IFSL Structured Solutions OEIC

Transcription

1 IFSL Structured Solutions OEIC Annual Long Report and Audited Financial Statements For the year ended 31st December 2010: n IFSL Privalto Stabiliser Protected Fund n IFSL Privalto Stabiliser Plus Protected Fund n IFSL Privalto Millenium Tracker Fund For the accounting period 21st May 2010 to 31st December 2010: n IFSL Harewood UK Enhanced Income Fund Issue date: 22nd September 2011

2 Contact Information The Company IFSL Structured Solutions OEIC Authorised Corporate Director (ACD) Investment Fund Services Limited Registered Office and Operating Address: Pearl House Moorgate London EC2R 6PA (Authorised and regulated by the Financial Services Authority) Investment Manager THEAM (Formerly known as Harewood Asset Management), a wholly owned subsidiary of BNP Paribas Investment Partners 1 Boulevard Haussman Paris France (Authorised and regulated in France by the Autorité des Marchés Financiers (AMF)) Directors of Investment Fund Services Limited (IFSL) Deborah Alexander Martin Ratcliffe Helen Redmond Tina Wilkinson Administrators, Registrars and Custodian BNP Paribas Securities Services (London Branch) Pearl House Moorgate London EC2R 6PA (BNP Paribas Securities Services London Branch is authorised and supervised in France by the Autorité de Contrôle Prudentiel (ACP) and authorised by and subject to limited regulation by the Financial Services Authority for the conduct of its business in the UK) Depositary The Royal Bank of Scotland plc 36 St. Andrew Square Edinburgh EH2 2YB Registered and Head Office of the Company Pearl House Moorgate London EC2R 6PA Auditor Ernst & Young LLP Ten George Street Edinburgh EH2 2DZ Solicitors Simmons & Simmons City Point One Ropemaker Street London EC2Y 9SS

3 Contents Page Report of the Authorised Corporate Director (the ACD ) Directors Statement Report of the Depositary Statement of the Authorised Corporate Director s Responsibilities Independent Auditor s Report IFSL Privalto Stabiliser Protected Fund Investment Objective and Policy Investment Manager s Review Performance Record Including: Fund Sizes and Net Asset Values, Distribution Summary, Share Price Range and Total Expense Ratio Portfolio Statement IFSL Privalto Stabiliser Plus Protected Fund Investment Objective and Policy Investment Manager s Review Performance Record Including: Fund Sizes and Net Asset Values, Distribution Summary, Share Price Range and Total Expense Ratio Portfolio Statement IFSL Privalto Millenium Tracker Fund Fund Closure Notice IFSL Harewood UK Enhanced Income Fund Investment Objective and Policy Investment Manager s Review Performance Record Including: Fund Sizes and Net Asset Values, Distribution Summary, Share Price Range and Total Expense Ratio Portfolio Statement IFSL Structured Solutions OEIC Annual Report

4 Contents (continued) Page Statement of Total Return Statement of Change in Net Assets Attributable to Shareholders Balance Sheet Notes to the Financial Statements Distribution Tables General Information IFSL Structured Solutions OEIC Annual Report 2010

5 Report of the Authorised Corporate Director (the ACD ) Constitution and Authorised Status The IFSL Structured Solutions OEIC ( the Company ) is an open-ended Investment Company with Variable Capital ( ICVC ) incorporated under the Open-Ended Investment Companies Regulations ( OEIC Regulations ). The Company is a UCITS Scheme as defined in the FSA s Collective Investment Schemes sourcebook ( COLL ) and is also an umbrella company for the purposes of the OEIC Regulations. The Company is incorporated in England and Wales with registered number IC The Company was authorised by an order made by the FSA with effect from 18th August The head office of the Company is at Moorgate, London EC2R 6PA. This is also the address for the service on the Company of notices or other documents required or authorised to be served on it. The base currency for the Company is pounds sterling. The maximum size of the Company s capital is 100,000,000,000 and the minimum size is 1. The operation of the Company is governed by the OEIC Regulations and COLL (together the Regulations ), the Company s Instrument of Incorporation and the Company s Prospectus. Shareholders do not have any proprietary interest in the underlying assets of the Funds. The shareholders of the Company will not be liable for the debts of the Company. The Authorised Corporate Director ( ACD ) is the sole director of the Company and is responsible for al laspects of administration and management within the ICVC. The ACD is Investment Fund Services Limited ( IFSL ), Moorgate, London, EC2R 6PA, and is authorised and regulated by the Financial Services Authority. The Depositary acts as the custodian for all assets relating to the Company. The Depositary is The Royal Bank of Scotland plc, 36 St Andrew Square, Edinburgh EH2 2YB. The Depositary is authorised and regulated by the Financial Services Authority. Copies of the Company s Prospectus are available free of charge from the ACD upon request. IFSL Structured Solutions OEIC Annual Report

6 Report of the Authorised Corporate Director (the ACD ) (continued) The Funds The Company is structured as an umbrella scheme. Provision exists for an unlimited number of Sub-Funds. Four Sub-Funds (referred to in this document as Funds ) are available for investment: n IFSL Privalto Stabiliser Protected Fund n IFSL Privalto Stabiliser Plus Protected Fund n IFSL Privalto Millenium Tracker Fund * n IFSL Harewood UK Enhanced Income Fund n IFSL Harewood US Enhanced Income Fund ** * Shareholders should note that on 8th October 2010, the ACD made an application to the FSA in respect of the proposed termination of IFSL Privalto Millenium Tracker Fund (the Fund ). The ACD sent a letter to shareholders on 12th October 2010 explaining the reasons for the proposed termination of the Fund and the shareholders options. Dealing in units in the Fund was suspended from 13th December 2010, and the ACD commenced termination of the Fund on this date. This means that the property held by the Fund was liquidated and any costs such as tax were paid. Termination accounts were distributed on the 28th February 2011 to investors who remained invested on the 12th October 2010 and the termination accounts were dated 31st December The termination accounts confirmed there was no final distribution. The termination of this Sub-Fund is now complete. Shareholders should refer to the letter mentioned above and if they are in any doubt as to the action that they should take, the ACD recommends that investors should consult a person who is appropriately authorised under the Financial Services and Markets Act 2000 and who specialises in advising on investments of the type referred to in this notice. ** The IFSL Harewood US Enhanced Income Fund was launched on 23rd February Each Fund would be a UCITS Scheme if they were separate standalone open-ended investment companies in respect of which an authorisation order made by the FSA were in force. The property attributable to each Fund shall be managed as if such Fund belonged to the UCITS scheme category as specified in COLL. The Funds shall be operated separately and the property attributable to each Fund shall be managed in accordance with the investment objective and policy applicable to each Fund. As a Fund is not a legal entity, if the assets attributable to any one Fund were insufficient to meet the liabilities attributable to it, the shortfall might have to be met out of the assets attributable to the other Funds of the Company. Whilst the Company is unlimited in duration, both the IFSL Privalto Stabiliser Protected Fund and the IFSL Privalto Stabiliser Plus Protected Fund, in accordance with the applicable investment objectives and policies, are of limited duration. The IFSL Harewood UK Enhanced Income Fund and the IFSL Harewood US Enhanced Income Fund are not of limited duration. This is explained in more detail in the Prospectus. Subject to the terms set out in the Prospectus, holders of shares in the Funds are entitled to receive the net revenue derived from that Fund and to redeem their Shares at a price linked to the value of the property of the relevant Fund. 4 IFSL Structured Solutions OEIC Annual Report 2010

7 Directors Statement The financial statements on pages 27 to 39 were approved by the ACD and signed on its behalf by: Deborah Alexander Martin Ratcliffe Investment Fund Services Limited (IFSL) Authorised Corporate Director of IFSL Structured Solutions OEIC 22nd September 2011 IFSL Structured Solutions OEIC Annual Report

8 Report of the Depositary for the year ended 31st December 2010 Statement of the Depositary s Responsibilities and Report of the Depositary to the Shareholders of IFSL Structured Solutions OEIC ( the Company ) The depositary is responsible for the safekeeping of all of the property of the Company (other than tangible moveable property) which is entrusted to it and for the collection of revenue that arises from that property. It is the duty of the depositary to take reasonable care to ensure that the Company is managed in accordance with the Financial Services Authority s Collective Investment Schemes Sourcebook (COLL), as amended, the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228), as amended ( the OEIC Regulations ), the Company s Instrument of Incorporation and Prospectus, in relation to the pricing of, and dealings in, shares in the Company; the application of revenue of the Company; and the investment and borrowing powers applicable to the Company. Having carried out such procedures as we consider necessary to discharge our responsibilities as depositary of the Company, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Company, acting through the Authorised Corporate Director: (i) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Company s shares and the application of the Company s revenue in accordance with COLL and, where applicable, the OEIC Regulations, and the Instrument of Incorporation. We would however refer investors to the ACD letter dated 19th September 2011 which provides details of amendments to the Prospectus in relation to distributable income and the Funds investment policy. (ii) has observed the investment and borrowing powers and restrictions applicable to the Company. Royal Bank of Scotland plc 36 St. Andrew Square Edinburgh EH2 2YB 22nd September IFSL Structured Solutions OEIC Annual Report 2010

9 Statement of the Authorised Corporate Director s Responsibilities The Financial Services Authority s Collective Investment Schemes Sourcebook ( COLL ) requires the Authorised Corporate Director ( ACD ) to prepare Financial Statements for each accounting period which give a true and fair view in accordance with United Kingdom Generally Accepted Accounting Practice of the financial affairs of the Company and of its net revenue and the net gains for the year. In preparing the Financial Statements the ACD is required to: n comply with the Prospectus, the Statement of Recommended Practice for Financial Statements of Authorised Funds issued in October 2010 ( IMA SORP ), the Instrument of Incorporation, United Kingdom Generally Accepted Accounting Practice and applicable accounting standards; n select suitable accounting policies and then apply them consistently; n make judgements and estimates that are reasonable and prudent; and n prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in operation. The ACD is required to keep proper accounting records and to manage the Company in accordance with COLL, the Instrument of Incorporation and the Prospectus. The ACD is responsible for taking reasonable steps for the prevention and detection of fraud and other irregularities. The ACD is responsible for ensuring that, to the best of its knowledge and belief, there is no relevant audit information of which the auditors are unaware. It is the responsibility of the ACD to take all necessary steps as a director to familiarise themselves with any relevant audit information and to establish that the auditor is aware of that information. IFSL Structured Solutions OEIC Annual Report

10 Independent Auditor s Report to the members of IFSL Structured Solutions OEIC We have audited the financial statements of IFSL Structured Solutions OEIC ( the Company ) for the year ended 31st December 2010 which comprise the Statement of Total Return, Statement of Change in Net Assets Attributable to Shareholders, Balance Sheet, related notes 1 to 13 and the Distribution Tables. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company s members, as a body, pursuant to Paragraph of the rules of the Collective Investment Schemes Sourcebook of the Financial Services Authority. Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the authorised corporate director (ACD) and auditors As explained more fully in the ACD s responsibilities statement set out on page 7, the ACD is responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the ACD; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: n give a true and fair view of the financial position of the Company as at 31st December 2010 and of the net revenue and the net capital gains on the scheme property of the Company for the year then ended; and n have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice. 8 IFSL Structured Solutions OEIC Annual Report 2010

11 Opinion on other matters prescribed by the rules of the Collective Investment Schemes Sourcebook of the Financial Services Authority In our opinion: n the financial statements have been properly prepared in accordance with the Statement of Recommended Practice relating to Authorised Funds, the rules of the Collective Investment Schemes Sourcebook of the Financial Services Authority and the Instrument of Incorporation; n the information given in the ACD s report for the financial year for which the financial statements are prepared is consistent with the financial statements; n there is nothing to indicate that proper accounting records have not been kept or that the financial statements are not in agreement with those records; and n we have received all the information and explanations which, to the best of our knowledge and belief, are necessary for the purposes of our audit. Ernst & Young LLP Statutory Auditor Edinburgh 22nd September 2011 IFSL Structured Solutions OEIC Annual Report

12 IFSL Privalto Stabiliser Protected Fund Investment Objective and Policy for the year ended 31st December 2010 Investment Objective From the Strike Date to the Maturity Date (such period being referred to as the Investment Term) the Fund s investment objective shall be to provide capital growth equal to 150% or potentially greater (depending on market conditions on the Strike Date) of the performance of the BNP Paribas Millenium 10 Europe Excess Return Index (the Index ) over the same period (the Index Final Performance ) in accordance with the formula described below, and a protected minimum amount as at the Maturity Date being 100p per share (the Protected Price ). Strike Date means 15th December 2008 being the start of the Investment Term. Maturity Date means 15th December 2014 being the date on which the Investment Term will finish and on which the shares in the Fund will be compulsorily redeemed. Investment Term means the period commencing on the Strike Date and terminating on the Maturity Date during which the Fund will be invested in the OTC Derivative with the Counterparty. Redemption Amount In other words, the objective of the Fund is to provide to investors at the Maturity Date a Redemption Amount per share held equal to the greater of: n the Protected Price; or n (a) the Protected Price plus (b) 100p multiplied by 150% of the Index Final Performance. For these purposes Index Final Performance = (Index closing price on Maturity Date/Index closing price on Strike Date) 1. The achievement of the investment objective only applies on the Maturity Date. Investors who redeem their shares prior to the Maturity Date may not receive a Redemption Amount in line with that stated in the investment objective. The Initial Offer Period The Fund launched on the 15th September 2008 (the Launch Date ). From such date until the Strike Date (the Initial Offer Period ) the price of shares increased to a level of 100p per share as at the Strike Date. This means that if an investor purchased a share in the Fund during the Initial Offer Period, the Protected Price covers the investor s initial investment plus any return accrued whilst the share was held during the Initial Offer Period (less any initial charges to the extent applicable). Investment Policy The investment objective of the Fund will be achieved principally by the Company entering into a single over the counter derivative contract documented in the form of an ISDA Master Agreement as supplemented by a transaction confirmation with a single investment grade Standard & Poors rated counterparty, BNP Paribas (the OTC Derivative ). 10 IFSL Structured Solutions OEIC Annual Report 2010

13 The OTC Derivative is an equity derivative which has been specifically designed to match the returns as specified in the Fund s investment objective. The Company will not invest directly in the assets which constitute the Index or other reference assets, instead BNP Paribas will, in accordance with the terms of the OTC Derivative, pay to the Company an amount calculated in accordance with a formula by reference to the Protected Price and the performance of the Index which results in an amount per Share equal to the Redemption Amount per share in accordance with the Fund s objective. That amount will be payable by reference to the period between the Strike Date and the Maturity Date. Between the Launch Date and the Strike Date the Fund (as described in The Initial Offer Period ) accrued a money market return. This was achieved under the OTC Derivative by the setting at the Launch Date (by reference to a money market rate) of a daily-increasing price at which the Company could, between the Launch Date and the Strike Date, increase or unwind the amount invested by the Company on behalf of the Fund in the OTC Derivative. The price was set so that it increased from the Launch Date level to a price at the Strike Date which equates to 100p per share. BNP Paribas is the parent of both the ACD and the Investment Manager and in its role as single counterparty to the OTC Derivative it has not been selected through any competitive bidding or tender process. However, the terms of the OTC Derivative are required to comply with the Regulations and BNP Paribas is an approved bank for these purposes. Each of the ACD, the Investment Manager and BNP Paribas has in place systems and procedures to identify and manage any potential or actual conflicts of interests with a view to safeguarding the interests of investors in the Company. Level of Protection Offered by Shares in the Fund As part of its investment objective, the Fund aims to offer protection to investors holding Shares at the end of the Investment Term. Such shareholders will be entitled to receive at least 100p for each share held at the end of the Investment Term. This protection means that even if the performance over the Investment Term is negative, shareholders holding Shares on the Maturity Date will be entitled to receive 100p per share. For those investors in the Fund who purchased Shares after the Initial Offer Period at a price greater than 100p per share, the Protected Price will be less than the amount originally paid. Therefore, in those circumstances any portion of the share price paid in excess of 100p is not protected. Conversely, for those investors who purchased Shares at less than 100p per share, the level of protection would be greater than their original investment (excluding any initial charge paid). The ability of the Fund to achieve its investment objective and provide the level of protection as stated above is wholly dependent on the ability of BNP Paribas to meet its obligations under the OTC Derivative. However investors should note that the OTC Derivative is collateralised as explained in Collateral and under Risk Factors in the Prospectus. Level of Exposure to Investment Performance Offered by the Fund Investors should generally be aware that if the Fund did not offer the level of protection as described above, there would be the potential for the Fund to achieve a greater level of return for its investors. Also investors would be able to benefit from a greater level of participation of the Index Final Performance than the 150% participation offered by the Fund. Essentially, investors in the Fund forego this opportunity to achieve this potentially greater performance in exchange for the level of protection as described above. IFSL Structured Solutions OEIC Annual Report

14 IFSL Privalto Stabiliser Protected Fund Investment Objective and Policy (continued) Termination of the Fund On the Maturity Date all outstanding Shares not redeemed prior to such time will be compulsorily redeemed by the Fund with monies being returned to shareholders as soon as possible thereafter. Investors will receive prior written notice of such compulsory redemption from the ACD and will receive the proceeds not later than four Business Days following redemption in the usual way. Following the compulsory redemption of any outstanding Shares in the Fund, the Fund will be terminated in accordance with the Regulations. If for any reason the termination process described is delayed, postponed or for any reason the ACD has determined that it would not be in the best interests of either the Company or the Fund to follow such course of action, the Fund will invest all of its assets (to the extent such assets exist) in deposits, cash or near cash until such time as the Fund is finally terminated. There are a number of circumstances where the OTC Derivative may be terminated by either the Company or by the Counterparty prior to the Maturity Date, as explained further in the Prospectus. In the event that the OTC Derivative is terminated prior to the Maturity Date, Shares shall be compulsorily redeemed. 12 IFSL Structured Solutions OEIC Annual Report 2010

15 IFSL Privalto Stabiliser Protected Fund Investment Manager s Review for the year ended 31st December 2010 The IFSL Privalto Stabiliser Protected Fund ended 2010 trading at p per share (as of 31st December 2010), +6.45% since the strike date (15th December 2008). As was the case in 2009, the BNP Paribas Millenium 10 Europe Excess Return Index ( the Index, as referred to in the Prospectus) was subject to significant erratic market movements throughout 2010, which caused substantial rebalancing movements. In that respect 2010 was still a difficult year for the Index (US Dollar got stronger by 20% versus the Euro over the first half of the year, then -11% in the second half). In Quarter 1, the Fund s Net Asset Value ( NAV ) increased +1.07% despite the fact that equity markets worldwide remained relatively unchanged. The strategy remained near the 25% limit in property, which helped in achieving a positive performance during the last two months of the quarter. The Index became bullish in equities, especially in Japan, as markets staged a rally at the beginning of March The strategy started the year with a significant short position in European equities, which provided a cushion as markets went down during the first half of the quarter. In the meantime, it became bullish regarding the US Dollar and significantly short in commodities. Equity markets tumbled worldwide in Quarter 2 following the emergence of the European sovereign debt crisis. In that context the Fund resisted relatively well, retreating -1.88% over the quarter, while the Eurostoxx50 Index was down % over the same period. The May crisis negatively impacted the Index s major long positions (near 25%) in US and Japanese equities. Despite this, the Index kept these positions on throughout the quarter as the model works on a one-year trend rather than short-term bets. However the strategy reacted well by taking a position in European equities therefore reducing the negative impact of this event on the Fund s NAV. The Index also favoured commodities. In Quarter 3 the Fund posted a flat performance (+0.17%). The strategy gained from its significant exposures to the US equity and property markets but a considerable fall in the value of the US Dollar erased some of those gains. The Index decreased its positions in property, Japan and China. However, the position in European equities and the positions in commodities and the US Dollar all reached the maximum allowed for each market (+25%). In Quarter 4 the Fund posted a strong performance of +4.17% as the Japanese, US, property and commodities markets picked up sharply. By the end of the quarter, the Index reached maximum exposures in the US Dollar, property, US, Japanese and commodities markets. The model also kept significant short positions in European and Chinese equities in order to respect the volatility limit (10% target), which should help in case of a market downturn. A rise in the 4-year swap rate negatively impacted the capital protection component of the Fund therefore preventing it from posting an even better performance. Nonetheless, it is important to remember that the IFSL Privalto Stabiliser Protected Fund is not a pure equity fund. The Fund s primary objective is capital preservation, combined with participation in a multiasset strategy with a limited risk-budget (10% target volatility) aimed at defensive investors. IFSL Structured Solutions OEIC Annual Report

16 IFSL Privalto Stabiliser Protected Fund Performance Record for the year ended 31st December 2010 Fund Sizes and Net Asset Values Net asset Number of Net asset value As at value ( ) shares in issue per share (pence) Class A Accumulation Sterling 31st December ,386,118 22,646, st December ,262,719 20,913, Distribution Summary Fund accounting dates Final 31st December Interim 30th June Distribution payment dates 28th February 31st August Share Price Range Accumulation Shares Sterling Highest share Lowest share Calendar Year price (pence) price (pence) 2008* * From 15th September 2008 to 31st December 2008 Total Expense Ratio (TER) Total Expense Ratio 1.50% 1.50% The Total Expense Ratio shows the Fund s annual operating expenses as a percentage of its annual net assets. This is a measure of the total costs associated with managing the Fund during the preceding year. Apart from the initial charge and transaction costs, all other expenses are included in the TER. The TER is an internationally accepted standard for the comparison of costs in authorised funds. The TER has been calculated on an annualised basis for IFSL Structured Solutions OEIC Annual Report 2010

17 IFSL Privalto Stabiliser Protected Fund Portfolio Statement as at 31st December 2010 Percentage Market of total Holding Value net assets 000 % Derivatives % (100.12%) 20,913,516 OTC Derivative 22, , Portfolio of investments % (100.12%) 22, Net other liabilities (27) (0.12) Total net assets 22, The figures in brackets represent percentages as at 31st December IFSL Structured Solutions OEIC Annual Report

18 IFSL Privalto Stabiliser Plus Protected Fund Investment Objective and Policy for the year ended 31st December 2010 Investment Objective From the Strike Date to the Maturity Date (such period being referred to as the Investment Term) the Fund s investment objective shall be to provide capital growth equal to 180% or potentially greater (depending on market conditions on the Strike Date) of the performance of the BNP Paribas Millenium 10 Europe Excess Return Index (the Index ) over the same period (the Index Final Performance ) in accordance with the formula described below, and a protected minimum amount as at the Maturity Date being 100p per share (the Protected Price ). Strike Date means 15th December 2008 being the start of the Investment Term. Maturity Date means 15th December 2014 being the date on which the Investment Term will finish and on which the shares in the Fund will be compulsorily redeemed. Investment Term means the period commencing on the Strike Date and terminating on the Maturity Date during which the Fund will be invested in the OTC Derivative with the Counterparty. Redemption Amount In other words, the objective of the Fund is to provide to investors at the Maturity Date a Redemption Amount per share held equal to the greater of: n the Protected Price; or n (a) the Protected Price plus (b) 100p multiplied by 180% of the Index Final Performance. For these purposes Index Final Performance = (Index closing price on Maturity Date/Index closing price on Strike Date) 1. The achievement of the investment objective only applies on the Maturity Date. Investors who redeem their shares prior to the Maturity Date may not receive a Redemption Amount in line with that stated in the investment objective. The Initial Offer Period The Fund launched on the 15th September 2008 (the Launch Date ). From such date until the Strike Date (the Initial Offer Period ) the price of shares increased to a level of 100p per share as at the Strike Date. This means that if an investor purchased a share in the Fund during the Initial Offer Period, the Protected Price covers the investor s initial investment plus any return accrued whilst the share was held during the Initial Offer Period (less any initial charges to the extent applicable). Investment Policy The investment objective of the Fund will be achieved principally by the Company entering into a single over the counter derivative contract documented in the form of an ISDA Master Agreement as supplemented by a transaction confirmation with a single investment grade Standard & Poors rated counterparty, BNP Paribas (the OTC Derivative ). 16 IFSL Structured Solutions OEIC Annual Report 2010

19 The OTC Derivative is an equity derivative which has been specifically designed to match the returns as specified in the Fund s investment objective. The Company will not invest directly in the assets which constitute the Index or other reference assets, instead BNP Paribas will, in accordance with the terms of the OTC Derivative, pay to the Company an amount calculated in accordance with a formula by reference to the Protected Price and the performance of the Index which results in an amount per share equal to the Redemption Amount per Share in accordance with the Fund s objective. That amount will be payable by reference to the period between the Strike Date and the Maturity Date. Between the Launch Date and the Strike Date the Fund (as described in The Initial Offer Period ) accrued a money market return. This was achieved under the OTC Derivative by the setting at the Launch Date (by reference to a money market rate) of a daily-increasing price at which the Company could, between the Launch Date and the Strike Date, increase or unwind the amount invested by the Company on behalf of the Fund in the OTC Derivative. The price was set so that it increased from the Launch Date level to a price at the Strike Date which equates to 100p per share. BNP Paribas is the parent of both the ACD and the Investment Manager and in its role as single counterparty to the OTC Derivative it has not been selected through any competitive bidding or tender process. However, the terms of the OTC Derivative are required to comply with the Regulations and BNP Paribas is an approved bank for these purposes. Each of the ACD, the Investment Manager and BNP Paribas has in place systems and procedures to identify and manage any potential or actual conflicts of interests with a view to safeguarding the interests of investors in the Company. Level of Protection Offered by Shares in the Fund As part of its investment objective, the Fund aims to offer protection to investors holding Shares at the end of the Investment Term. Such shareholders will be entitled to receive at least 100p for each share held at the end of the Investment Term. This protection means that even if the performance over the Investment Term is negative, shareholders holding Shares on the Maturity Date will be entitled to receive 100p per share. For those investors in the Fund who purchased Shares after the Initial Offer Period at a price greater than 100p per share, the Protected Price will be less than the amount originally paid. Therefore, in those circumstances any portion of the share price paid in excess of 100p is not protected. Conversely, for those investors who purchased Shares at less than 100p per share, the level of protection would be greater than their original investment (excluding any initial charge paid). The ability of the Fund to achieve its investment objective and provide the level of protection as stated above is wholly dependent on the ability of BNP Paribas to meet its obligations under the OTC Derivative. However investors should note that the OTC Derivative is collateralised as explained in Collateral and under Risk Factors in the Prospectus. Level of Exposure to Investment Performance Offered by the Fund Investors should generally be aware that if the Fund did not offer the level of protection as described above, there would be the potential for the Fund to achieve a greater level of return for its investors. Also investors would be able to benefit from a greater level of participation of the Index Fund Performance than the 180% participation offered by the Fund. Essentially, investors in the Fund forego this opportunity to achieve this potentially greater performance in exchange for the level of protection as described above. IFSL Structured Solutions OEIC Annual Report

20 IFSL Privalto Stabiliser Plus Protected Fund Investment Objective and Policy (continued) Termination of the Fund On the Maturity Date all outstanding Shares not redeemed prior to such time will be compulsorily redeemed by the Fund with monies being returned to shareholders as soon as possible thereafter. Investors will receive prior written notice of such compulsory redemption from the ACD and will receive the proceeds not later than four Business Days following redemption in the usual way. Following the compulsory redemption of any outstanding Shares in the Fund, the Fund will be terminated in accordance with the Regulations. If for any reason the process described is delayed, postponed or for any reason the ACD has determined that it would not be in the best interests of either the Company or the shareholders in the Fund to follow such course of action, the Fund will invest all of its assets (to the extent such assets exist) in deposits, cash or near cash until such time as the Fund is finally terminated. There are a number of circumstances where the OTC Derivative may be terminated by either the Company or by the Counterparty prior to the Maturity Date which are explained further in the Prospectus. In the event that the OTC Derivative is terminated prior to the Maturity Date, Shares shall be compulsorily redeemed. 18 IFSL Structured Solutions OEIC Annual Report 2010

21 IFSL Privalto Stabiliser Plus Protected Fund Investment Manager s Review for the year ended 31st December 2010 The IFSL Privalto Stabiliser Plus Protected Fund ended 2010 trading at p per share (as of 31st December 2010), +6.38% since the strike date (15th December 2008). As was the case in 2009, the BNP Paribas Millenium 10 Europe Excess Return Index ( the Index, as referred to in the Prospectus) was subject to significant erratic market movements throughout 2010, which caused substantial rebalancing movements. In that respect 2010 was still a difficult year for the Index (US Dollar got stronger by 20% versus the Euro over the first half of the year, then -11% in the second half). In Quarter 1, the Fund s Net Asset Value ( NAV ) increased +1.52% despite the fact that equity markets worldwide remained relatively unchanged. The strategy remained near the 25% limit in property, which helped in achieving a positive performance during the last two months of the quarter. The Index globally favoured equities, especially in Japan, as markets staged a rally at the beginning of March The strategy started the year with a significant position in European equities, which provided a cushion as markets went down during the first half of the quarter. In the meantime, it favoured the US Dollar and significantly lessened the position in commodities. Equity markets tumbled worldwide in Quarter 2 following the emergence of the European sovereign debt crisis. In that context the Fund resisted relatively well, retreating -0.27% over the quarter, while the Eurostoxx50 Index was down % over the same period. The May crisis negatively impacted the Index s major long positions (near 25%) in US and Japanese equities. Despite this, the Index kept those positions on throughout the quarter as the model work on a one-year trend rather than short-term bets. However the strategy reacted well by taking a position in European equities therefore reducing the negative impact of this event on the Fund s NAV. The Index also favoured commodities. In Quarter 3 the Fund posted a flat performance (+0.10%). The strategy gained from its significant exposures to the US equity and property markets but a considerable fall in the value of the US Dollar erased some of those gains. The Index decreased its positions in property, Japan and China. However, the position in European equities and the positions in commodities and the US Dollar all reached the maximum allowed for each market (+25%). In Quarter 4 the Fund posted a strong performance of +3.93% as the Japanese, US, property and commodities markets picked up sharply. By the end of the quarter, the Index reached maximum exposures in the US Dollar, property, US, Japanese and commodities markets. The model also kept significant positions in European and Chinese equities in order to respect the volatility limit (10% target), which should help in case of a market downturn. A rise in the 4-year swap rate negatively impacted the capital protection component of the Fund therefore preventing it from posting an even better performance. Nonetheless, it is important to remember that the IFSL Privalto Stabiliser Plus Protected Fund is not a pure equity fund. The Fund s primary objective is capital preservation, combined with participation in a multi-asset strategy with a limited risk-budget (10% target volatility) aimed at defensive investors. IFSL Structured Solutions OEIC Annual Report

22 IFSL Privalto Stabiliser Plus Protected Fund Performance Record for the year ended 31st December 2010 Fund Sizes and Net Asset Values Net asset Number of Net asset value As at value ( ) shares in issue per share (pence) Class A Accumulation Sterling 31st December ,381,238 27,913, st December ,409,433 24,824, Distribution Summary Fund accounting dates Final 31st December Interim 30th June Distribution payment dates 28th February 31st August Share Price Range Accumulation Shares Sterling Highest share Lowest share Calendar Year price (pence) price (pence) 2008* * From 15th September 2008 to 31st December 2008 Total Expense Ratio (TER) Total Expense Ratio 0.75% 0.75% The Total Expense Ratio shows the Fund s annual operating expenses as a percentage of its annual net assets. This is a measure of the total costs associated with managing the Fund during the preceding year. Apart from the initial charge and transaction costs, all other expenses are included in the TER. The TER is an internationally accepted standard for the comparison of costs in authorised funds. The TER has been calculated on an annualised basis for IFSL Structured Solutions OEIC Annual Report 2010

23 IFSL Privalto Stabiliser Plus Protected Fund Portfolio Statement as at 31st December 2010 Percentage Market of total Holding Value net assets 000 % Derivatives % (100.06%) 24,824,924 OTC Derivative 26, , Portfolio of investments % (100.06%) 26, Net other liabilities (17) (0.06) Net assets 26, The figures in brackets represent percentages as at 31st December IFSL Structured Solutions OEIC Annual Report

24 IFSL Privalto Millenium Tracker Fund Fund Closure Notice Shareholders should note that on 8th October 2010, the ACD made an application to the FSA in respect of the proposed termination of IFSL Privalto Millenium Tracker Fund (the Fund ). The ACD sent a letter to shareholders on 12th October 2010 explaining the reasons for the proposed termination of the Fund and the shareholders options. Dealing in units in the Fund was suspended from 13th December 2010, and the ACD commenced termination of the Fund on this date. This means that the property held by the Fund was liquidated and any costs such as tax were paid. Termination accounts were distributed on the 28th February 2011 to investors who remained invested on the 12th October 2010 and the termination accounts were dated 31st December The termination accounts confirmed there was no final distribution. The termination of this Sub-Fund is now complete. Shareholders should refer to the letter mentioned above and if they are in any doubt as to the action that they should take, the ACD recommends that investors should consult a person who is appropriately authorised under the Financial Services and Markets Act 2000 and who specialises in advising on investments of the type referred to in this notice. 22 IFSL Structured Solutions OEIC Annual Report 2010

25 IFSL Harewood UK Enhanced Income Fund Investment Objective and Policy from 21st May 2010 to 31st December 2010 Investment Objective The Fund s investment objective shall be to provide investors with a stream of quarterly income distributions and a return on capital via exposure to the UK equity market. The investment objective shall be achieved by reference to an investment strategy (the Strategy ) linked to the total return performance of the FTSE 100 Index (the Index ) and the systematic sale of notional short-term call options on such Index. The Strategy aims to produce an enhanced income in exchange for giving up some potential growth in the Index above a certain level. Investment Policy The investment objective of the Fund will be achieved principally by the Company entering into a single over the counter derivative contract in respect of each Share class documented in the form of an ISDA Master Agreement as supplemented by a transaction confirmation with a single investment grade Standard & Poors rated counterparty, BNP Paribas (the OTC Derivative ). The OTC Derivative is an equity derivative which has been specifically designed to match the returns as specified in the Fund s investment objective. The Company will not invest directly in the assets which constitute the Index or other reference assets, instead BNP Paribas will, in accordance with the terms of the OTC Derivative, pay to the Company an amount calculated in accordance with a formula by reference to the performance of the Index in accordance with the Fund s objective. BNP Paribas is the parent of both the ACD and the Investment Manager and in its role as single counterparty to the OTC Derivative it has not been selected through any competitive bidding or tender process. However, the terms of the OTC Derivative are required to comply with the Regulations and BNP Paribas is an approved bank for these purposes. Each of the ACD, the Investment Manager and BNP Paribas has in place systems and procedures to identify and manage any potential or actual conflicts of interests with a view to safeguarding the interests of investors in the Company. The ability of the Fund to achieve its investment objective and provide the level of protection as stated above is wholly dependent on the ability of BNP Paribas to meet its obligations under the OTC Derivative. However investors should note that the OTC Derivative is collateralised as explained in Collateral and under Risk Factors in the Prospectus. We would however refer investors to the ACD letter dated 19th September 2011 which provides details of amendments to the Prospectus in relation to distributable income and the Funds investment policy. IFSL Structured Solutions OEIC Annual Report

26 IFSL Harewood UK Enhanced Income Fund Investment Manager s Review from 21st May 2010 to 31st December 2010 The Fund generated revenue before expenses and tax of 8.44% in respect to the A shareclass and 8.46% in respect to the B shareclass between the Fund launch date (21st May 2010) and 31st December From 21st May to the end of Quarter 2, the Fund s NAV decreased by -1.26% compared to a more substantial decline of -2.63% in the Index. The Fund s ability to outperform the Index highlights the capacity of the Fund s strategy to cushion against negative markets and reduce the negative impact of market drawdowns. The strategy generated a 0.57% net inflow in call premium. In Quarter 3, the Fund posted a strong performance of +8.14%. The Index on the other hand increased by %, demonstrating that the Fund s NAV participated well in strong market growth, though not fully, due to a 3.97% net outflow in call premium. The Fund achieved a performance of +4.31% in Quarter 4, compared to a +6.06% performance for the Index. The Fund s ability to closely follow the Index demonstrates the strategy s efficiency in dynamically adjusting the strike price of call options in order to give preference to market performance. Overall, the Fund posted a strong performance in 2010, combined with a high level of revenue and reduced volatility compared to the index, which was in line with the defensive nature of the strategy. 24 IFSL Structured Solutions OEIC Annual Report 2010

27 IFSL Harewood UK Enhanced Income Fund Performance Record for the year ended 31st December 2010 Fund Sizes and Net Asset Values Net asset Number of Net asset value As at value ( ) shares in issue per share (pence) Class A Income Sterling 31st December ,282,933 5,000, Class B Income Sterling 31st December ,287,077 5,000, Distribution Summary Fund accounting dates Final 31st December Interim 30th June Distribution payment dates 28th February 31st August 31st May 30th November Share Price Range Income Shares Income Shares Class A Sterling Class B Sterling Highest share Lowest share Highest share Lowest share Calendar Year price (pence) price (pence) price (pence) price (pence) 2010* * From 21st May 2010 to 31st December 2010 Total Expense Ratio (TER) Class A 1.90% Class B 1.15% The Total Expense Ratio shows the Fund s annual operating expenses as a percentage of its annual net assets. This is a measure of the total costs associated with managing the Fund during the preceding year. Apart from the initial charge and transaction costs, all other expenses are included in the TER. The TER is an internationally accepted standard for the comparison of costs in authorised funds. The TER has been calculated on an annualised basis IFSL Structured Solutions OEIC Annual Report