RHB ASIAN HIGH YIELD FUND - RM ANNUAL REPORT RHB Asset Management Sdn Bhd ( X) For the financial year ended 31 May 2018

Transcription

1 RHB ASIAN HIGH YIELD FUND - RM ANNUAL REPORT 2018 For the financial year ended 31 May 2018 RHB Asset Management Sdn Bhd ( X) Head Office Level 8, Tower 2 & 3, RHB Centre Jalan Tun Razak Kuala Lumpur, Malaysia Tel : Fax :

2 GENERAL INFORMATION ABOUT THE FUND Name, Category and Type Fund Name - RHB Asian High Yield Fund - RM Fund Category - Wholesale Feeder (fixed income) fund Fund Type - Income and growth fund Investment Objective, Policy and Strategy Objective of the Fund The Fund aims to provide income^ and long-term* capital growth by investing in one target fund. Note: The income is in the form of units, unless the unitholder specifically requests for the distribution to be paid out to the unitholder. * long term in this context refers to a period of between 5 7 years. Strategy The Fund will invest principally in the US Dollar ( USD ) denominated class A shares of the Target Fund. The Target Fund is one of the sub-funds under the umbrella fund, Fidelity Funds. Fidelity Funds is an open-ended investment company established in Luxembourg as a Société d Investissement à Capital Variable ( SICAV ) and qualifies as an undertaking for collective investment in transferable securities ( UCITS ) under Luxembourg laws. Fidelity Funds is managed by the management company, FIL Investment Management (Luxembourg) S.A. and its regulatory authority is the Commission de Surveillance du Secteur Financier (Luxembourg Financial Sector Supervising Authority) under Chapter 15 of the Luxembourg Law of 17 December The investment manager of the Target Fund is FIL Fund Management Limited (domiciled in Bermuda) and its regulatory authority is Bermuda Monetary Authority. The investment manager of the Target Fund is subject to the Bermuda Investment Business Act of The sub-investment manager of the Target Fund is FIL Investment Management (Hong Kong) Limited whose regulatory authority is the Securities and Futures Commission of Hong Kong under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong). Both the Target Fund and the USD denominated class A shares of the Target Fund were launched on 2 April

3 This Fund is a feeder fund that invests at least 95% of Net Asset Value in the Target Fund. The asset allocation of the Fund will be as follows:- At least 95% of - Investments in the USD denominated class A shares of the Net Asset Value Target Fund. 2% to 5% of - Investments in liquid assets including money market Net Asset Value instruments and Placements of Cash. Performance Benchmark The performance of the Fund is benchmarked against the Bank of America Merill Lynch ( BofA/Merrill Lynch Blended Index ): Asian Dollar High Yield Index ( ACCY ), 20% Level 4 Cap 3% Constrained. Permitted Investments and Restrictions The Fund will invest in one collective investment scheme i.e. Fidelity Funds - Asian High Yield Fund, trade in financial derivatives, invest in money market instruments and make Placements of Cash with any financial institutions, and any other investments as agreed between the Trustee and the Manager from time to time, provided that there is no inconsistency with the Fund s objective. In undertaking the Fund s investments, the Fund must not invest in a fund-offunds, a feeder fund, or any sub-fund of an umbrella scheme which is a fund-offunds or a feeder fund. Distribution Policy Subject to the level of income, distribution, if any, after deduction of taxation and expenses (i.e. net distributions) is declared quarterly. Any distribution made, will be out of the Fund s realised gains or realised income. 2

4 MANAGER S REPORT MARKET REVIEW During the review year (1 June 2017 to 31 May 2018), the benchmark Bank of America ( BofA ) Merrill Lynch Blended Index: ACCY, 20% Level 4 Cap 3% Constrained (Q490 Index) generated 0.63% in United States ( US ) Dollar terms, helped by higher coupon income. High yield credit spreads widened over the year due to weak risk sentiments owing to higher yields, strong supply and other global factors such as Italy political woes and China-US trade tension. Fundamentally, there have been signs of improvement, with the net rating change of Asian high yield issuers turning positive in the first quarter of 2018 for the first time in five years. At a country level, Chinese leaders reiterated their agenda of focussing on curbing financial risk, eradicating poverty, fighting pollution and supply side reforms, while maintaining steady growth. It announced that it is likely to ease restrictions for foreign companies in its financial, manufacturing and services sectors, while stepping up efforts to protect intellectual property and expand imports. Also, China's ruling Communist Party set the stage for President Xi Jinping to stay in office indefinitely, with a proposal to remove a constitutional clause limiting presidential service to just two terms in office. China also announced that it is likely to roll out unified regulations to rein in shadow banking before its annual legislative sessions scheduled in early March. On the macro front, China s first quarter Gross Domestic Product ( GDP ) rose at a faster-than-anticipated pace, due to strong consumer demand, healthy exports and robust property investment. Rating agency Moody s upgraded India s sovereign rating to Baa2. Furthermore, the government announced a bank recapitalisation plan for state-owned banks worth $32 billion over two years to address bad loans, stimulate credit growth and support private sector investments. There was uncertainty over the operation of state-run banks. Following a $2 billion fraud at Punjab National Bank, the regulator set a 15-day deadline for banks to improve oversight of their operational and technological risks. On a positive note, India s GDP for the January March quarter surpassed estimates, due to robust construction activity, consumer spending and corporate investment. Fitch and Moody s upgraded their sovereign rating for Indonesia, citing effective monetary and fiscal policies. Foreign reserves rose to record high of $130 Billion, boosted by sovereign bond issuance and increasing revenue from tax and exports. Its trade deficit widened unexpectedly and was the highest in almost four years in January. Meanwhile, its fourth quarter GDP rose at a higher-than-anticipated pace, due to a pickup in exports. 3

5 TARGET FUND REVIEW During the review year, the target fund generated total returns of 1.72%, outperforming the benchmark by 1.09% on a gross basis. Coupon income and underweight position in US Dollar duration were the key contributors to relative returns, while credit selection weighed on performance. US Treasury yields rose over the year as the US Federal Reserve ( Fed ) raised interest rates for the third time in 2017 and the Senate approved the biggest overhaul of the US tax code. They further rose in 2018 on Fed signalling of a March rate hike, balance sheet normalisation plans and better than expected US wage data. Over the year, the target fund s holdings in utility and communications enhanced gains, while bias against basic industry and exposure to energy weighed on performance. From a credit selection perspective, the overweight allocations to Ottawa Holdings and Postal Savings Bank contributed to the returns. Ottawa Holdings, subsidiary of Indonesia-based PT Bhakti Investama, benefited due to the country s rating upgrade by Fitch and Moody s. Additional tier 1 (AT1) Chinese bonds of Postal Saving Bank remained resilient to market volatility. Sub-debts issued by Chinese banks tend to exhibit lower market beta due to their inactive investor base. The allocation to Perusahaan Listrik Negara also added value. Higher quality sovereign quasi names held up better than the broader high yield market as risk sentiment deteriorated. Conversely, lack of exposure to Mie Holding Corp detracted from relative performance. Stronger oil prices further supported the optimism around cashflow improvement upon acquisition of CQ Energy. The distressed issuer managed to repay the principal of 2018 bonds by borrowing USD 100 million from Huarong supporting the credit in February. The target fund manager continues to avoid this issuer given its questionable liquidity profile to service 2019 bond repayment, subordinated structure of the 2019 bonds and questionable upside from the CQ energy acquisition. Market liquidity of this bond has always been poor, thus ironically reduced mark to market impact over the year of weakness recently. The target fund s underweight position in China Cinda Asset Management complex also weighed on returns. As the Chinese AT1 complex has stayed resilient despite year-to-date ( YTD ) volatility given its inactive investor base. These bonds are often used to form structured products, which will be locked away for a certain period. The target fund uses credit derivatives to support liquidity and to help replicate the return profile of the illiquid parts of the reference index. The long position in credit default swaps ( CDS ) contributed to relative performance during the year through income. 4

6 FUND PERFORMANCE REVIEW DURING THE YEAR For the financial year under review, the Fund has registered a gain of 0.16%* in net asset value terms. Comparatively, the benchmark, BofA/ Merrill Lynch Blended Index: ACCY, 20% Level 4 Cap 3% Constrained (Q490 Index), recorded a loss of 6.43%*. As a result of efficient hedging strategy to mimic the performance of the Target Fund, the Fund has met its investment objective during the financial year under review. * Source: Lipper for Investment Management ( Lipper IM ), 20 June 2018 MARKET OUTLOOK AND STRATEGY Looking at the second quarter of 2018, the target fund manager remains cautiously positive on the Asian high yield market. Although risk sentiment has weakened compared to the start of the year, the synchronised global growth backdrop remains intact. Over the year to date period, there were indications of higher US inflation and interest rates, which led to fund outflows in Asian US Dollar denominated bonds. However, the latest data points to signs of a deceleration, suggesting that the current trend of emerging market/asian fund flows could reverse. Fundamentally, there has been a strong improvement in Asian issuers in general, especially in the more cyclical sectors, as most results in the past two quarters were solid. Additionally, valuations are much more attractive compared to where they were in Regarding potential headwinds, fears over a global trade war are likely to lead to continued volatility. The target fund manager base case remains that the US and China will eventually resolve their differences, despite the duration of such process could be longer than expected. Italy political uncertainties could affect global sentiment, but should have minimal direct impact on Asia s macro and credit fundamentals. The target fund manager concerns over strong issuance and higher US rates have materialized and pushed credit spreads wider YTD. But with onshore funding cost now back at lower levels, and the latest U.S. data mentioned above, the target fund manager believe the remaining year will have a more balanced technical dynamic. The target fund is slightly overweight in terms of credit beta, with a bias towards strong conviction issuers. In addition to its cash holding, the target fund has 10% 15% market weight in short dated (<1year)/near-term callable bonds to ensure a robust liquidity profile and maintain high natural income. This also helps to keep overall volatility relatively low going forward. 5

7 PERFORMANCE DATA Annual Total Return For the Financial Year/Period Ended 31 May 2018 % 2017 % 2016^ % RHB Asian High Yield Fund - RM - Capital Return (8.45) Income Return Total Return BofA/Merrill Lynch Blended Index: ACCY, 20% Level 4 Cap 3% Constrained (6.43) Average Annual Return 1 Year % Since launch ** % RHB Asian High Yield Fund - RM BofA/Merrill Lynch Blended Index: ACCY, 20% Level 4 Cap 3% Constrained (6.43) 6.91 ^ For the financial period since last day of Initial Offer Period 6

8 Performance of RHB Asian High Yield Fund - RM for the period from 28 June 2015** to 31 May 2018 Cumulative Return Over The Period (%) ** Being the last day of the Initial Offer Period Source: Lipper IM, 20 June 2018 The abovementioned performance figures are indicative returns based on daily Net Asset Value of a unit (as per Lipper Database) since inception. The calculation of the above returns is based on computation methods of Lipper. Note : Past performance is not necessarily indicative of future performance and unit prices and investment returns may go down, as well as up. The abovementioned performance computations have been adjusted to reflect distribution payments and unit splits wherever applicable. As at 31 May Fund Size Net Asset Value (RM million)* Units In Circulation (million)* Net Asset Value Per Unit (RM)*

9 Financial Year/Period Ended 31 May Historical Data Unit Prices NAV Price - Highest (RM)* Lowest (RM)* Distribution and Unit Split Gross Distribution Per Unit (sen) Net Distribution Per Unit (sen) Distribution Date NAV before distribution (cum) NAV after distribution (ex) Gross Distribution Per Unit (sen) Net Distribution Per Unit (sen) Distribution Date NAV before distribution (cum) NAV after distribution (ex) Gross Distribution Per Unit (sen) Net Distribution Per Unit (sen) Distribution Date NAV before distribution (cum) NAV after distribution (ex) Gross Distribution Per Unit (sen) Net Distribution Per Unit (sen) Distribution Date NAV before distribution (cum) NAV after distribution (ex) Gross Distribution Per Unit (sen) Net Distribution Per Unit (sen) Distribution Date NAV before distribution (cum) NAV after distribution (ex) * The figures quoted are ex-distribution 8

10 Financial Year/Period Ended 31 May Historical Data Unit Split Others Management Expense Ratio (MER) (%) # Portfolio Turnover Ratio (PTR) (times) ## # The MER for the financial year was consistent with previous financial year (refer to Note 13). ## The PTR for the financial year was lower compared with previous financial year due to lesser investment activities which has resulted in a lower PTR for the financial year under review (refer to Note 14). DISTRIBUTION During the financial year under review, the Fund has declared total net distribution of sen per unit, which is equivalent to a net yield of 8.91% based on the average net asset value for the financial year. 9

11 PORTFOLIO STRUCTURE The asset allocations of the Fund as at reporting date were as follows: As at 31 May Sectors % % % Collective investment scheme - foreign Liquid assets and other net current assets/(liabilities) (1.20)* The assets allocation reflects the Fund s strategy to have maximum exposure to the investments. * The excess over 100% of total net asset value is attributable to provision made for income distribution, which has not been paid as at 31 May

12 BREAKDOWN OF UNIT HOLDINGS BY SIZE Account Holders No. Of Units Held* Size of Holdings No. % ( 000) % 5,000 and below ,001 to 10, ,001 to 50, , ,001 to 500, , ,001 and above , Total , * Excluding Manager s stock SOFT COMMISSION The Fund Manager may only receive soft commission in the form of research and advisory services that assist in the decision-making process relating to the Fund s investments. During the financial year under review, the Manager did not receive or utilise any soft commission from brokers/dealers in consideration for directing dealings in the investment of the Fund. However, in the event the Manager were to receive any soft commission in the future, these will only be retained by the Manager if they were in the form of goods and services which were of demonstrable benefit to the unitholders. 11

13 RHB ASIAN HIGH YIELD FUND - RM STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 2018 Note RM RM ASSETS Investments 5 65,424,969 83,240,812 Amount due from fund manager of collective investment scheme - 1,304,055 Forward foreign currency contracts 7-2,721,751 Amount due from Manager 159, ,896 Income distribution receivable Other receivable Deposits with a licensed financial institution Bank balances ,163 1,819,715 6, ,299 72,974 1,884,630 2,931 TOTAL ASSETS 67,464,964 89,887,348 LIABILITIES Forward foreign currency contracts 7 399,750 - Amount due to Manager 6,038 - Accrued management fee 90, ,299 Amount due to Trustee 3,605 4,892 Income distribution payable 62,766 - Other payables and accruals 14,325 10,110 TOTAL LIABILITIES 576, ,301 NET ASSET VALUE 66,888,360 89,750,047 EQUITY Unitholders capital 65,248,694 81,981,516 Retained earnings 1,639,666 7,768,531 66,888,360 89,750,047 UNITS IN CIRCULATION (UNITS) 8 66,272,400 81,411,000 NET ASSET VALUE PER UNIT (EX-DISTRIBUTION) (RM) The accompanying notes are an integral part of the financial statements. 12

14 RHB ASIAN HIGH YIELD FUND - RM STATEMENT OF INCOME AND EXPENSES FOR THE FINANCIAL YEAR ENDED 31 MAY 2018 Note RM RM INCOME Income distribution from investments 4,195,384 4,198,168 Interest income from deposits with a licensed financial institutions 71,788 76,674 Net (loss)/gain on investments Net foreign currency exchange loss 5 (8,950,663) (264,878) 6,421,932 (259,705) Net fair value gain/(loss) on forward foreign currency contracts 7 6,372,362 (1,797,119) 1,423,993 8,639,950 EXPENSES Management fee 9 (790,097) (822,918) Trustee s fee 10 (46,231) (48,485) Audit fee (5,350) (5,350) Tax agent s fee (3,800) (600) Other expenses (78,368) (83,495) (923,846) (960,848) Net income before taxation 500,147 7,679,102 Taxation Net income after taxation 500,147 7,679,102 Net income after taxation is made up of as follows: Realised amount 12,819,432 (1,257,760) Unrealised amount (12,319,285) 8,936, ,147 7,679,102 The accompanying notes are an integral part of the financial statements. 13

15 RHB ASIAN HIGH YIELD FUND - RM STATEMENT OF CHANGES IN NET ASSETS VALUE FOR THE FINANCIAL YEAR ENDED 31 MAY 2018 Unitholders capital Retained earnings Total net asset value RM RM RM Balance as at 1 June ,474,166 1,396,808 48,870,974 Movement in net asset value: Net income after taxation - 7,679,102 7,679,102 Creation of units arising from distributions Creation of units arising from applications 1,800,197 76,402, ,800,197 76,402,748 Cancellation of units (43,695,595) - (43,695,595) Distributions (Note 12) - (1,307,379) (1,307,379) Balance as at 31 May ,981,516 7,768,531 89,750,047 Balance as at 1 June ,981,516 7,768,531 89,750,047 Movement in net asset value: Net income after taxation - 500, ,147 Creation of units arising from distributions Creation of units arising from applications 6,255,917 17,692, ,255,917 17,692,425 Cancellation of units (40,681,164) - (40,681,164) Distributions (Note 12) - (6,629,012) (6,629,012) Balance as at 31 May ,248,694 1,639,666 66,888,360 The accompanying notes are an integral part of the financial statements. 14

16 RHB ASIAN HIGH YIELD FUND - RM STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 31 MAY 2018 Note RM RM CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from sales of investments 23,121,871 32,238,827 Purchase of investments (8,882,496) (54,503,565) Income distribution received from investments - 21,035 Interest received from deposits with licensed financial institutions 71,788 76,674 Management fee paid Trustee s fee paid (803,466) (47,518) (802,888) (46,377) Payment for other fees and expenses (87,638) (92,535) Net realised gain/(loss) on foreign currency contracts 9,493,863 (6,858,709) Net cash generated from/(used in) operating activities 22,866,404 (29,967,538) CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from units created 18,058,139 76,477,553 Payment for cancellation of units (40,675,125) (44,326,120) Payments for income distribution (310,329) (485,783) Net cash (used in)/generated from financing activities (22,927,315) 31,665,650 Net (decrease)/increase in cash and cash equivalents (60,911) 1,698,112 Cash and cash equivalents at the beginning of financial year 1,887, ,449 Cash and cash equivalents at the end of the financial year 6 1,826,650 1,887,561 The accompanying notes are an integral part of the financial statements. 15

17 RHB ASIAN HIGH YIELD FUND - RM NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 MAY THE FUND, THE MANAGER AND THEIR PRINCIPAL ACTIVITIES The RHB Asian High Yield Fund - RM (hereinafter referred to as the Fund ) was constituted pursuant to the execution of a Deed dated 1 June 2015 (hereinafter referred to as the Deed ) between RHB Asset Management Sdn Bhd ( the Manager ) and HSBC (Malaysia) Trustee Berhad ( the Trustee ). The Fund was launched on 8 June 2015 and will continue its operations until terminated according to the conditions provided in the Deed. The principal activity of the Fund is to invest in Permitted Investments as defined under the Deed which includes to invest in one collective investment scheme, that is, the Fidelity Funds - Asian High Yield Fund, trade in financial derivatives, money market instruments and make placements of cash, and any other investments as agreed between the Trustee and the Manager from time to time. All investments will be subject to the Securities Commission s Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework, SC requirements, the Deed, except where exemptions or variations have been approved by the SC, internal policies and procedures and objective of the Fund. The main objective of the Fund is to aim to provide income and long-term capital growth by investing in one target fund, ie: the Fidelity Asian High Yield Fund USD. The Manager, a company incorporated in Malaysia, is a wholly-owned subsidiary of RHB Investment Bank Berhad, effective 6 January Its principal activities include rendering of investment management services, management of unit trust funds and private retirement schemes and provision of investment advisory services. These financial statements were authorised for issue by the Manager on 25 July

18 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparation of the financial statements The financial statements have been prepared under the historical cost convention, as modified by financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss, except as disclosed in this summary of significant accounting policies, and in accordance with Malaysian Financial Reporting Standards ( MFRS ) and International Financial Reporting Standards ( IFRS ). The preparation of financial statements in conformity with MFRS and IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the financial year. It also requires the Manager to exercise its judgement in the process of applying the Fund s accounting policies. Although these estimates and judgement are based on the Manager s best knowledge of current events and actions, actual results may differ. a) The Fund has applied the following amendments for the first time for the financial year beginning on 1 June 2017: Amendments to MFRS 107 Statement of Cash Flows Disclosure Initiative (effective from 1 January 2017) introduce an additional disclosure on changes in liabilities arising from financing activities. The adoption of these amendments did not have any impact on the current year or any prior period and is not likely to affect future periods. 17

19 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.1 Basis of preparation of the financial statements (continued) (b) The new standards and amendments to published standards which are relevant to the Fund but not yet effective and have not been early adopted are as follows: (i) Financial year beginning on/after 1 June 2018 MFRS 9 Financial Instruments (effective from 1 January 2018) will replace MFRS 139 Financial Instruments: Recognition and Measurement. MFRS 9 retains but simplifies the mixed measurement model in MFRS 139 and establishes three primary measurement categories for financial assets: amortised cost, fair value through profit or loss and fair value through other comprehensive income ( OCI ). The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are always measured at fair value through profit or loss with an irrevocable option at inception to present changes in fair value in OCI (provided the instrument is not held for trading). A debt instrument is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. For liabilities, the standard retains most of the MFRS 139 requirements. These include amortised cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather in profit or loss unless this creates an accounting mismatch. MFRS 9 introduces an expected credit loss model on impairment that replaces the incurred loss impairment model used in MFRS 139. The expected credit loss model is forward-looking and eliminates the need for a trigger event to have occurred before credit losses are recognised. The above standards and amendments to published standards are not expected to have a significant impact on the Fund s financial statements. 18

20 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.2 Financial assets Classification Financial assets are designated as fair value through profit or loss when they are managed and their performance are evaluated on a fair value basis. The Fund designates its investment in collective investment scheme as financial assets at fair value through profit or loss at inception. Derivatives are financial assets at fair value through profit or loss categorised as held for trading unless they are designated hedges. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been included in current assets. The Fund s loans and receivables comprise cash and cash equivalents, amount due from fund manager of collective investment scheme, amount due from Manager, income distribution receivable and other receivable which are all due within 12 months. Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade date, the date on which the Fund commits to purchase or sell the asset. Investments are initially recognised at fair value. Subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Fund has transferred substantially all risks and rewards of ownership. Unrealised gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category including the effects of currency translation are recognised in profit or loss in the financial year in which they arise. 19

21 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.2 Financial assets (continued) Recognition and measurement (continued) Collective investment schemes are valued based on the last published net asset value per unit or share of such collective investment schemes at end of each financial year. Derivatives are currency forward contracts. Financial derivative position will be marked to market at the close of each valuation day. Foreign exchange gains and losses on the derivative financial instrument are recognised in statement of income and expenses when settled or at the date of the statement of financial position at which time they are included in the measurement of the derivative financial instrument. Deposits with licensed financial institutions are stated at cost plus accrued interest calculated on the effective interest method over the period from the date of placement to the date of maturity of the respective deposits. Loans and receivables are subsequently carried at amortised cost using the effective interest method. 20

22 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.2 Financial assets (continued) Impairment of financial assets For assets carried at amortised cost, the Fund assesses at the end of the reporting financial year whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. 2.3 Financial liabilities Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability. Financial liabilities, within the scope of MFRS 139, Financial Instruments: Recognition and Measurement are recognised in the statement of financial position when, and only when, the Fund becomes a party to the contractual provisions of the financial instrument. The Fund s financial liabilities which include forward foreign currency contracts, amount due to Manager, accrued management fee, amount due to Trustee, income distribution payable, other payables and accruals are recognised initially at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest method. A financial liability is de-recognised when the obligation under the liability is extinguished. Gains and losses are recognised in profit or loss when the liabilities are de-recognised, and through the amortisation process. 21

23 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.4 Derivative financial instruments The Fund s derivative financial instruments comprise forward foreign currency contracts. Derivatives are initially recognised at fair value on the date a derivative contract is entered into, and are subsequently re-measured at their fair value. The fair value of forward foreign currency contracts is determined using forward exchange rates at the date of the statement of financial position, with the resulting value discounted back to present value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and the nature of the item being hedged. Derivatives that do not qualify for hedge accounting are classified as held for trading and accounted for in accordance with the accounting policy set out in Note Unitholders capital The unitholders contributions to the Fund meet the criteria of the definition of puttable instruments to be classified as equity instruments under MFRS 132 Financial Instruments: Presentation. Those criteria include: the units entitle the holder to a proportionate share of the Fund s net assets value; the units are the most subordinated class and class features are identical; there is no contractual obligations to deliver cash or another financial asset other than the obligation on the Fund to repurchase; and the total expected cash flows from the units over its life are based substantially on the profit or loss of the Fund. The outstanding units are carried at the redemption amount that is payable at each financial year if unitholder exercises the right to put the units back to the Fund. Units are created and cancelled at prices based on the Fund s net asset value per unit at the time of creation or cancellation. The Fund s net asset value per unit is calculated by dividing the net assets attributable to unitholders with the total number of outstanding units. 22

24 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Distributions Distribution to the Fund s unitholders is accounted for as a deduction from realised reserves. A proposed distribution is recognised as a liability in the year in which it is approved by the Trustee. 2.7 Income recognition Income distribution from collective investment scheme is recognised when the Fund s right to receive payment is established. Interest income from deposits with licensed financial institutions is recognised on an accrual basis using the effective interest method. Realised gain or loss on sale of the collective investment scheme is arrived at after accounting for cost of investments, determined on the weighted average cost method. Net income or loss is the total of income less expenses. 2.8 Taxation Current tax expense is determined according to Malaysian tax laws and includes all taxes based upon the taxable income earned during the financial year. Tax on income distribution from foreign collective investment scheme is based on the tax regime of the respective country that the Fund invests in. 2.9 Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise bank balances and deposits with a licensed financial institution which are subject to an insignificant risk of changes in value Presentation and functional currency Items included in the financial statements of the Fund are measured using the currency of the primary economic environment in which the Fund operates (the functional currency ). The financial statements are presented in Ringgit Malaysia, which is the Fund s presentation and functional currency. 23

25 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.10 Presentation and functional currency (continued) Due to mixed factors in determining the functional currency of the Fund, the Manager has used its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions and have determined the functional currency to be in RM primarily due to the following factors: The Fund s cash is denominated in RM for the purpose of making settlement of the creation and cancellation. The Fund s units are denominated in RM. The Fund s expenses are denominated in RM Foreign currency translation Foreign currency transactions in the Fund are accounted for at exchange rates prevailing at the transaction dates. Foreign currency monetary assets and liabilities are translated at exchange rates prevailing at the reporting date. Exchange differences arising from the settlement of foreign currency transactions and from the translation of foreign currency monetary assets and liabilities are recognised in profit or loss Segmental information Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The operating results are regularly reviewed by the Manager and the Investment Committee. The Investment Committee assumes the role of chief operating decision maker, for performance assessment purposes and to make decisions about resources allocated to the investment segment based on the recommendation by the Investment & Security Selection Committee. 24

26 3 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Fund is exposed to a variety of risks, which include management risk, market risk, price risk, interest rate risk, currency risk, credit risk, liquidity risk and capital risk. Financial risk management is carried out through internal control processes adopted by the Manager and adherence to the investment restrictions as stipulated in the Information Memorandum or Securities Commission Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework. Market risk Market risk is a risk that arises when the prices of investments in the market place are affected by circumstances such as general market or economic events. These circumstances, which may be a local or global event, can affect a local market where the Target Fund is invested in or global markets and subsequently, the value of the Target Fund s investments. Price risk Price risk is the risk that the fair value of an investment of the Fund will fluctuate because of changes in market prices (other than those arising from interest rate risk). The Fund is exposed to equity security price risk (other than those arising from interest risk) for it investments of RM65,424,969 (2017: RM83,240,812) in quoted investments. The sensitivity analysis is based on the assumption that the price of the quoted securities investments fluctuate by +/(-) 5% with all other variables held constant, the impact on the net income/loss is +/(-) RM3,271,248 (2017: RM4,162,041). Interest rate risk Interest rate risk is the risk that the cost or the value of the financial instruments will fluctuate due to changes in market interest rates. The Fund s exposure to the interest rate risk is mainly from short term placements with financial institutions. The Manager overcomes the exposure by way of maintaining deposits on short term basis. Therefore, exposure to interest rate fluctuation is minimal. 25

27 3 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Currency risk Currency risk is associated with financial instruments that are quoted and/or priced in foreign currency denomination. Malaysian based investor should be aware that if the Ringgit Malaysia appreciates against the currencies in which the portfolio of the investment is denominated, this will have an adverse effect on the net asset value of the Fund and vice versa. Investors should note any gains or losses arising from the movement of foreign currencies against its home currency may therefore increase/decrease the capital gains of the financial instruments. Nevertheless, investors should realise that currency risk is considered as one of the major risks to financial instruments in foreign assets due to the volatile nature of the foreign exchange market. The sensitivity of the Fund s net asset value attributable to unitholders as at reporting date to changes in foreign exchange movements at the end of each financial year. The analysis is based on the assumption that the foreign exchange rate fluctuates by +/(-) 5%, with all other variables remain constants, is + RM351,201/(-) RM343,202 (2017: + RM167,674/(-) RM176,341). 26

28 3 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Credit risk Credit risk refers to the possibility that the issuer of a particular investment will not be able to make timely or full payments of principal or income due on that investment. The risk arising from placements of Islamic deposits in licensed financial institutions is managed by ensuring that the Fund will only place deposits in reputable licensed financial institutions.. For amount due from stockbrokers, the settlement terms are governed by the relevant rules and regulations as prescribed by the Bursa Malaysia Securities Berhad ( Bursa Malaysia ).The settlement terms of the proceeds from the creation of units receivable from the Manager are governed by the Information Memorandum. The following table sets out the credit risk concentration of the Fund: Forward foreign currency contracts Cash and cash equivalents Other financial assets* Total RM RM RM RM 2018 Financial instituitions AAA - 1,826,650-1,826,650 Others , ,345-1,826, ,345 2,039, Financial instituitions AAA - 1,887,561-1,887,561 AA2 267, ,459 Non-rated 2,454, ,454,292 Others - - 2,037,224 2,037,224 2,721,751 1,887,561 2,037,224 6,646,536 * Comprise amount due from fund manager of collective investment scheme, amount due from Manager, income distribution receivable and other receivable. The financial assets of the Fund are neither past due nor impaired. 27

29 3 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in meeting its financial obligations. Liquidity risk exists when particular investments are difficult to sell, possibly preventing the Fund from selling such illiquid securities at an advantageous time or price. Wholesale funds with principal investment strategies that involve securities or securities with substantial market and/or credit risk tend to have the greater exposure to liquidity risk. As part of its risk management, the Manager will attempt to manage the liquidity of the Fund through asset allocation and diversification strategies within the portfolio. The Manager will also conduct constant fundamental research and analysis to forecast future liquidity of its investments. The table below summarises the Fund s financial liabilities into relevant maturity groupings based on the remaining period from the statement of financial position date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Between Less than 1 month 1 month to 1 year RM RM 2018 Forward foreign currency contracts - 336,617 Amount due to Manager 6,038 - Accrued management fee 90,120 - Amount due to Trustee 3,605 - Income distribution payable 62,766 - Other payables and accruals - 14, , , Accrued management fee 122,299 - Amount due to Trustee 4,892 - Other payables and accruals - 10, ,191 10,110 28

30 3 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Capital risk The capital of the Fund is represented by equity consisting of unitholders capital of RM65,248,694 (2017: RM81,981,516) and retained earnings of RM1,639,666 (2017: RM7,768,531). The amount of equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of unitholders. The Fund s objective when managing capital is to safeguard the Fund s ability to continue as a going concern in order to provide returns for unitholders and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Fund. 4 FAIR VALUE ESTIMATION Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). The fair value of financial assets and liabilities traded in active market (such as publicly traded derivatives and trading securities) are based on quoted market prices at the close of trading on the financial year end date. An active market is a market in which transactions for the assets or liabilities take place with sufficient frequency and volume to provide pricing information on an ongoing basis. 29

31 4 FAIR VALUE ESTIMATION (CONTINUED) The fair value of financial assets and liabilities that are not traded in an active market is determined by using valuation techniques. The Fund uses a variety of methods and makes assumptions that are based on market conditions existing at each financial year end date. Valuation techniques used for non-standardised financial instruments such as options, currency swaps and other over-the-counter derivatives, include the use of comparable recent transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity-specific inputs. The fair values are based on the following methodologies and assumptions: (i) For bank balances, deposit with a licensed financial institution with maturities less than 1 year, the carrying value is a reasonable estimate of fair value. (ii) The carrying value of receivables and payables are assumed to approximate their fair values due to their short term nature. Fair value hierarchy The Fund adopted MFRS 13 Fair Value Measurement in respect of disclosures about the degree of reliability of fair value measurement. This requires the Fund to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1: Quoted prices (unadjusted) in active market for identical assets or liabilities Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) Level 3: Inputs for the asset and liability that are not based on observable market data (that is, unobservable inputs) 30

32 4 FAIR VALUE ESTIMATION (CONTINUED) Fair value hierarchy (continued) The following table analyses within the fair value hierarchy the Fund s financial assets at fair value through profit or loss (by class) measured at fair value: Level 1 Level 2 Level 3 Total RM RM RM RM 2018 Investments: - Collective investment scheme - foreign 65,424, ,424,969 Derivative financial instruments: - Forward foreign currency contracts - (399,750) - (399,750) 65,424,969 (399,750) - 65,025, Investments: - Collective investment scheme - foreign 83,240, ,240,812 Derivative financial instruments: - Forward foreign currency contracts - 2,721,751-2,721,751 83,240,812 2,721,751-85,962,563 Investments in collective investment scheme whose values are based on quoted market prices in active markets are classified within Level 1. The Fund does not adjust the quoted prices for these instruments. The Fund s policies on valuation of these financial assets are stated in Note

33 5 INVESTMENTS RM RM Investments: - Collective investment scheme - foreign 65,424,969 83,240, RM RM Net (loss)/gain on investments comprised: - net realised gain on disposal 245,051 2,575,010 - net unrealised (loss)/gain on changes in fair values (9,195,714) 3,846,922 (8,950,663) 6,421,932 Investments as at 31 May 2018 are as follows: Name of Counter Quantity Cost Fair Value % of Net Asset Value RM RM % COLLECTIVE INVESTMENT SCHEME - FOREIGN Luxembourg Fidelity Asian High Yield Fund - USD 2,023,612 69,227,625 65,424,

34 5 INVESTMENTS (CONTINUED) Investments as at 31 May 2017 are as follows: Name of Counter Quantity Cost Fair Value % of Net Asset Value RM RM % COLLECTIVE INVESTMENT SCHEME - FOREIGN Luxembourg Fidelity Asian High Yield Fund USD 2,270,836 77,847,754 83,240, CASH AND CASH EQUIVALENTS Cash and cash equivalent comprise: RM RM Deposit with a licensed financial institution 1,819,715 1,884,630 Bank balances 6,935 2,931 1,826,650 1,887,561 33

35 7 FORWARD FOREIGN CURRENCY CONTRACTS As at 31 May 2018, there were eleven (2017: eight) forward foreign currency contracts outstanding. The notional principal amount of the outstanding forward foreign currency contracts amounted to RM58,417,171 (2017: RM84,234,892). The forward foreign currency contracts were entered into was for hedging against the currency exposure arising from the investment in the collective investment scheme denominated in USD. As the Fund has not adopted hedge accounting, the change in the fair value of the forward foreign currency contract is recognised immediately in statement of income and expenses RM RM Net realised gain/(loss) on forward foreign currency contracts 9,493,863 (6,858,709) Unrealised (loss)/gain on forward currency contracts (3,121,501) 5,061,590 6,372,362 (1,797,119) 34

36 8 UNITS IN CIRCULATION Units Units At the beginning of the financial year 81,411,000 48,327,000 Creation of units during the financial year: Arising from distribution Arising from applications 5,912,400 16,382,000 1,737,000 72,138,000 Cancellation of units during the financial year (37,433,000) (40,791,000) At the end of the financial year 66,272,400 81,411,000 9 MANAGEMENT FEE In accordance with the Information Memorandum, the management fee provided in the financial statements is 1.50% (2017: 1.50%) per annum based on the net asset value of the Fund, calculated on a daily basis for the financial year. 10 TRUSTEE S FEE In accordance with the Information Memorandum, the Trustee s fee provided in the financial statements is 0.06% (2017: 0.06%) per annum based on the net asset value of the Fund, calculated on a daily basis for the financial year. 35

37 11 TAXATION (a) Tax charge for the financial year RM RM Current taxation - - (b) Numerical reconciliation of income tax expense The numerical reconciliation between the net income before taxation multiplied by the Malaysian statutory income tax rate and the tax expense of the Fund is as follows: RM RM Net income before taxation 500,147 7,679,102 Tax calculated at a statutory tax rate of 24% 120,035 1,842,984 Tax effects of: - Investment income not subject to tax (341,758) (2,073,588) - Expenses not deductible for tax 13,079 12,975 purposes - Restriction on tax deductible expenses 208, ,629 Tax expense