Designated at fair value through profit or loss 31 Dec Sep 2017 at inception: - Foreign collective investment scheme (Note 1(a)) 1,057,035 1,223,659 - Foreign currency swap (Note 1(b)) 7,046 (4,385) RM RM 1,064,081 1,219,274 Net gain on financial assets at fair value through 1 Oct Oct Dec Dec 2016 RM RM profit or loss: - Realised gain/(loss) on disposals 47,942 (108,576) - Unrealised fair value (loss)/gain (29,049) 162,568 18,893 53,992 (a) Foreign collective investment scheme Name of collective Percentage investment scheme Quantity Value of net asset value 31 Dec 2017 Units RM % Luxembourg Target Fund - Cost 1,005,053 Accumulated unrealised gain on financial assets at fair value through profit or loss 51,982 Quantity/Market Value 29,804 1,057,

14 NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) 1. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (CONTINUED) (a) Foreign collective investment scheme (continued) Name of collective Percentage investment scheme Quantity Value of net asset value 30 Sep 2017 Units RM % Luxembourg Target Fund - Cost 1,131,197 Accumulated unrealised gain on financial assets at fair value through profit or loss 92,462 Quantity/Market Value 33,686 1,223, As at period/year end, the investment portfolio of the Target Fund is made up of the following: 31 Dec Sep 2017 By Country % of portfolio % of portfolio India Indonesia Philippines South Korea Thailand Dec Sep 2017 By Secr % of portfolio % of portfolio Financial services Government and municipal bonds

15 NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) 1. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (CONTINUED) (b) Foreign currency swap At the end of the financial period, there is 1 (30 September 2017: 1) foreign currency swap outstanding. The notional principal amount of the outstanding foreign currency swap amounted RM1,021,203 (30 September 2017: RM1,185,467). The foreign currency swap entered in during the financial period was for hedging against the currency exposure arising from the investment in the foreign collective investment scheme denominated in US Dollar. The change in the fair value of the foreign currency swap is recognised immediately in the statement of comprehensive income during the financial period. 2. CASH AND CASH EQUIVALENTS 31 Dec Sep 2017 RM RM Bank balances in a licensed financial institution 36,730 33, ACCRUED MANAGEMENT FEE Expense Accrual 1 Oct Oct Dec Dec Dec Sep 2017 RM RM RM RM Management fee 4,062 5,826 1,334 1,493 For the current and prior comparative periods, the Manager is entitled receive a fee of 1.40% per annum of the net asset value of the fund. Management fees are billed and payable monthly in arrears. 4. ACCRUED TRUSTEE FEE Expense Accrual 1 Oct Oct Dec Dec Dec Sep 2017 RM RM RM RM Trustee fee 4,810 4,810 1,621 1,568 For the current and prior comparative periods, the Trustee is entitled receive a fee of 0.05% per annum of the net asset value of the Fund, subject a minimum fee of RM18,000 per annum. Trustee fees are billed and payable monthly in arrears. 7

16 NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) 5. UNIT HOLDERS' CAPITAL / UNITS IN CIRCULATION 31 Dec Sep 2017 Number of Number of units RM units RM Beginning balance 1,335, ,224,075 1,750, ,537,849 Creation 43, , Cancellation (218,423.43) (200,585) (414,918.73) (379,229) Total comprehensive income for the financial period - 4,711-65,455 Closing balance 1,160, ,067,887 1,335, ,224, UNITS HELD BY RELATED PARTY 31 Dec Sep 2017 Number of Number of units RM units RM Holding company of the Manager - Franklin Templen Capital Holdings Pte. Ltd. - RM class 43, , The above units are legally held and were transacted at the prevailing market price. Other than the above, there were no units held by Direcrs or parties related the Manager. 7. DISTRIBUTION No distribution was declared by the Fund for the financial periods ended 31 December 2017 and 31 December MANAGEMENT EXPENSE RATIO ( MER ) 1 Oct Oct Dec Dec 2016 % p.a. % p.a. MER The MER of the Fund is the ratio of the sum of annualised fees and expenses incurred by the Fund the average net asset value of the Fund calculated on a daily basis. 8

17 NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) 9. PORTFOLIO TURNOVER RATIO ( PTR ) The PTR of the Fund, which is the ratio of average tal acquisitions and disposals of investment the average net asset value of the Fund calculated on a daily basis, is 0.13 times (31 December 2016: 0.05 times). 10. TRANSACTIONS WITH THE TARGET FUND MANAGER Target Fund Manager 1 Oct Oct Dec Dec 2016 RM % RM % Franklin Advisers Inc. 287, , The above transaction values are in respect of transactions in foreign collective investment scheme. Transactions in this investment do not involve any commission or brokerage and all the above transactions have been established under terms that are no less favorable than those arranged with independent third parties. The Fund is a feeder fund which invests primarily in the Target Fund, hence all transactions were made with the Target Fund Manager. 9

18 STATEMENT BY THE MANAGER I, Avinash Deepak Satwalekar, being Direcr of the Manager, Franklin Templen Asset Management (Malaysia) Sdn Bhd, for Templen Asian Bond Fund do hereby state that in the opinion of the Manager, the accompanying unaudited statement of financial position, unaudited statement of comprehensive income, unaudited statement of changes in net assets attributable unit holders and unaudited statement of cash flows are drawn up so as give a true and fair view of the financial position of the Fund as at 31 December 2017 and the comprehensive income, the changes in net assets attributable unit holders and cash flows of the Fund for the financial period from 1 Ocber December Avinash Deepak Satwalekar For and on behalf of the Manager Franklin Templen Asset Management (Malaysia) Sdn Bhd Kuala Lumpur, Malaysia 20 February

19 Franklin Templen Asset Management (Malaysia) Sdn. Bhd. Suite 31-02, 31st Floor, Menara Keck Seng 203, Jalan Bukit Bintang Kuala Lumpur, Malaysia tel +60 (3) fax +60 (3) Franklin Templen Investments. All rights reserved. FTIFMY TABAR 01/18