Annual Report June 2018

Transcription

1 Annual Report June 2018 For the Year Ended 30 June 2018 Areca enhancedincome Fund

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3 Contents CORPORATE DIRECTORY 2 MANAGER S REPORT Fund Information, Performance & Review 3 Market Review & Outlook 9 TRUSTEE S REPORT 13 AUDITED FINANCIAL STATEMENTS FOR Areca enhancedincome Fund Statement by The Manager Auditors Report

4 CORPORATE DIRECTORY MANAGER Areca Capital Sdn Bhd ( D) 107, Blok B, Pusat Dagangan Phileo Damansara 1 No. 9, Jalan 16/11, Off Jalan Damansara Petaling Jaya, Selangor Tel: , Fax: website: invest@arecacapital.com BOARD OF DIRECTORS Wong Teck Meng (Executive) Edward Iskandar Toh Bin Abdullah (Executive) Raja Datuk Zaharaton Bt Raja Dato Zainal Abidin (Independent) Dr. Junid Saham (Independent) INVESTMENT COMMITTEE MEMBERS Dato Seri Lee Kah Choon (Independent) Raja Datuk Zaharaton Bt Raja Dato Zainal Abidin (Independent) Dr. Junid Saham (Independent) TRUSTEE Maybank Trustees Berhad (5004-P) 8th Floor, Menara Maybank 100 Jalan Tun Perak Kuala Lumpur Tel: , Fax: AUDITOR Deloitte PLT (LLP LCA) Level 16, Menara LGB 1 Jalan Wan Kadir, Taman Tun Dr. Ismail Kuala Lumpur Tel: , Fax: TAX ADVISER Deloitte Tax Services Sdn Bhd (36421-T) Level 16, Menara LGB 1 Jalan Wan Kadir, Taman Tun Dr. Ismail Kuala Lumpur Tel: , Fax: MANAGER S OFFICE AND BRANCHES HEAD OFFICE 107, Blok B, Pusat Dagangan Phileo Damansara 1, No. 9, Jalan 16/11, Off Jalan Damansara, Petaling Jaya, Selangor. Tel: , Fax: website: invest@arecacapital.com PENANG PULAU TIKUS PERAK - IPOH MALACCA Belissa Row 11A, (First Floor) 95A, Jalan Melaka Raya 24 Jalan Burma, Georgetown Persiaran Greentown 5 Taman Melaka Raya Pulau Pinang Greentown Business Centre Melaka Tel : Ipoh, Perak Tel : Fax: Tel : Fax: Fax:

5 FUND INFORMATION Name of the Fund Areca enhancedincome Fund Fund Category/ Type Objective of the Fund Benchmark Distribution Policy of the Fund Fixed Income/Income & Growth To provide long term investors with high level of income (income could be in the form of Units or cash) stream and an opportunity for capital appreciation Maybank s 12-month fixed deposit rate Twice a year, subject to availability of distributable income. In the absence of written instructions from a Unit Holder, the Manager is entitled to reinvest the income distributed from the Fund in additional units of that Fund at the NAV per unit at the end of the distribution day with no entry fee. Profile of unitholdings * excluding units held by the Manager Rebates & Soft Commissions As at 30 June 2018 No. of No. of Size of Holding (Units) % units held % accounts (million) Up to 5, ,001 to 10, ,001 to 50, ,001 to 500, ,001 and above Total* The Manager retains soft commissions received from stockbrokers, provided these are of demonstrable benefit to unitholders. The soft commissions may take the form of goods and services such as, data and quotation services, computer software incidental to the management of the Fund and investment related publications. Cash rebates (if any) are directed to the account of the Fund. During the year under review, the Manager had not received soft commissions in the form of data and quotation services which are incidental to the investment management and performance tracking of the Fund. Launch Date 30 July 2007 Initial Offer Price RM per unit during the initial offer period of 10 days ended 8 August Pricing Policy Single Pricing Selling and repurchase of units by Manager are at Net Asset Value per unit Financial Year End 30 June 3

6 FUND PERFORMANCE Net Asset Value ( NAV ) as at 30 June Total Net Asset Value (RM million) * Units in circulation (million units) * NAV per unit (RM) * * Ex-Distribution HIGHEST & LOWEST NAV per unit for the financial year ended 30 June Please refer to Note 1 for further information on NAV and pricing policy Highest NAV per unit (RM) * Lowest NAV per unit (RM) * * Ex-Distribution ASSET ALLOCATION % of NAV as at 30 June Quoted Securities Main Board Construction Consumer Products Finance Industrial Products Properties Technology Trading/Services Negotiable Instrument of Deposit Collective Investment Scheme Unquoted Fixed Income Securities Corporate bonds Cash & cash equivalents including placement & repo DISTRIBUTION Distribution date June 2016 Gross distribution (sen per unit) Net distribution (sen per unit) NAV before distribution (RM per unit) (28 Jun) NAV after distribution (RM per unit) (29 Jun) UNIT SPLITS There was no unit split exercise for the financial period under review. EXPENSE/ TURNOVER for the financial year ended 30 June Management expense ratio (MER) (%) Please refer to Note 2 for further information Portfolio turnover ratio (PTR) (times) Please refer to Note 3 for further information TOTAL RETURN for the financial year ended 30 June Please refer to Note 4 for further information Total Return (%) Capital Return (%)

7 - Income Return (%) Annual Total Return (%) Benchmark: Average Maybank s 12- month fixed deposit rate (%) yr 3-yrs 5-yrs Average Total Return per annum (%) NOTES: Note 1: Selling of units by the Management Company (i.e. when you purchase units and invests in the Fund) and redemption of units by the Management Company (i.e. when you redeem your units and liquidate your investments) will be carried out at NAV per unit (the actual value of a unit). The entry/ exit fee (if any) would be computed separately based on your net investment/ liquidation amount. Note 2: MER is calculated based on the total fees and expenses incurred by the Fund, divided by the average net asset value calculated on a daily basis. Note 3: PTR is computed based on the average of the total acquisitions and total disposals of the investment securities of the Fund, divided by the average net asset value calculated on a daily basis. Note 4: Fund performance figures are calculated based on NAV to NAV and assume reinvestment of distributions (if any) at NAV. The total return and the benchmark data are sourced from Lipper. Unit prices and distributions payable, if any, may go down as well as up. Past performance of the Fund is not an indication of its future performance. 5

8 FUND REVIEW For the 12 months ended 30th June 2018, the Fund endured a loss of 4.49%p.a. It underperformed the benchmark of 3.20% p.a. for Maybank s 12-month fixed deposit rate. The diminution from our equity exposure could not be sufficiently covered by the steady income of the fixed income portion. As at close of period, the Fund holds 44.4% in corporate bonds rated AA or better and 12.8% in equities. The predominant sector of the fixed income portion is in the finance sector constituting 25.6% of our funds. For the year, the Fund has yet to achieve its objective in providing high level of income stream and an opportunity for capital appreciation. Moving forward, the Fund will keep to the strategy of corporate bonds providing the base performance while looking forward to an improved equity market performance to enhance the overall returns. We will consider hybrid instruments to diversify and improve its performance. Investment Policy and Strategy The Fund invests in fixed income securities with relatively high level of yield. The Fund may also invest in listed equities and equity-related securities to take advantage of the both fixed income and equity markets climate. NAV per unit as at 30 June 2018 RM Movement of asset allocation as a percentage of Net Asset Value for the financial year ended 30 June % 80% Bonds & other fixed income instruments 60% 85.16% 77.17% 81.16% 76.21% Equities & equity-related securities 40% Cash and cash equivalents 20% 0% 14.44% 12.86% 8.44% 15.10% 30-Sep Dec Mar Jun-18 *as a % of net asset value 6

9 FUND REVIEW Asset Allocation/ Portfolio Composition as at 30 June Equities and equity-related 12.86% 10.93% 76.21% securities 12.86% 12.28% 8.73% Negotiable instrument of deposit % Collective investment scheme % 4.41% Unquoted fixed income securities 76.21% 78.56% 79.04% Cash & cash equivalents 10.93% 4.45% 6.08% 7

10 Top 5 Holdings by Issuers: FUND REVIEW As at 30 Sep 2017 (%) As at 31 Dec 2017 (%) 1) Alpha Circle Sdn Bhd (AA-IS) ) Alpha Cirlce Sdn Bhd (AA-IS) ) Golden Assets International Finance Limited (AA2) ) Golden Assets International Finance Limited (AA2) ) Eastern & Oriental Berhad (NR) ) Eastern & Oriental Berhad (NR) ) CIMB Thai Bank Public Company Limited (AA3) ) Hong Leong Bank Berhad (A3) ) Hong Leong Bank Berhad (A3) ) DRB-HICOM Berhad (A) 5.41 As at 31 Mar 2018 (%) As at 30 Jun 2018 (%) 1) Alpha Circle Sdn Bhd (AA-IS) ) Eastern & Oriental Berhad (NR) ) Golden Assets International Finance Limited (AA2) ) Alpha Circle Sdn Bhd (AA-IS) ) Eastern & Oriental Berhad (NR) ) Hong Leong Bank Berhad (AA2) ) Hong Leong Bank Berhad (A3) ) DRB-HICOM Berhad (A) ) AMMB Holdings Berhad (A1 & A3) ) AMMB Holdings Berhad (A1 & A3) 9.02 Performance of Areca enhancedincome Fund for the financial period since inception to 30 June 2018 Areca enhancedincome Maybank 12 Months Fixed Deposit Rate 8

11 MANAGER S REPORT MARKET REVIEW & OUTLOOK ECONOMIC REVIEW The last 12 months can be largely characterized by the upswing in the US economy. From third quarter last year, quarterly year-on-year GDP grew 2.3%, 2.5%, 2.6% and 2.8% respectively, clearly forming an upward trend. Operating at practically full employment, unemployment registered its lowest level in 18 years in May this year at 3.8%. Inflation has also been on an uptrend with core inflation breaching 2% in the last 4 months of this year in review. Significantly, 12 months moving average stands at 1.89% as at June. Credit has to be given partially for the successful passing of the tax reform bill towards the end of 2017 where top bracket corporate rates were reduced from 35% to 21% to help energize the economy further. In this period, Federal Fund s rate was raised 3 times from 1.25% to 2% while the Federal Reserve began their balance sheet shrinking task in October A gradual paring down of their mammoth US$4.5 trillion balance sheet may take a while but will complement the general mode of draining the excess liquidity that built up over a six year Quantitative Easing programs phase from 2008 to The first full year of the Trump presidency is also fraught with much distractions and controversies. Apart from the ongoing investigation into Russian collusion with Trumps campaign, there were the multiple sackings of government personnel and ongoing battle with the media. Geopolitics were mixed. Taking a step back from Syria conflict, Trump seem to add fuel to fire by relocating the US embassy in Israel to Jerusalem from Tel-Aviv, a decision passed by congress several Presidents ago but never carried out for obvious reasons. He then appeared to have made some headway with North Korea culminating with a summit in Singapore which produced more fanfare than substance. The latest sideshow is the instigating of Iran where the US pulled out of the Iran nuclear deal and reimposing economic sanctions. During the course of the year, he ruffled the feathers of friends and foe alike by insulting NATO and imposed wide ranging tariffs that affect Canada, Mexico, Europe, Japan and China. The ongoing trade tariffs war began in January with introduction of tax on solar panels and washing machines. Over the months, it gained momentum and tariffs were attached to steel and aluminum imports. Then in targeting China directly, US$34 billion of Chinese goods were taxed. This would then be raised to US$50 billion, and eventually to over US$200 billion of imports from China. In response, China has steadfastly resisted by focusing on internal issues by devaluing their currency, strengthening financial market and reducing borrowing cost. They recorded a strong 2Q GDP of 6.7% growth over the same period last year. In June, they surprised market with a 1% reduction to Reserve Ratio, freeing up more than US$100 billion of liquidity directing banks to repay high cost medium term facility with PBOC and to release loans to SMEs. As for Malaysia, the 14 th General Election was carried out with unprecedented and unexpected results leading to a change in government through the ballot boxes without untoward incidences. There is a general mood of cautious optimism with a sense of renewed hope and reborn ideals in this new Malaysia. However, the current exercise of kitchen sinking especially from the financial accounts of the nation does not sit well with foreign investors as well as international rating agencies. In zero rating GST and replacing it with Sales and Services tax, a massive shortfall in revenue is to be expected. The plan is to meet this by a combination deferring high cost projects and increased contribution from Petronas. In light of their perceived uncertainties, foreign participants have withdrawn RM19 billion from the fixed income markets and RM6 billion from the stock market this year alone. Rating agencies have been patient but alert to the need for concrete policies from this new government as they continue to unearth further mismanagements by previous administration. Economically, 1Q GDP came in at a respectable 5.4% following 6.2% and 5.9% for 3Q and 4Q last year respectively. Foreign Reserves stands at USD104.7 billion (or RM423.4 billion) at the end of June against end last June s USD99.8 billion (or RM424.8 bil). Inflation for June dropped drastically to 0.8% on zero rating GST, the lowest level since February 2015, easing from the high of this year in review of 4.3% recorded in September

12 MANAGER S REPORT FIXED INCOME MARKET REVIEW The period under review saw the issuance of RM97.0 bil MGS/GII through 34 tenders vs RM84.5 bil in the previous period (July 16 June 17). In addition, there were also 16 issues privately placed raising another RM13.5 bil. On the foreign holdings of our debt; data shows a marked improvement in the second half of 2017 with an inflow of RM12.6 billion following the previous 12 months (July 16- June 17) outflow of RM42.1 billion. However, the first six months of 2018 saw a complete reversal with foreign investors pulling out RM19.0 bil as reaction to the uncertainties that naturally come with a new government. As at end June 2018, foreign holdings of Malaysian debt securities total RM171.6 bil or 23.8% (vs RM178.0 bil or 26.6% for end June 2017), which is the lowest percentage level since my records began in During this period, there were 6 OPR meetings where the benchmark rate was raised by 0.25% to 3.25% in January this year reacting to the strong US growth and potential inflationary pressures. Malaysian sovereign yield curve shifted up between 10 and 30 bps reflecting pressure from the US rate hikes as well as our own Overnight Policy rate hike. Global inflation picked up throughout the year fueled by higher oil prices with Crude oil rising from US$48 per barrel to just below US$80 at end of period. However, the sluggish economies in Europe and Japan, the ongoing trade war with China and China s rising bad debt helped quell the excitement. Constant Maturity Conventional Yield-To-Maturity: June 2018 vs June 2017 Tenure 1Y 3Y 5Y 7Y 10Y Jun 17 Jun 18 Jun 17 Jun 18 Jun'17 Jun 18 Jun 16 Jun 18 Jun 16 Jun 18 MGS AAA AA A Source: Bond Pricing Agency Malaysia Sdn Bhd (BPA) EQUITY MARKET REVIEW During the period under review, the FBM KLCI Index which is the barometer of the Malaysian equity market declined 4.1% to close at 1,692 points. The broader market FBM Emas Index shed 1.4% to 11,961 points while the FBM Small Cap Index dropped 19.7% to 14,013 points. Regional markets closed mixed during the period with the top performers being Vietnam and New Zealand while the laggards were China and the Philippines. Initially, the market performance was capped by rising geopolitical tension in North Korea. However, global markets gradually shrugged the North Korea tensions due to robust economic data and corporate earnings on the back of a synchronized global upturn. The performance of the FBM KLCI lagged its regional peers as investors continued to focus on North Asian markets due to stronger earnings momentum. Under the 2018 Budget announced in October, the government expects GDP to grow by 5.0% 5.5% in 2018, driven by buoyant export markets and improving domestic demand. Meanwhile, fiscal deficit is expected to narrow to 2.8% of GDP in Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.00% in November 2017 for the eighth consecutive Monetary Policy Committee (MPC) meeting. The decision was in line with market expectations. However, BNM indicated that they may consider reviewing the current degree of monetary policy accommodation. The statement was interpreted as more hawkish and raised the possibility of an earlier than expected interest rate hike in The more hawkish stance by BNM coupled with strength in macro numbers and oil price helped the Ringgit. BNM raised the OPR by 25 bps in Jan For the period under review, the Ringgit strengthened by 6.3% against the US Dollar. 10

13 MANAGER S REPORT Asian markets started strongly in The gains were shortlived with selling pressure from February onwards as inflationary concerns in the US affected long term bond rates and US-China trade war concerns rattled global markets. There were concerns about potential contagion in Emerging Markets with Argentina needing an International Monetary Fund (IMF) bailout, the largest in the fund s history. In May 2018, the 14th General Elections in Malaysia produced an unexpected result with Pakatan Harapan forming the new government. The knee-jerk reaction was market weakness due to policy uncertainty. Among some of the major initial changes include the zero rating of GST and the cancellation of major projects like HSR and MRT3. Despite the revenue gap from the zero rating of GST, the government reaffirmed its budget deficit target of 2.8% mainly through cost cuts and reintroduction of the Sales and Service Tax (SST). ECONOMIC OUTLOOK With the US chugging along the economic uptrend, it is hoped that the rest of the world gets dragged along. Supported by solid labour data, growth is expected to trudge positively along. Signs of improving wages have recently added to factors that will keep inflation on the incline. The gradual shrinking of the Fed s balance sheet and the ongoing trade spat and its uncertain trade policies will help rein in some exuberance from the cheap and easy money perspective. Unfortunately, Europe continue to be mired by sporadic news of deteriorating debt with Italy, Spain and Greece leading the headlines despite improved inflation and unemployment data. Softer economic data can be expected. Meantime, the UK remains embroiled with Brexit negotiations. The ongoing trade war also poses an uncertain path for China. However, China has invested in spreading and hedging delivery and distribution channels at Government to Government level decades ago. With this edge, it is no surprise that China appear to project themselves as the bigger man in this rift by calmly reacting to Trump s instigation while obscurely maintaining underhand tactics. China has demonstrated their desire to improve credit risk of the financial industry while maintaining supportive monetary policies. For Malaysia, it may be prudent to downplay expectations as the new government goes about fixing and plugging the excesses of the previous government. It may even be overly optimistic to maintain fiscal debt discipline of 2.8%. It has been said that domestic consumption may have to take up the slack from reduced government expenditure, growth may taper down a tad while inflation firmly lower as the zero rating of GST take full effect. There is also the possible disruption to oil supply as dispute with Iran expands. Iran; being the fifth largest producer in the world, cutting of their supply may have significant and widespread ramifications. Important to note that OPEC s agreement to reduce supply have aided the rise over the last 12 months by about 60%. FIXED INCOME MARKET OUTLOOK The US dotplot show 2 more rate hikes for 2018 and another 2 more in This fairly hawkish view is premised on the optimism that the full effect of the tax reform is yet to be felt and the need to balance that with the gradual reduction of excess liquidity. The strengthening economy has also attracted huge inflows from fund mangers financial investments abroad boosting US$ strength further. This has capped US Treasury 10 year benchmark yields to below 3%. Touching a low of 2.05% in September last year in this period in review, 10 year yields have steadily risen to a high of 3.11% in May accompanied by the 3 rate hikes this period, before being ushered back down to 2.86% tempered by trade war fears. The upcoming anticipated hikes may pressure yields above the 3% mark again but will likely be hard pressed to sustain in the absence of resolution to the trade dispute. For Malaysia, interest rates will likely take the path of inward looking as priority. This means that the focus is on keeping cost low and sustainable for the larger masses of citizens and ensuring affordability at all strata of societies amidst moderation of growth while we transition to new policies. Only if there is an aggressive series of rate hikes by the US or spillover effects of hyperinflation from 11

14 MANAGER S REPORT external economies, it is strongly believed that our domestic rates may not change for at least the next six months with a slight possibility of even a cut. This remains conducive for our fixed income markets in that interest rates and duration risk is fairly contained. EQUITY MARKET OUTLOOK We are cautious on equity markets in the near term in view of various external factors that could contribute to market volatility. The factors include rising interest rates, fund outflow from Emerging Markets, and US-China trade war. Expectations of rising interest rates in the US and fear of contagion from weak Emerging Markets like Argentina and Turkey have contributed to portfolio outflows from Emerging Markets. The recent US-China trade war has increased the risk premium for equities. While negotiations have commenced for US and China to resolve their differences, the timing of a resolution remains difficult to predict. In the meantime, the uncertainty and noise would contribute to gyrations in financial markets. Meanwhile, the market has gradually come to grips with the changes from the new Pakatan Harapan government. With expected restraint on public sector spending needed to offset the reduction in tax revenue from GST, this would have a slight negative impact on economic growth. The new government s push for reforms including greater transparency, reducing corruption and wastage, and strengthening government institutions is expected to be positive for Malaysia in the medium to long term. We would employ a stock picking strategy to focus on selected themes including improving consumer sentiment, defensive businesses, and export oriented manufacturing companies with strong growth potential. On a more positive note, the zero rating of GST is expected to provide a short term boost to consumption. Additionally, the MIER Consumer Sentiment Index has recovered to a 3 1/2 year high. With the Sales and Service Tax (SST) expected to raise less revenue compared to GST, this is expected to be a net positive for consumption. We see opportunities in strong consumer franchises. We anticipate that the market could undergo some periods of above average volatility. To mitigate the impact from an increase in volatility, we would have a portion of the portfolio in stocks that have a generally more stable or defensive business. We would also invest in export oriented manufacturing companies with strong growth potential especially in the gloves and technology sector. These companies are expected to benefit from a stronger US Dollar vis-à-vis the Ringgit. For the glove companies, we believe that earnings growth would be driven by capacity expansion and robust demand for gloves globally. As for the technology space, the sector is expected to deliver strong earnings growth on market share gains and sustained demand growth in the global semiconductor sales. The ongoing US-China trade war could potentially see more production of goods diverted into neutral countries like Malaysia. 12

15 TRUSTEE S REPORT TRUSTEE S REPORT For The Financial Year Ended 30 June 2018 To the Unitholders of Areca enhancedincome Fund We have acted as Trustee of Areca enhancedincome Fund ( the Fund ) for the financial year ended 30 June To the best of our knowledge, Areca Capital Sdn Bhd ( the Manager ) has managed the Fund in the financial year under review in accordance with the following:- 1. Limitations imposed on the investment powers of the Manager under the Deeds, securities laws and Guidelines on Unit Trust Funds; 2. Valuation and pricing of the Fund are carried out in accordance with the Deeds and any regulatory requirements; and 3. Creation and cancellation of units are carried out in accordance with the Deeds and any regulatory requirement. For Maybank Trustees Berhad (Company No: 5004-P) BERNICE K M LAU Head, Operations Kuala Lumpur, Malaysia 20 August

16 ARECA enhancedincome REPORT STATEMENT OF FINANCIAL POSITION As Of 30th June, Note RM RM Assets Investments Unquoted fixed income securities 5 17,221,021 32,975,195 Collective investment scheme 5-1,975,069 Quoted securities 5 2,905,359 5,153,653 Total Investments 20,126,380 40,103,917 Other Assets Other receivables 6 222, ,166 Short-term deposits 7 2,289,392 1,445,236 Cash at bank 2,990 23,648 Total Other Assets 2,515,063 1,938,050 Total Assets 22,641,443 42,041,967 Unitholders Fund and Liabilities Unitholders Fund Unitholders capital 8 21,684,376 39,724,737 Unrealised reserve 9 (3,751,041) (949,666) Realised reserve 10 4,662,038 3,199,394 Net Asset Value attributable to unitholders 22,595,373 41,974,465 Liabilities Other payables and accrued expenses 11 43,652 67,502 Tax liabilities 2,418-46,070 67,502 Total Unitholders Fund and Liabilities 22,641,443 42,041,967 Number of Units In Circulation 8 47,458,971 84,176,711 Net Asset Value Per Unit The accompanying Notes form an integral part of the Financial Statements. 14

17 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For The Financial Year Ended 30th June, Note RM RM Investment Income Interest income 1,504,184 2,262,693 Gross dividend income 119, ,713 Net (loss)/ gain on investments: Investment at fair value through profit or loss ( FVTPL ) 5 (2,380,362) 241,346 Total Investment Income (756,725) 2,624,752 Expenditure Management fee , ,197 Trustee s fee 14 27,372 40,549 Transaction cost 37,769 19,664 Audit fee 10,450 9,500 Tax agent s fee 3,650 4,100 Other expenses 31,461 48,675 Total Expenditure 574, ,685 Net (Loss)/ Income Before Tax (1,331,395) 1,809,067 Income Tax Expense 15 (7,336) - Net (Loss)/ Income After Tax/Total Comprehensive (Loss)/ Income For The Financial Year (1,338,731) 1,809,067 Net Income After Tax Is Made Up Of: Realised gain 1,462,644 1,634,407 Unrealised (loss)/ gain (2,801,375) 174,660 (1,338,731) 1,809,067 The accompanying Notes form an integral part of the Financial Statements. 15

18 STATEMENT OF CHANGES IN NET ASSET VALUE For The Financial Year Ended 30th June, 2018 Unitholders Realised Unrealised Total net capital reserve reserve asset value RM RM RM RM As of 1st July, ,057,266 1,564,987 (1,124,326) 57,497,927 Amounts received from units created 1,434, ,434,135 Amounts paid for units cancelled (18,766,664) - - (18,766,664) Total comprehensive income for the financial year - 1,809,067-1,809,067 Net unrealised gain transferred to unrealised reserve - (174,660) 174,660 - As of 30th June, ,724,737 3,199,394 (949,666) 41,974,465 As of 1st July, ,724,737 3,199,394 (949,666) 41,974,465 Amounts received from units created 1,159, ,159,463 Amounts paid for units cancelled (19,199,824) - - (19,199,824) Total comprehensive loss for the financial year - (1,338,731) - (1,336,313) Net unrealised loss transferred to unrealised reserve - 2,801,375 (2,801,375) - As of 30th June, ,684,376 4,662,038 (3,751,041) 22,595,373 The accompanying Notes form an integral part of the Financial Statements. 16

19 STATEMENT OF CASH FLOWS For The Financial Year Ended 30th June, RM RM Cash Flows From/(Used in) Operating Activities Proceeds from disposal of investments 27,442,350 25,405,918 Gross dividend income received 107, ,713 Interest received 1,762,778 2,314,817 Purchase of investments (9,845,175) (11,271,008) Management fee paid (484,714) (710,849) Trustee s fee paid (28,688) (41,593) Transaction cost paid (37,769) (19,664) Tax paid (4,918) - Payment for other fees and expenses (47,349) (62,854) Net Cash From Operating Activities 18,863,859 15,735,480 Cash Flows From/(Used In) Financing Activities Proceeds from units created 1,159,463 1,534,135 Payment for cancellation of units (19,199,824) (18,832,678) Net Cash Used In Financing Activities (18,040,361) (17,298,543) Net Increase/(Decrease) In Cash And Cash Equivalents 823,498 (1,563,063) Cash And Cash Equivalents At Beginning Of Year 1,468,884 3,031,947 Cash And Cash Equivalents At End Of Year 2,292,382 1,468,884 Cash and cash equivalents consist of the following amounts: RM RM Short-term deposits 2,289,392 1,445,236 Cash at bank 2,990 23,648 2,292,382 1,468,884 The accompanying Notes form an integral part of the Financial Statements. 17

20 NOTES TO THE FINANCIAL STATEMENTS 1. GENERAL INFORMATION Areca enhancedincome Fund ( enhancedincome or the Fund ) was established pursuant to a Trust Deed dated 12th March, 2007 as modified by the First Supplemental Deed dated 27th June 2007, Second Supplemental Deed dated 14th April 2008, Third Supplemental Deed dated 21st October 2008, Fourth Supplemental Master Deed dated 10th April 2009, Fifth Supplemental Master Deed dated 12th March 2013 and Sixth Supplemental Master Deed dated 6th September, 2013 between Areca Capital Sdn Bhd as the Manager, the Trustee and all the registered unitholders of the Fund ( the Deed ). The principal activity of the Fund is to invest in investments as defined under the Schedule 7 of the First Supplemental Deed, which include stocks and shares of companies quoted in any recognised Stock Exchange(s) in Malaysia, quoted and unquoted fixed income securities and deposits with financial institutions. The Fund commenced operations on 30th July, 2007 and will continue its operations until terminated by the Trustee in accordance with Part 12 of the Master Deed. The objective of the Fund is to provide long term investors with high level of income stream and an opportunity for capital appreciation by investing in fixed income securities with relatively high level of yield. The Fund may also invest in listed equities and equity-related securities to take advantage of the both fixed income and equity markets climate. The Manager of the Fund is Areca Capital Sdn Bhd, a company incorporated in Malaysia. Its principal activities are managing private and unit trust funds. The financial statements were authorised for issue by the Board of Directors of the Manager in accordance with a resolution of directors on 20 August BASIS OF PREPARATION OF FINANCIAL STATEMENTS The financial statements of the Fund have been prepared in accordance with Malaysian Financial Reporting Standards ( MFRSs ), International Financial Reporting Standards ( IFRSs ). Adoption of New and Revised Malaysian Financial Reporting Standards In the current financial year, the Fund has applied a number of amendments to MFRSs and new interpretations issued by the Malaysian Accounting Standards Board ( MASB ) that are relevant to its operations and effective for an accounting period that begins on or after 1st January, 2017 as follows: Amendments to MFRS 107 Amendments to MFRS 112 Disclosure Initiative Recognition of Deferred Tax Assets for Unrealised Losses Amendments to MFRSs contained in the document entitled Annual Improvements to MFRSs cycle The adoption of these new and revised MFRSs did not result in significant changes in the accounting policies of the Fund and had no significant effect on the financial performance or position of the Fund. Standards, Issue Committee ( IC ) Interpretation and Amendments in Issue But Not Yet Effective At the date of authorisation for issue of these financial statements, the new and revised Standards, IC Interpretation and Amendments which were in issue but not yet effective and not early adopted by the Fund are as listed below: MFRS 9 Financial Instruments 2 MFRS 15 Revenue from Contracts with Customers (and the related 18

21 MFRS 16 Leases 4 Clarifications) 1 MFRS 17 Insurance Contracts 6 Amendments to MFRS 2 Classification and Measurement of Share-based Payment Transactions 1 Amendments to MFRS 4 Applying MFRS 9 Financial Instruments with MFRS 4 Insurance Contracts 3 Amendments to MFRS 9 Prepayment Feature with Negative Compensation 4 Amendments to MFRS 10 and MFRS 128 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture 7 Amendments to MFRS 119 Plan Amendment, Curtailment or Settlement 4 Amendments to MFRS 128 Long-term Interests in Associates and Joint Ventures 4 Amendments to MFRS 140 Transfers of Investment Property 1 IC Interpretation 22 Foreign Currency Transactions and Advance Consideration 1 IC Interpretation 23 Uncertainty over Income Tax Payments 4 Amendments to MFRSs Annual Improvements to MFRSs Cycle 1 Amendments to MFRSs Annual Improvements to MFRSs Cycle 4 Amendments to MFRSs Amendments to References to the Conceptual Framework in MFRS Standards 5 1 Effective for annual periods beginning on or after 1st January, Effective for annual periods beginning on or after 1st January, 2018, with early application permitted. In addition, an entity may elect to early apply only the requirementsfor the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss for annual periods beginning before 1st January, 2018, as stated in paragraph of MFRS 9. 3 Overlay approach to be applied when MFRS 9 is first applied. Deferred approach effective for annual periods beginning on or after 1st January, 2018 and only available for three years after that date. 4 Effective for annual periods beginning on or after 1st January, Effective for annual periods beginning on or after 1st January, Effective for annual periods beginning on or after 1st January, Effective date deferred to a date to be announced by MASB. The Manager of the Fund anticipates that the abovementioned Standards, IC Interpretation and Amendments will be adopted in the annual financial statements of the Fund when they become effective and that the adoption of these Standards, IC Interpretation and Amendments will have no material impact on the financial statements of the Fund in the period of initial application 19

22 except for MFRS 9 and MFRS 15. However, it is not practicable to provide a reasonable estimate of the effect of MFRS 9 and MFRS 15 until the Manager undertakes a detailed review. MFRS 9 Financial Instruments In November, 2014, Malaysian Accounting Standards Board ( MASB ) issued the final version of MFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces MFRS 139 Financial Instruments: Recognition and Measurement and all previous versions of MFRS 9. MFRS 9 is effective for annual periods beginning on or after 1st January, 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Key requirements of MFRS 9: (a) All recognised financial assets that are within the scope of MFRS 139 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under MFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss. (b) (c) (d) With regards to the measurement of financial liabilities designated as at fair value through profit or loss, MFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability be presented in other comprehensive income, unless the recognition of the effects of changes in the liability s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability s credit risk are not subsequently reclassified to profit or loss. Under MFRS 139, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss. In relation to the impairment of financial assets, MFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under MFRS 139. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised. The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in MFRS 139. Under MFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an economic relationship. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity s risk management activities have also been introduced. 20

23 MFRS 15 Revenue from Contracts with Customers In September, 2014, MFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Subsequently, amendments to MFRS 15 were issued in June, 2018 which provide clarifications on certain requirements of MFRS 15 and provide additional transitional relief upon implementing MFRS 15. MFRS 15 will supersede the current revenue recognition guidance including MFRS 118 Revenue, MFRS 111 Construction Contracts and the related Interpretations when it becomes effective. The core principle of MFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Under MFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when control of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in MFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by MFRS SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The financial statements of the Fund have been prepared under the historical cost convention. Historical cost is generally based on the fair value of the consideration given in exchange for assets. Fair value is 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, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of MFRS 2, leasing transactions that are within the scope of MFRS 117, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in MFRS 102 or value in use in MFRS 136. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. The principal accounting policies adopted are set out below. 21

24 Income Recognition Dividend income is recognised based on the ex-dividend date, when the right to receive the dividend has been established. Interest income from unquoted fixed income securities and short-term deposits is recognised on a time proportion basis that reflects the effective yield on the asset. Realised gain and loss on disposal of investments is arrived at based on net sales proceeds less carrying value and from reversal of prior year s unrealised gains and losses for financial instruments which were realised (i.e. sold, redeemed or matured) during the reporting period. Unrealised gains and losses comprise changes in the fair value of financial instruments for the reporting period. Transaction Costs Transaction costs are costs incurred to acquire or dispose financial assets or liabilities at fair value through profit or loss. They include fees and commissions paid to agents, advisors, brokers and dealers. Transaction costs, when incurred, are immediately recognised in the profit or loss. Income Tax Income tax comprises Malaysian corporate tax for the reporting period, which is measured using the tax rates that have been enacted or substantively enacted at the end of the reporting period. No deferred tax is recognised as no temporary differences have been identified. Distribution Distributions are at the discretion of the Trustee. A distribution to the Fund s Unitholders is accounted for as a deduction from realised reserve. A proposed distribution is recognised as a liability in the period in which it is approved by the Trustee. Functional and Presentation Currency The financial statements are measured using the currency of the primary economic environment in which the Fund operates ( functional currency ). The financial statements are presented in Ringgit Malaysia ( RM ), which is also its functional currency. Unitholders Capital The unitholders contributions to the Fund meet the definition of puttable instruments classified as equity instruments under the revised MFRS 132 Financial Instruments: Presentation. The units in the Fund are puttable instruments which entitle the unitholders to a pro-rata share of the net asset of the Fund. The units are subordinated and have identical features. There is no contractual obligation to deliver cash or another financial asset other than the obligation on the Fund to repurchase the units. The total expected cash flows from the units in the Fund over the life of the units are based on the change in the net asset of the fund. Creation and Cancellation of Units The Fund issues cancellable units, which are cancelled at the unitholder s option and are classified as equity. Cancellable units can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s net assets value. The outstanding units is carried at the redemption amount that is payable at the net assets value if the holder exercises the right to put the unit back to the Fund. Units are created and cancelled at the holder s option 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

25 Financial Instruments Financial instruments are recognised in the statement of financial position when, and only when the Fund has become a party to the contractual provisions of the financial instruments. Financial assets and liabilities include cash at bank, quoted and unquoted securities, receivables and payables. The accounting policies on recognition and measurement of these items are disclosed in their respective accounting policies. Financial instruments are classified as assets or liabilities in accordance with the substance of the contractual arrangements. Interest, dividends, gains and losses relating to financial instruments classified as assets, are reported as investment income. Financial Assets Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss (FVTPL), held-to-maturity investments, available-for-sale financial assets and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective Interest Method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all transaction costs and other premiums or discounts) through the expected life of the financial asset, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. FVTPL Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: it has been acquired principally for the purpose of selling it in the near term; or on initial recognition it is part of a portfolio of identified financial instruments that the Fund manages together and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Fund s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or it forms part of a contract containing one or more embedded derivatives, and MFRS 139 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset of liability) to be designated as at FVTPL. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss under Net gain or loss on financial assets at FVTPL account. Investments Investments in quoted securities are classified as at FVTPL and valued at the last done market price quoted on Bursa Malaysia at the end of the reporting period. Unquoted fixed income securities are classified as FVTPL and are generally valued on a daily basis with the appropriate prices by reference to quotes published by an approved bond pricing agency 23