Aberdeen Property ICVC. Annual Long Report For the period ended 31 December 2016

Transcription

1 Aberdeen Property ICVC Annual Long Report For the period ended 31 December 2016

2 Contents Report of the Authorised Corporate Director Statement of the Authorised Corporate Director s Responsibilities Authorised Corporate Director s Statement Statement of the Depositary s Responsibilities and Report of the Depositary to the shareholders of Aberdeen Property ICVC Independent auditor s report to the shareholders of Aberdeen Property ICVC Notes to the financial statements of Aberdeen Property ICVC Aberdeen UK Property Fund Remuneration Important information General information Appointments... 51

3 Report of the Authorised Corporate Director Welcome to the Annual Long Report for Aberdeen Property ICVC (the Company ) covering the period ended 31 December 2016 (the report ). The Company is an investment company with variable capital incorporated under the OEIC Regulations in England with registered number IC and is authorised and regulated by the Financial Conduct Authority (the FCA ) under regulation 12 of the Open-Ended Investment Companies Regulations 2001 (SI2001/1228) ( the OEIC Regulations ). The Authorised Corporate Director (the ACD ) and Alternative Investment Fund Manager of the Company is Aberdeen Fund Managers Limited, a private company limited by shares which was incorporated in England and Wales on 7 November Its ultimate holding company is Aberdeen Asset Management PLC, which is incorporated in Scotland. The investment activity of the Company started on 4 March The Company is a non-ucits retail scheme which complies with Chapter 5 of the Financial Conduct Authority Collective Investment Schemes sourcebook (the COLL sourcebook ). The Company is structured as an umbrella fund, in that the scheme property of the Company currently has one sub-fund. The investment objective and policies and a review of the investment activities during the period are disclosed in the financial statements of the individual sub-fund. New sub-funds may be established from time to time by the ACD with the approval of the FCA and Depositary. The assets of each sub-fund will be treated as separate from those of every other sub-fund and will be invested in accordance with the investment objective and investment policy applicable to that sub-fund. Each sub-fund has credited to it the proceeds of all shares linked to it, together with the assets in which such proceeds are invested or reinvested and all income, earnings, profits or assets deriving from such investments. The sub-fund would, if it were a separate investment company with variable capital, also be a non-ucits retail scheme which complies with Chapter 5 of the COLL sourcebook. The sub-fund is a segregated portfolio of assets and, accordingly, the assets of a sub-fund belong exclusively to that sub-fund and shall not be used to discharge directly or indirectly the liabilities of, or claims against, any other person or body, including the Company, or any other sub-fund, and shall not be available for any such purpose. As at 31 December 2016, the Company has issued shares in the Aberdeen UK Property Fund (the Sub-Fund ). Shareholders are not liable for the debts of the Company. Significant events During the period to 31 December 2016 the following changes were made to the Company and therefore the following changes were reflected in the Prospectus of Aberdeen Property ICVC: The list of Eligible Markets was updated; Minor clarifications were made to the Dealing Suspension, Valuation and Dilution sections; The list of Directors was updated; The Taxation section was updated in accordance with the Personal Savings Allowance. For more information on the Personal Savings Allowance please see the Government website A copy of the Prospectus is available on our website or by contacting Customer Services. Please see the Important Information section on page 49 for further details on the dealing suspension on the Sub-fund following the result of the UK Referendum on membership of the European Union. aberdeen-asset.com 01

4 Statement of the Authorised Corporate Director s Responsibilities The Financial Conduct Authority Collective Investment Schemes sourcebook (the COLL sourcebook ) 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 capital gains/losses for the period. In preparing the financial statements the ACD is required to: comply with the Prospectus, the Statement of Recommended Practice (IMA SORP) for Financial Statements of Authorised Funds issued in May 2014 and the Instrument of Incorporation; and follow generally accepted accounting principles (UK accounting standards and applicable law) including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; and 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 the COLL sourcebook, 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 their 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 auditors are aware of that information. The ACD is also responsible for the maintenance and integrity of the website on which the financial statements and auditors report are published and distributed electronically. Please note that legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Authorised Corporate Director s Statement In accordance with the requirements of the COLL sourcebook as issued and amended by the Financial Conduct Authority, we hereby certify the report on behalf of Aberdeen Fund Managers Limited, the Authorised Corporate Director. Alan Hawthorn Director Aberdeen Fund Managers Limited 17 February 2017 William Hemmings Director Aberdeen Fund Managers Limited 17 February Aberdeen Property ICVC

5 Statement of the Depositary s Responsibilities and Report of the Depositary to the Shareholders of Aberdeen Property ICVC For the period ended 31 December 2016 The Depositary must ensure that the Company is managed in accordance with the Financial Conduct Authority s Collective Investment Schemes Sourcebook, the Investment Funds Sourcebook, the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228) (the OEIC Regulations), as amended, the Financial Services and Markets Act 2000, as amended, (together the Regulations ), the Company s Instrument of Incorporation and Prospectus (together the Scheme documents ) as detailed below. The Depositary must in the context of its role act honestly, fairly, professionally, independently and in the interests of the Company and its investors. The Depositary is responsible for the safekeeping of all custodial assets and maintaining a record of all other assets of the Company in accordance with the Regulations. The Depositary must ensure that: the Company s cash flows are properly monitored and that cash of the Company is booked into the cash accounts in accordance with the Regulations; the sale, issue, redemption and cancellation of shares are carried out in accordance with the Regulations; the value of shares in the Company is calculated in accordance with the Regulations; any consideration relating to transactions in the Company s assets is remitted to the Company within the usual time limits; the Company s income is applied in accordance with the Regulations; and the instructions of the Alternative Investment Fund Manager ( the AIFM ) are carried out (unless they conflict with the Regulations). The Depositary also has a duty to take reasonable care to ensure that the Company is managed in accordance with the Regulations and the Scheme documents in relation to 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 AIFM: (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 income in accordance with the Regulations and the Scheme documents of the Company, and (ii) has observed the investment and borrowing powers and restrictions applicable to the Company. National Westminster Bank Plc 17 February 2017 aberdeen-asset.com 03

6 Independent Auditor s report to the shareholders of Aberdeen Property ICVC ( the Company ) For the year ended 31 December 2016 Report on the financial statements Our opinion In our opinion, Aberdeen Property ICVC s financial statements, (the financial statements of the Company ): give a true and fair view of the financial position of the Company and each of the sub-funds as at 31 December 2016 and of the net revenue and the net capital losses and cash flows of the scheme property of the Company and each of the sub-funds for the period then ended; and have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, the Statement of Recommended Practice for UK Authorised Funds, the Collective Investment Schemes sourcebook and the Instrument of Incorporation. What we have audited Aberdeen Property ICVC (the Company ) is an umbrella fund with a single sub fund. The financial statements of the Company, included within the Annual Long Report (the Annual Report ) comprise the financial statements of the sub-fund, which are prepared by Aberdeen Fund Managers Limited (the Authorised Corporate Director ), and comprise for the sub-fund: the balance sheet as at 31 December 2016; the statement of total return for the period then ended; the statement of change in net assets attributable to shareholders for the period then ended; the cashflow statement for the period then ended; the summary of significant accounting policies and notes applicable to the financial statements of the Company and notes to the financial statements of the sub fund, which include other explanatory information; 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), the Statement of Recommended Practice Financial Statements of UK Authorised Funds issued by the Investment Management Association (the Statement of Recommended Practice for UK Authorised Funds ), the Collective Investment Schemes sourcebook and the Instrument of Incorporation. In applying the financial reporting framework, the Authorised Corporate Director has made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Opinions on matters prescribed by the Collective Investment Schemes sourcebook In our opinion: we have obtained all the information and explanations we consider necessary for the purposes of the audit; and the information given in the Authorised Corporate Director s Report for the financial period for which the financial statements are prepared is consistent with the financial statements. Other matters on which we are required to report by exception Propriety of accounting records and information and explanations received Under the Collective Investment Schemes sourcebook we are required to report to you if, in our opinion: proper accounting records have not been kept; or the financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Responsibilities for the financial statements and the audit Our responsibilities and those of the Authorised Corporate Director As explained more fully in the Authorised Corporate Director s Responsibilities Statement set out on page 2, the Authorised Corporate Director 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) ( ISAs (UK & Ireland) ). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company s shareholders as a body in accordance with paragraph of the Collective Investment Schemes sourcebook as required by paragraph 67(2) of the Open-Ended Investment Companies Regulations 2001 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. 04 Aberdeen Property ICVC

7 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF ABERDEEN PROPERTY ICVC ( THE COMPANY ) CONTINUED What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). 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 and the Company s sub-fund s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Authorised Corporate Director; and the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 17 February 2017 Notes: a) The maintenance and integrity of the Aberdeen Asset Management website is the responsibility of the Authorised Corporate Director; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. aberdeen-asset.com 05

8 Notes to the financial statements of Aberdeen Property ICVC For the period ended 31 December Accounting policies (a) Basis of accounting The financial statements have been prepared on a historical cost basis, as modified by the revaluation of investments, and in accordance with the Statement of Recommended Practice (SORP) for Financial Statements of Authorised Funds issued by the Investment Management Association in May 2014 (IMA SORP 2014), and Financial Reporting Standard (FRS) 102. The Investment Management Association has been renamed the Investment Association. The financial statements have been prepared on the going concern basis. (b) Revenue Rental income is accounted for on an accruals basis. Benefits to lessees in the form of rent free periods are treated as a reduction in overall return on the leases and lease incentives given as capital contributions are shown as a debtor and amortised on a straight line basis over the lease term. Interest on deposits and fixed interest stocks are recognised as earned. Revenue earned from debt securities is recognised on an effective yield basis. Dividends on equities and preference stocks are recognised when the securities are quoted ex-dividend. Dividends from Real Estate Investment Trusts ( REITs ) are recognised as distributable revenue when the securities are quoted ex-dividend. Dividends received from UK REITs are split into PID (Property Income Distributions) and Non-PID components for tax purposes. Revenue arising from UK REITs tax-exempt rental business is colloquially known as PID revenue. A UK REIT may also carry out activities that give rise to taxable profits and gains. It is from these that the REIT will make a Non-PID distribution. These are treated for tax purposes in the same way as dividends from normal UK companies. Surrender premiums paid by tenants for the early redemption of a lease are recognised as revenue in the period that all obligations relating to the surrender have been performed. Special dividends may be treated as repayments of capital or as revenue depending on the circumstances of the particular case. The ordinary element of stocks received in lieu of cash dividends is recognised as revenue and where applicable, is included in the distribution. In the case of enhanced scrip dividends, the value of the enhancement is treated as capital. Revenue from authorised collective investment schemes are recognised when the investments are quoted ex-dividend. Where accumulation units or shares are held in another authorised collective investment scheme, the accumulation of revenue relating to the holding is recognised in the revenue account including any witholding taxes but excluding tax credits. Equalisation on distributions received is deducted from the cost of the investment and does not form part of the distributable income. Other revenue is recognised as earned. Revenue is allocated when earned in the proportion of the Net Asset Value of each share class to the total Net Asset Value of the sub-fund. (c) Expenses The underlying sub-fund may have a number of different share classes. Each share class may suffer a different Authorised Corporate Director ( ACD ) fee. Consequently the level of expenses attributable to each share class will differ. All expenses other than those relating to the purchase and sale of investments are included in expenses in the statement of total return and are accounted for on an accruals basis. Where fees are payable from capital, these will not form part of the distribution. The ACD s annual fee is charged to the revenue property of the sub-fund and is deducted for the purposes of calculating the distribution. Expenses incurred in respect of, or attributable to, the sub-funds as a whole are allocated when incurred in the proportion of the net asset value of each share class to the total net asset value of the sub-fund. Expenses are charged to the revenue property of the sub-fund. Rebates are applied where ACD fees are incurred by the underlying investments. Internal management fee rebates are offset against the ACD periodic charge, meaning in some circumstances the ACD fee will be negative due to rebates received. Surrender premiums paid by the Sub-fund to tenants following the break of a lease are recognised immediately in the Statement of Total Return as an expense. (d) Distribution policy The revenue from the sub-fund s investments accumulates during each accounting period. If revenue exceeds expenses during the period, the net revenue of the sub-fund is available for distribution (or re-investment) at share class level to the shareholders in accordance with the OEIC Regulations. If expenses exceed revenue during the period, the net revenue shortfall may be funded from capital. The Sub-fund makes property, interest and dividend distributions. Gains and losses on non-derivative investments and currencies, whether realised or unrealised, are taken to capital and are not available for distribution. For derivative investments, where positions are undertaken to enhance capital return, the gains and losses are taken to capital, otherwise where they generate revenue, the amounts are included as revenue or expense and affect distributions. 06 Aberdeen Property ICVC

9 NOTES TO THE FINANCIAL STATEMENTS OF ABERDEEN PROPERTY ICVC CONTINUED (e) Taxation The Sub-fund is registered as a Property Authorised Investment Fund (PAIF). As such, any income derived from its property investments is tax exempt. UK dividend revenue is disclosed net of any related tax credit. Overseas dividends continue to be disclosed gross of any foreign tax suffered, the tax element being separately disclosed in the taxation note. Deferred taxation is provided on all timing differences that have originated during the period, but not reversed by the balance sheet date other than those differences regarded as permanent. Any liability to deferred tax is provided at the average applicable rate of tax. Deferred tax assets and liabilities are not discounted to reflect the time value of money. Deferred tax assets are only recognised to the extent that it is regarded more likely than not that there will be taxable profits against which the reversal of underlying timing differences can be offset. (f) Valuation of investments Property investments are included in the Balance Sheets at fair value. Fair value is the open market value as defined in the Appraisal and Valuation Standards Manual issued by the Royal Institution of Chartered Surveyors of the United Kingdom ( the RICS ). Property investments within the Company are valued by CBRE Limited as Valuation Adviser (the Valuer), on the basis of a full valuation with physical inspection once a year. Regulation requires a review of the last full valuation by the Valuer at least once per month. Leasehold properties that are leased out to tenants under operating leases are classified as investment properties as the risks and rewards are retained by the Company. They are included in the Balance Sheets at fair value. We shall continue to monitor market conditions and may increase the frequency of reviews as we consider appropriate in the light of those conditions. Further, regulations require us to consult and agree with the Valuer a value for a particular immoveable property if we, the Valuer or the Depositary of the Company have reasonable grounds to believe that the most recent valuation of that property does not reflect its current value. The Valuer s fees shall increase to reflect the additional reviews it is to carry out and additional fees may be payable to the Valuer in respect of any requirement to agree a value for a property, or any other valuation service which the Valuer may be required or requested to provide. As at 31 December 2016 the Valuation Adviser was entitled to receive a fee of 0.02% per annum of the average value of the immovable property within the Company. This fee was payable quarterly. The Valuation Adviser receives additional fees for the set up costs of new acquisitions and these are agreed at the point of purchase between the ACD and the Valuation Adviser. Equity securities, collective investment schemes and fixed interest securities are valued at market value, excluding any accrued interest in the case of fixed interest securities. Market value is defined by the IMA SORP (2014) as fair value, which generally is the bid value of each security. Illiquid, unlisted, delisted, unapproved or suspended securities are priced based on the ACD s assessment of their fair value. Open forward currency contracts are shown in the portfolio statement and are valued using quoted forward rates. The net gains/(losses) are reflected in Forward foreign exchange currency contracts in Net capital gains/(losses). Open futures contracts are shown in the portfolio statement and are valued using broker prices. The net gains/(losses) are reflected in Future contracts in Net capital gains/(losses). Development properties are valued at the expected purchase price on completion, less any costs to be incurred in order to complete the development. Acquisition costs, tax and professional fees directly attributable to a property are capitalised. (g) Exchange rates Assets and liabilities denominated in foreign currencies are translated into sterling at the exchange rates prevailing at close of business on 31 December Foreign currency transactions are translated at the rates of exchange ruling on the date of such transactions. Exchange differences on such transactions follow the same treatment as the principal amounts. (h) Dilution adjustment In certain circumstances (as detailed in the Prospectus) the ACD may apply a dilution adjustment on the creation or cancellation of shares, which is applied to the capital of the relevant sub-fund on an accruals basis. The adjustment is intended to protect existing investors from the costs of buying or selling underlying investments as a result of large inflows or outflows from the Fund. (i) Derivatives The sub-fund may enter into permitted transactions such as derivative contracts or forward foreign currency transactions. Where these transactions are used to protect or enhance revenue, the revenue and expenses are included within net revenue in the statement of total return. Where the transactions are used to protect or enhance investments, the gains/losses are treated as capital and included within gains/losses on investments in the statement of total return. Any open positions in these types of transactions at the year end are included in the balance sheet at their mark to market value and shown in the portfolio statement. aberdeen-asset.com 07

10 NOTES TO THE FINANCIAL STATEMENTS OF ABERDEEN PROPERTY ICVC CONTINUED (j) Property purchases and sales Property purchases are recognised on completion. Property sales are derecognised on completion. (k) Provision for bad debts It is the policy of the Company to provide for the potential non-recovery of tenant debts by way of a bad debts provision. Provisions are made for tenant arrears greater than one year, and also for recommendations made by the Managing Agents for specific tenant circumstances, where tenants are facing financial difficulties and there is a risk that the debt will not be recovered. Arrears are written off at the discretion of the ACD where non recoverability of specific tenant debts is confirmed. (l) Service charges Service charge revenue and service charge expenditure, attributable to tenants, are accounted for on an accruals basis and in the accounting period in which the services are rendered. When the Company is acting as principal, service charge revenue and expenditure are separately disclosed under revenue and expenses in the statement of total return. When the Company is acting as an agent, the commission rather than gross revenue and expenses is recorded. In determining whether the Company is acting as principal or agent and hence whether the revenue and expenditure is recognised gross or net, the following indicators (of being a principal) are considered: The Company is the primary obligor in the arrangement i.e. the obligation to settle service charges is with the Company The Company bears the risks of owning the property The Company has latitude in establishing the rentals The Company has discretion in service charge supplier selection The Company is involved in the determination of lease specifications The Company bears the credit risk In practice, a review of lease agreements will give sufficient indication whether or not the above criteria are met. Void costs attributable to the Company have been separately disclosed under expenses in the statement of total return. (m) Statement of Cash Flows In accordance with the requirements of FRS 102 and the IMA SORP (2014), a Sub-Fund Statement of Cash Flows has been provided as property investments are not deemed to satisfy the exemption criteria in FRS 102 of being highly liquid. (n) Consolidated Financial Statements Consolidated Financial Statements have been prepared in accordance with FRS 102 Section 9 Consolidated and Separate Financial Statements. The Consolidated Financial Statements include the financial statements of the Sub-Fund and its subsidiary undertaking. The Sub-Fund s Financial Statements recognise the investments at fair value. 2. Risk exposures and risk management policies Generic risks that the Aberdeen range of funds are exposed to and the risk management techniques employed are disclosed below. Numerical disclosures and specific risks related to individual sub-funds, where relevant, are disclosed within the relevant sub-fund financial statements. Risk Management Process (RMP) Regulated funds must establish, implement and maintain an adequate and documented Risk Management Process ( RMP ) for identifying the risks to which a fund is, or might be, exposed. The RMP must comprise of such procedures as are necessary to enable a Management Company to assess the exposure of each fund it manages to market risk, liquidity risk, counterparty risk, operational risk and all other risks that might be material for that fund. The risk management policy must address at least the following elements: 1. the techniques, tools and arrangements that enable compliance with the applicable COLL and FUND rules; 2. the allocation of responsibilities pertaining to risk management; and 3. the terms, contents and frequency of reporting of the risk management function. This RMP provides explanations, descriptions and demonstrations of the control environment for the funds. It also provides an overview of the governance arrangements set by Aberdeen Fund Managers Limited (AFML), as the Management Company (either the Manager (Manager) or Alternative Investment Fund Manager (AIFM)); a subsidiary of Aberdeen Asset Management PLC; as well as explaining the processes and allocation of responsibilities relating to risk management including the form, content and frequency of reporting. It also provides details of the policies, arrangements, processes and techniques used in the identification, monitoring and measurement of the material risks for the funds to ensure compliance with regulatory and internal limits. 08 Aberdeen Property ICVC

11 NOTES TO THE FINANCIAL STATEMENTS OF ABERDEEN PROPERTY ICVC CONTINUED There is also a requirement in the FCA COLL and FUND rules (the Rules ) that a manager uses a risk management process to enable it to monitor and measure at any time the risk of its funds positions and their contribution to the overall risk profile of those funds. A copy of the RMP is available upon request. Types of risks Funds are broadly exposed to many types of risk, all of which can have an impact on the return from an investment. These can be categorised into: Market Risk Counterparty Risk Liquidity Risk Operational Risk The first three are primarily focussed on the investment itself and the financial losses associated with it. Within the Group these risks are monitored independently by the Market Risk Department. Operational risk is defined as the risk of loss that can arise from inadequate or failed internal processes, people and systems, or from external events such as fraud. Within the Group these risks are monitored by the Business Risk Department. General Market Risks Affecting All Asset Types Below is a non-exhaustive list: Country risk - an adverse change in the outlook (or, the perceived outlook) for a country, can result in the price of the assets in that country fluctuating and the portfolio experiencing a loss. Emerging market and frontier countries tend to fluctuate more (i.e. be more volatile) than developed countries and as a result are perceived to be more risky. Sector risk - when the outlook (or, the perceived outlook) for a sector changes, the price of the securities in that sector adjust and the portfolio can experience a loss. Asset-class risk - changes in the outlook (or, the perceived outlook) for a specific asset-class, can result in the price of the underlying securities within that asset-class to shift, thus the portfolio can experience a loss. Inflation/deflation risk - the risk that the value of assets or income from investments will be worth less in the future as inflation erodes the value of money. Interest rate risk - an unfavourable change in interest rates can affect the price of a security, which in turn results in the portfolio experiencing a loss. Interest rate changes not only affect fixed income products but have material impacts on funding arrangements and other asset types. Currency risk - fluctuations in the foreign exchange rates can adversely affect the value of a portfolio. Derivatives risk - utilising derivatives can increase leverage and risk. This can result in the portfolio having higher volatility, where small market moves can lead to a more than proportionate increase in profits or losses. Additionally where derivatives are used for hedging purposes, there may be situations where hedge positions are not perfectly correlated with the underlying asset, which may lead to losses arising from market movements. Concentration risk - the risk associated with any single exposure or group of exposures with the potential to produce large enough losses to materially threaten the portfolio s value. This may be from concentration in a single name or an industry. Default risk - the risk of a loss arising from an issuer that is unlikely to pay its loan obligations in full. Default risk will impact all creditsensitive transactions, including loans, securities and derivatives. Equity Risk Equity risk - an adverse change in the price of a stock, sector or index (e.g. Vodafone, Utilities, FTSE 100, etc.). Market capitalisation - smaller companies, due to their size can be more sensitive to both market and stock specific information. As a result smaller companies tend to be more volatile and less liquid than larger companies. Fixed Income Risk Sovereign risk - the risk of a portfolio loss arising from a sovereign state freezing foreign currency payments or when it defaults on its obligations. The probability of these events occurring tends to be linked with the country s economic performance and its political stability. Ratings risk - an unfavourable change in the credit ratings (e.g. general downgrades from S&P, Moody s, or Fitch) can result in a loss in value for the portfolio. Issuer risk - changes in the creditworthiness of an issuer, or group of issuers can affect the price of a security resulting in a loss in the value for the portfolio. aberdeen-asset.com 09

12 NOTES TO THE FINANCIAL STATEMENTS OF ABERDEEN PROPERTY ICVC CONTINUED Direct Property Risks Refinancing risk the risk that upon a specific refinancing date an asset s valuation has fallen below the value of the financing. Covenant risk the risk that a property or portfolio of properties fail(s) a covenant due to falling valuation or a fall in interest coverage ratios. Re-letting risk the risk that a property no longer meets the requirements of prospective tenants and ceases to be an attractive rental opportunity, and the subsequent impact on resale value. Development risk the risk that a development or a redevelopment of a property fails to deliver the expected uplift in income or valuation, or that the costs of development are materially higher than budgeted. Property Multi-Manager Risks Direct property risk the risks that all direct property investments are exposed to as detailed above. Manager risk the risk that the underlying manager of an investment fails to carry out its duties as set out in the constitutional documents or its legal obligations to the fund and its investors. Multi-Asset Funds, Fund of Long-Only Funds and Fund of Hedge Funds Risks These types of funds have the ability to invest in all the other assets classes, and therefore will be subject to the relevant market risks. Additionally the funds can invest into other asset classes where risks may be relevant, such as: Commodity risk - an adverse change in commodity prices (e.g. cotton, gold, natural gas, crude oil, etc.). Funding/Liquidity risk - the risk that an underlying fund is unable to meet margin calls to fund its open positions (particularly relevant in the Fund of Hedge Funds business where underlying managers may use significant levels of leverage). Manager risk the risk that the underlying manager of an investment fund fails to carry out its duties as set out in the constitutional documents or its legal obligations to the fund and its investors. Private Equity Risks Funding/Liquidity risk risk that debt facility or unfunded commitments cannot be funded when they fall due. Returns risk the possibility that targeted returns are not achieved. Manager risk the risk that the underlying manager of an investment Fund fails to carry out its duties as set out in the constitutional documents or its legal obligations to the fund and its investors. Infrastructure Risks Portfolio risk risk that deals/transactions do not close; targeted returns are not achieved; market conditions are not optimal for asset disposals. Project risk risk that the fund incurs a loss of equity; a lack of alignment of interest arising between sponsor and other unitholders; a deviation from the business plan; a lack of diversification in terms of contractors used on projects; and Counterparty risk pertaining to external counsels with respect to local knowledge. Construction risk The risk of partial or full loss during a project s construction period. Funding/Liquidity risk risk that unfunded commitments cannot be funded when they fall due. Refinancing Risk - The risk of adverse market conditions changing terms and conditions of refinancing. Factors that cause changes in market risks include, but are not limited to: future perceived prospects (i.e. changes in perception regarding the future economic position of countries, companies, sectors, etc.); shifts in demand and supply of products and services; political turmoil, changes in interest rate/inflation/taxation policies; major natural disasters; recessions; and terrorist attacks. How Market Risk is measured The RMP uses several ways to review and measure Market Risk: Leverage: has the effect of gearing a fund s expected performance by allowing it to gain greater exposure to underlying investment opportunities (gains and losses). The higher the leverage the greater the risk (potential loss). Volatility, Value-at-Risk (VaR) and Conditional VaR (CVaR): Volatility indicates how a fund is expected to perform. The higher the volatility the higher the risk. VaR measures with a degree of probability the minimum the fund could expect to lose in any given time frame. Assuming a normal (Gaussian) distribution, this is a function of the volatility. The higher the volatility, the higher the VaR, the greater the risk. CVaR determines the expected loss, given that the VaR has been reached. Tracking Error (TE): Measures the expected magnitude of divergence of returns between the fund and benchmark over a given time. Systematic and Stock Specific Risk: systematic risk represents the proportion of a fund s risk that is attributable to market exposure; and specific risk represents the risk that is intrinsic to individual stocks (i.e. particular to a given stock s attributes). 10 Aberdeen Property ICVC

13 NOTES TO THE FINANCIAL STATEMENTS OF ABERDEEN PROPERTY ICVC CONTINUED Sensitivity Analysis: Effective duration and dollar value per basis point (DV01) measures allow the quantification of the interest rate risk across portfolios. Stress Tests and Scenario Analysis: This captures how much the current portfolio will make or lose if certain conditions occur. Concentration Risk: By grouping the portfolio into various different exposures (e.g. country, sector, issuer, asset, etc.), we are able to see where, if any, concentration risk exists. Tenant and Rent Roll Risk: This measure considers property vacancies, lease rolls, tenant quality and tenant concentration at an asset level (being direct funds at a property level, Property Multi-Manager at a target fund level) to provide an indication of the stability of income. Debt Risk: After a certain level, debt can significantly increase the volatility of return and limit the capacity of managing the asset appropriately. This measure considers and weights the loan to gross asset value, debt expiry, current and potential covenant breach and cost of debt at asset level to provide an indication of whether debt is endangering the stability of income and the capacity of the fund management team to follow the fund s strategy. Loan-To-Value (LTV): similar to leverage, but is debt facility specific, giving a portfolio increased exposure to a particular asset through the use of a secured bank loan. Unequal application of LTV within a portfolio can lead to outsized exposure to investment risk, particularly if gearing is at high levels. Refinancing Risk: This measure considers the risks inherent in refinancing any debt held within a portfolio. Returns Risk: Within Private Equity the market uses Total Value to Paid-In (TVPI) and Distributions to Paid-In (DPI) ratio s, to help monitor the fund s performance. Managing Risk For some of the risk measurements above, specific risk limits appropriate for each fund will be set. The limits will generally be either hard limits or soft limits. Hard limits are strictly enforced to ensure the Management Company does not inadvertently (or deliberately) breach them and add additional risk exposure to the fund. Where possible, this is hard coded into the front office dealing system, Charles River (used for equities, fixed income, multi-asset and the fund of long-only funds businesses). This is done in a pre-trade capacity, preventing the fund manager adding to these exposures and breaching the set limits before the trade is actually executed. Front Office Compliance monitor this activity, escalating any breaches immediately. The majority of hard limits set, will aim to help prevent the occurrence of concentration risk. Soft limits, are generally internal limits or guidelines, and are designed to highlight any potential issues. These soft limits will be measured on individual basis and any exceptions from the limits will be discussed with the Management Company and where necessary rectified within a reasonable timeframe. Additionally, the Market Risk Department reviews all positions on each fund on an appropriate basis, generally monthly, to ensure that the Fund is not overly concentrated in any one specific area or issuer. Where the mandate is expressly focused in one particular country, region or asset class, the Market Risk Department will take this into account. Any issues or concerns arising from these concentrations are immediately investigated and discussed with the fund manager, and any remedial action is taken and the implementation monitored. Various risk management reports are produced regularly and circulated to various business areas including the relevant Board meetings. As stated above, Risk can be separated into market risk, counterparty risk and liquidity risk. Each type of risk is discussed in turn below. Market Risk Market Risk is a type of Investment Risk and measures the exposures to underlying market factors. It is the risk of loss resulting from fluctuations in the market value of a Fund s portfolio attributable to changes in market variables. Specific Risk (sometimes called Idiosyncratic Risk) is the part of risk directly associated with a particular asset, outside the realms of and not captured by Systematic Risk. In other words, it is the component of risk that is peculiar to a specific asset, and may manifest itself in various guises, for example: corporate actions, fraud or bankruptcy. Market risk is monitored through factor modelling and discounted cash flow techniques used to calculate both absolute and relative ex ante quantities such as tracking error ( TE ) and Value at Risk ( VaR ). The market risk is further monitored through the computation of the level of leverage by both the gross and net approach. The leverage is calculated by converting each financial derivative instrument into the equivalent position in the underlying assets of those derivatives, on a net asset value basis. The market risk linked to the concentration risk is mitigated through investment restrictions set according to the basic principle of diversification. Types of Market Risk include foreign currency risk and interest rate risk. Exposure to each is disclosed within the individual sub-funds financial statements. a) Foreign currency risk Fluctuations in the foreign exchange rates can adversely affect the value of a portfolio. aberdeen-asset.com 11

14 NOTES TO THE FINANCIAL STATEMENTS OF ABERDEEN PROPERTY ICVC CONTINUED b) Interest rate risk Interest rate risk is an unfavourable change in interest rates that can affect the price of a security, which in turn results in the portfolio experiencing a loss. Interest rate changes not only affect fixed income products but have material impacts on funding arrangements and other asset types. c) Global Exposure The funds must ensure that global exposure relating to derivatives and forward transactions held does not exceed the net value of the scheme property. Global exposure can be calculated as either as: (1) the incremental exposure and leverage generated through the use of derivatives and forward transactions, which may not exceed 100% of the net value of the scheme property (the commitment approach, refer to Leverage); or (2) the market risk of the scheme property (the VaR approach). The method suitable is determined by the investment strategy; types and complexities of the derivatives; and the proportion of the sub-fund comprising derivatives. Leverage Funds may achieve some leverage through the use of derivatives and other efficient portfolio management techniques. The use of leverage allows the manager to commit a relatively small amount of cash (generally known as premium or margin) to obtain exposure to the full returns of the associated underlying asset. Funds which use derivatives for investment purposes rather than for hedging or efficient portfolio management only may be more highly leveraged than funds which use derivatives solely for efficient portfolio management Leverage can be calculated in two ways. The Commitment Approach converts the derivative into the market value of the equivalent position in the underlying asset, adds leverage from reinvestment of collateral in non risk-free assets to the net asset value (NAV) of the fund and then divides this amount by the NAV. The derivative calculation can be reduced for any netting and/or hedging arrangement. The manager does not generally apply hedging or netting to the calculations with the exception of forward FX transactions used for hedging currency and exchange rate risks. The sum of notional or Gross approach takes the notional derivative positions and provides an overall total of the absolute values, adds leverage from reinvestment of collateral in non risk-free assets, adds the NAV and then divides the total by the NAV. The figures may therefore appear elevated especially when short term interest rate products are used (which require significantly larger notionals to achieve a similar degree of sensitivity/exposure to short term key rates of an interest rate curve compared to longer term rates). Funds which have a leverage limit exceeding 300% on either the Commitment or Gross approach are considered to employ significant leverage. Counterparty Risk Credit Risk is the risk that an underlying issuer may be unable (or unwilling) to make a payment or to fulfil their contractual obligations. This may materialise as an actual default or, or to a lesser extent, by a weakening in a counterparty s credit quality. The actual default will result in an immediate loss were as, the lower credit quality will more likely lead to mark-to-market adjustment. Counterparty Credit Risk is managed through processes outlined in the Credit Risk Management Policy ( CRMP ) detailing the creation and maintenance of credit opinions on Legal Entities and related consolidated banking Groups to client OTC derivatives transactions, cash security transactions and cash deposits. Derivatives and Credit Oversight Committee ( DCOC ) The DCOC is a regular forum consisting of representatives from Risk, Legal and Front Office teams from the Group. The responsibility of the DCOC is to ensure that the use of derivatives and other investment instruments is adequately controlled from a regulatory and operational perspective and within the context of the investment strategies for clients. It is also to ensure that the multiple facets of counterparty credit risk are discussed, monitored and where possible, managed within acceptable boundaries. For derivatives and other strategies, the Derivatives and Credit Oversight Committee is required to consider the credit risk of the counterparties which Aberdeen selects and trades with on behalf of its clients. These counterparties include: financial institutions used to transact OTC, FX, Repo, Reverse Repo and Securities Lending; brokers used for cash (delivery versus payment - DVP) transactions; and banks and money market funds used for liquidity and cash management purposes. In addition to the above and where appropriate, the collateral received in relation to the above transactions must be assessed to ensure it meets approved guidelines and is of suitable quality. Transactions involving OTC derivatives are entered into with counterparties that are approved by the Counterparty Credit Risk Department. OTC derivatives are traded under the terms of an ISDA Master agreement which defines the rights and obligations of parties engaging in derivatives trading. The Credit Support Annex (CSA) to the ISDA Master agreement contains the collateral terms applicable to the OTC derivatives contracts (with the exception of FX). The CSA highlights credit and operational thresholds (known as the Call Threshold and Minimum Transfer Amounts) the collateral movements are subject to. 12 Aberdeen Property ICVC