Annual Report Wholesale Funds Diversified Funds Investments Australia Ltd ABN 72 072 881 086 AFSL 227263
funds covered in this annual report Conservative ARSN 101 565 351 ABN 24 396 176 911 Balanced ARSN 101 565 431 ABN 14 193 060 779 Growth ARSN 101 565 520 ABN 43 698 348 922 High Growth ARSN 101 565 637 ABN 71 339 405 674 Diversified Bond ARSN 147 937 728 ABN 90 633 012 411 Responsible Entity Investments Australia Ltd ABN 72 072 881 086 AFSL 227263 Level 34 Freshwater Place 2 Southbank Boulevard Southbank Vic 3006 Telephone: (03) 8888 3888 Facsimile: 1300 765 712 vanguard.com.au 2 Annual Report
Contents About 4 Directors Report 5 Auditor s Independence Declaration 10 Statement of comprehensive income 11 Balance sheet 12 Statement of changes in equity 13 Statement of cash flows 14 Notes to the financial statements 15 Directors Declaration 43 Independent Auditor s Report 44 Wholesale Funds 3
About About Since our establishment in 1975, has strived to be the world s highest-value provider of investment products and services. We have an unwavering focus on our clients with a commitment to champion what s best for investors by offering outstanding service, while keeping costs low. Over the years has built a reputation as a global leader in client advocacy and earned the trust of millions of investors along the way. Our sole purpose has been to align our interest with those of our investors to ensure they have the best chance for investment success. With more than AUD $5.7 trillion in assets under management as of, including more than AUD $1 trillion in exchange traded funds, is one of the world s largest global investment management companies. In Australia, has been helping investors meet their long-term financial goals with low-cost investment solutions for over 20 years. Our unique structure putting investors interests first What sets apart and lets put investors first around the world is the ownership structure of The Group, Inc., in the United States. Rather than being publicly traded or owned by a small group of individuals, The Group is owned by s USdomiciled funds and ETFs. Those funds, in turn, are owned by their investors. This mutual structure aligns our interests with those of our investors and drives the culture, philosophy and policies throughout the organisation worldwide. As a result, Australian investors benefit from s stability and experience, low costs and client focus. Our investment expertise When you invest with, you have more than 40 years of investing experience behind you. So no matter which investment products suit your needs, you can feel confident that investments are built on a rigorous investment philosophy that stands the test of time. Low-cost investing We know we can t control the markets, but we can control the costs of investing. To that end, providing low-cost investments isn t a pricing strategy for us. It s how we do business. We can keep costs low because of our unique ownership structure in the United States, which allows us to return profits to investors through lower costs. 4 Annual Report
Directors' Report Directors Report The Responsible Entity of Wholesale (Diversified) Funds (the Funds ) for the year ended was Investments Australia Ltd (the Responsible Entity ). The directors of Investments Australia Ltd present their report together with the financial statements for the year ended. Principal activities The Funds invest in accordance with the investment policy of the Funds as set out in their respective Product Disclosure Statements (PDSs) and in accordance with the Fund Constitutions. The Funds predominantly invest in the Wholesale Funds, a group of unlisted unit trusts which are also managed by the Responsible Entity. The Funds seek to track the weighted average return of the various indices of the underlying Wholesale Funds in which they invest, in proportion to their strategic asset allocation, before taking into account fees, expenses and tax. The weights used are the strategic asset allocations to each asset class, for each individual Fund. The Funds did not have any employees during the year. There were no significant changes in the nature of the activities of the Funds during the year. Directors The following persons held office as directors of the Responsible Entity during the year or since the end of the year and up to the date of this report: J M Norris G W Reed (Resigned 31 July ) C R Comegys (Resigned 31 August ) C Kelton M Lovett (Resigned 6 December ) L Carr (Appointed 6 December ) C Lui (Appointed 31 August ) Review and results of operations The Funds invest in unlisted unit trusts and cash and cash equivalents. The investment policy of the Funds continues to be in accordance with the provisions of the Fund Constitutions. Wholesale Funds 5
Directors' Report Directors Report (continued) Review and results of operations (continued) Results The results of the operations of the Funds were as follows: Conservative Balanced Growth High Growth Diversified Bond Operating profit/(loss) before finance costs attributable to unitholders ($'000) 39,383 78,449 112,100 131,066 144,661 74,048 99,839 21,353 205 17,713 Distributions Distribution paid and payable ($'000) 67,552 94,826 157,385 179,842 176,397 162,662 92,160 66,244 8,600 36,703 Distribution (cents per unit) 6.9501 11.3210 9.8570 12.2892 11.9776 12.8097 13.6964 9.7283 5.6769 18.2933 Performance The table below details the performance of the Funds as represented by the total return, net of fees, which is calculated as the aggregation of the percentage capital growth and percentage distribution of income. The total return is shown for the past five years to. These are calculated in accordance with FSC Standard 6.0 Product Performance - calculation and presentation of returns. The directors assess the performance of the Funds by comparing each Fund s total return with the corresponding Index (the Benchmark) gross of fees. Conservative 2015 2014 2013 % % % % % Capital growth (2.03) (3.24) 5.32 5.49 5.82 Distribution of income 5.98 9.43 2.63 4.03 3.92 Total return 3.95 6.19 7.95 9.52 9.74 Benchmark Conservative Composite Index - Wholesale (1) 4.03 6.44 8.09 9.70 9.89 (1) Conservative Composite Index - Wholesale comprises of (weight/index): 13% S&P/ASX 300 Index, 10% MSCI World ex-australia Index (with net dividends reinvested) in Australian dollars, 2% S&P/ASX 300 A-REIT Index, 2% FTSE EPRA/NAREIT developed ex Australia rental index, Australian Dollar Hedged, 1.5% MSCI World ex-australia Small Cap Index (with net dividends reinvested) in Australian dollars, 1.5% MSCI Emerging Markets Index (with net dividends reinvested) in Australian dollars, 24% Bloomberg AusBond Composite 0+ Yr Index, 23% Bloomberg Barclays Global Treasury Index hedged into Australian dollars, 13% Bloomberg Barclays Global Aggregate Government-Related and Corporate Index hedged into Australian dollars, 10% Bloomberg AusBond Bank Bill Index. 2015 2014 2013 % % % % % Balanced Capital growth (1.30) (3.56) 6.87 8.26 10.03 Distribution of income 7.50 9.04 3.14 3.88 4.10 Total return 6.20 5.48 10.01 12.14 14.13 Benchmark Balanced Composite Index - Wholesale (2) 6.40 5.79 10.23 12.43 14.34 (2) Balanced Composite Index - Wholesale comprises of (weight/index): 22% S&P/ASX 300 Index, 17% MSCI World ex-australia Index (with net dividends reinvested) in Australian dollars, 3% S&P/ASX 300 A-REIT Index, 3% FTSE EPRA/NAREIT developed ex Australia rental index, Australian Dollar Hedged, 2.5% MSCI World ex-australia Small Cap Index (with net dividends reinvested) in Australian dollars, 2.5% MSCI Emerging Markets Index (with net dividends reinvested) in Australian dollars, 20% Bloomberg AusBond Composite 0+ Yr Index, 19% Bloomberg Barclays Global Treasury Index hedged into Australian dollars, 11% Bloomberg Barclays Global Aggregate Government-Related and Corporate Index hedged into Australian dollars. 6 Annual Report
Directors' Report Directors Report (continued) Review and results of operations (continued) Performance (continued) 2015 2014 2013 % % % % % Growth Capital growth (0.31) (5.08) 7.86 10.36 14.28 Distribution of income 9.11 9.26 3.98 4.11 4.30 Total return 8.80 4.18 11.84 14.47 18.58 Benchmark Growth Composite Index - Wholesale (3) 8.91 4.47 12.07 14.75 18.84 (3) Growth Composite Index - Wholesale comprises of (weight/index): 31% S&P/ASX 300 Index, 24% MSCI World ex-australia Index (with net dividends reinvested) in Australian dollars, 4% S&P/ASX 300 A-REIT Index, 4% FTSE EPRA/NAREIT developed ex Australia rental index, Australian Dollar Hedged, 3.5% MSCI World ex-australia Small Cap Index (with net dividends reinvested) in Australian dollars, 3.5% MSCI Emerging Markets Index (with net dividends reinvested) in Australian dollars, 12% Bloomberg AusBond Composite 0+ Yr Index, 12% Bloomberg Barclays Global Treasury Index hedged into Australian dollars, 6% Bloomberg Barclays Global Aggregate Government-Related and Corporate Index hedged into Australian dollars. 2015 2014 2013 % % % % % High Growth Capital growth 2.09 (3.56) 9.03 12.10 18.85 Distribution of income 9.29 6.38 4.61 4.67 4.26 Total return 11.38 2.82 13.64 16.77 23.11 Benchmark High Growth Composite Index - Wholesale (4) 11.50 3.08 13.90 16.97 23.34 (4) High Growth Composite Index Wholesale comprises of (weight/index): 40% S&P/ASX 300 Index, 31% MSCI World ex Australia Index (with net dividends reinvested) in Australian dollars, 5% S&P/ASX 300 A REIT Index, 5% FTSE EPRA/NAREIT developed ex Australia rental index, Australian Dollar Hedged, 4.5% MSCI World ex Australia Small Cap Index (with net dividends reinvested) in Australian dollars, 4.5% MSCI Emerging Markets Index (with net dividends reinvested) in Australian dollars, 4% Bloomberg AusBond Composite 0+ Yr Index, 4% Bloomberg Barclays Global Treasury Index hedged into Australian dollars, 2% Bloomberg Barclays Global Aggregate Government Related and Corporate Index hedged into Australian dollars. 2015 2014 2013 % % % % % Diversified Bond Capital growth (5.66) (8.75) 2.88 3.72 (0.93) Distribution of income 5.73 17.16 2.53 3.04 4.54 Total return 0.07 8.41 5.41 6.76 3.61 Benchmark Diversified Bond Composite Index - Wholesale (5) 0.33 8.73 5.69 7.12 3.96 (5) Diversified Bond Composite Index - Wholesale comprises of (weight/index): 40% Bloomberg AusBond Composite 0+ Yr Index, 60% Bloomberg Barclays Global Aggregate ex Securitised Index (hedged to AUD) Investors should be aware that past performance is not necessarily an indicator of future performance. Wholesale Funds 7
Directors' Report Directors Report (continued) Review and results of operations (continued) Unit redemption prices Unit redemption prices (quoted including distribution) are shown as follows: At Period high Period low $ $ $ $ $ $ Conservative 1.1783 1.2600 1.1955 1.2600 1.1581 1.1967 Balanced 1.3638 1.4176 1.3840 1.4250 1.3069 1.3292 Growth 1.4026 1.4215 1.4285 1.4505 1.3038 1.3173 High Growth 1.6194 1.5506 1.6556 1.6180 1.4610 1.4186 Diversified Bond 0.9579 1.0407 1.0054 1.1356 0.9493 1.0090 Significant changes in state of affairs In the opinion of the directors, there were no significant changes in the state of affairs of the Funds that occurred during the financial year. Matters subsequent to the end of the financial year Glenn Reed resigned as a Director of Investments Australia Ltd on 31 July. Rodney Comegys resigned as a Director of Investments Australia Ltd on 31 August. Cynthia Lui was appointed as a Director of Investments Australia Ltd on 31 August. No other matter or circumstance has arisen since that has significantly affected, or may significantly affect: (i) the operations of the Funds in future financial years; or (ii) the results of those operations in future financial years; or (iii) the state of affairs of the Funds in future financial years. Likely developments and expected results of operations The Funds will continue to be managed in accordance with the investment objectives and guidelines as set out in the governing documents of the Funds and in accordance with the provisions of the Fund Constitutions. The results of the Funds operations will be affected by a number of factors, including the performance of investment markets in which the Funds invest. Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. Indemnity and insurance of officers and auditors No insurance premiums were paid for out of the assets of the Funds in regards to insurance cover provided to either the officers of Investments Australia Ltd or the auditors of the Funds. So long as the officers of Investments Australia Ltd act in accordance with the Fund Constitutions and the Law, the officers remain indemnified out of the assets of the Funds against losses incurred while acting on behalf of the Funds. The auditors of the Funds are in no way indemnified out of the assets of the Funds. 8 Annual Report
Directors' Report Directors Report (continued) Review and results of operations (continued) Fees paid to and interests held in the Funds by the Responsible Entity or its associates Fees paid to the Responsible Entity and its associates out of the Funds property during the year are disclosed in note 12 of the financial statements. No fees were paid out of the Funds property to the directors of the Responsible Entity during the year. The number of interests in the Funds held by the Responsible Entity or its associates as at the end of the financial year are disclosed in note 12 of the financial statements. Interests in the Fund The movement in units on issue in the Funds during the year is disclosed in note 7 of the financial statements. The value of the Funds assets and liabilities are disclosed on the balance sheet and derived using the basis set out in note 2 of the financial statements. Environmental regulation The operations of the Funds are not subject to any particular or significant environmental regulations under either Commonwealth, State or Territory law. Rounding of amounts to the nearest thousand dollars Amounts in the directors report have been rounded to the nearest thousand dollars in accordance with ASIC Corporations (Rounding in Financial/Directors Report) Instrument /191, unless otherwise indicated. Auditor s independence declaration A copy of the auditor s independence declaration as required under Section 307C of the Corporations Act 2001 is set out on page 10. This report is made in accordance with a resolution of the directors. Colin Kelton Managing Director Melbourne 31 August Wholesale Funds 9
Auditor's Independence Declaration 10 Annual Report
Statement of comprehensive income Statement of comprehensive income For the year ended Conservative Balanced Growth High Growth Diversified Bond Investment income Notes $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Distribution income 60,524 44,688 124,992 96,278 121,024 82,921 66,372 47,986 7,622 5,554 Net gains/(losses) on financial instruments held at fair value through profit or loss 5 (20,438) 34,753 (11,181) 37,350 25,730 (6,372) 34,775 (25,143) (7,320) 12,312 Other operating income 41 57 75 84 67 70 40 32 5 10 Total net investment income/(loss) 40,127 79,498 113,886 133,712 146,821 76,619 101,187 22,875 307 17,876 Expenses Responsible Entity's fees 12 741 1,046 1,779 2,646 2,159 2,571 1,348 1,522 99 163 Other operating expenses 3 3 7 1 3 Total operating expenses 744 1,049 1,786 2,646 2,160 2,571 1,348 1,522 102 163 Operating profit/(loss) 39,383 78,449 112,100 131,066 144,661 74,048 99,839 21,353 205 17,713 Finance costs attributable to unitholders Distributions to unitholders 8 (67,552) (94,826) (157,385) (179,842) (176,397) (162,662) (92,160) (66,244) (8,600) (36,703) (Increase)/decrease in net assets attributable to unitholders 7 28,169 16,377 45,285 48,776 31,736 88,614 (7,679) 44,891 8,395 18,990 Profit/(loss) for the year Other comprehensive income Total comprehensive income for the year The above statement of comprehensive income should be read in conjunction with the accompanying notes. Wholesale Funds 11
Balance sheet Balance sheet As at Conservative Balanced Growth High Growth Diversified Bond Assets Notes $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Cash and cash equivalents 9 8 (1) 1,635 (17) 1,037 (1) 976 351 229 Receivables 3,477 954 6,029 1,961 5,962 2,062 4,977 1,168 96 43 Accrued income 24,531 17,601 60,794 36,068 68,190 34,058 41,527 20,081 2,032 2,521 Financial assets held at fair value through profit or loss 6 1,197,240 864,668 2,259,732 1,648,733 2,121,254 1,603,944 1,107,175 973,743 153,622 108,608 Total assets 1,225,256 883,222 2,328,190 1,686,745 2,196,443 1,640,063 1,154,655 994,992 156,101 111,401 Liabilities Distribution payable 8 32,466 62,602 94,380 111,462 125,036 111,201 68,257 38,684 3,076 4,857 Payables 453 486 1,114 358 1,122 504 998 456 80 7 Due to brokers payables for securities purchased 3,088 503 6,345 1,534 6,039 1,684 4,195 807 376 41 Total liabilities (excluding net assets attributable to unitholders) 36,007 63,591 101,839 113,354 132,197 113,389 73,450 39,947 3,532 4,905 Net assets attributable to unitholders (liability) 7 1,189,249 819,631 2,226,351 1,573,391 2,064,246 1,526,674 1,081,205 955,045 152,569 106,496 The above balance sheet should be read in conjunction with the accompanying notes. 12 Annual Report
Statement of changes in equity Statement of changes in equity For the year ended Conservative Balanced Growth High Growth Diversified Bond Total equity at the beginning of the financial year Notes $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Profit/(loss) for the year Other comprehensive income for the year Total comprehensive income Transactions with owners in their capacity as owners Total equity at the end of the financial year Under Australian Accounting Standards, net assets attributable to unitholders are classified as a liability rather than equity. As a result there was no equity at the start or end of the year. The above statements of changes in equity should be read in conjunction with the accompanying notes. Wholesale Funds 13
Statement of cash flows Statement of cash flows For the year ended Conservative Balanced Growth High Growth Diversified Bond Cash flows from operating activities Notes $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Proceeds from sale of financial instruments held at fair value through profit or loss 84,556 1,022,259 232,473 1,901,915 292,865 945,073 326,036 281,401 15,196 247,849 Purchases of financial instruments held at fair value through profit or loss (381,389) (300,872) (749,584) (500,242) (693,202) (325,424) (376,381) (167,798) (59,085) (59,491) Other income received 67 54 99 77 76 65 41 30 10 9 Responsible Entity's fees paid (741) (1,081) (1,741) (2,736) (2,114) (2,624) (1,338) (1,533) (99) (171) Operating expenses paid (4) Net cash inflow/(outflow) from operating activities 10(a) (297,507) 720,356 (518,753) 1,399,014 (402,375) 617,090 (51,642) 112,100 (43,978) 188,196 Cash flows from financing activities Proceeds from applications by unitholders 519,284 420,636 984,302 681,036 897,022 514,287 481,461 264,317 74,824 75,257 Payments for redemptions by unitholders (142,221) (1,124,688) (324,494) (2,044,803) (371,427) (1,090,333) (387,530) (354,071) (24,458) (256,002) Distributions paid from operating activities (79,547) (16,308) (139,403) (35,424) (122,182) (41,048) (41,313) (22,356) (6,266) (7,223) Net cash inflow/(outflow) from financing activities 297,516 (720,360) 520,405 (1,399,191) 403,413 (617,094) 52,618 (112,110) 44,100 (187,968) Net increase/(decrease) in cash and cash equivalents 9 (4) 1,652 (177) 1,038 (4) 976 (10) 122 228 Cash and cash equivalents at the beginning of the year (1) 3 (17) 160 (1) 3 10 229 1 Cash and cash equivalents at the end of the year 9 8 (1) 1,635 (17) 1,037 (1) 976 351 229 Non-cash financing activities 10(b) 18,141 30,526 35,062 70,433 40,380 50,159 21,274 28,538 4,116 28,206 The above statements of cash flows should be read in conjunction with the accompanying notes. 14 Annual Report
Notes to the financial statements For the year ended 1. General information These financial statements cover the Wholesale (Diversified) Funds (the Funds ) as registered managed investment schemes. The respective constitution dates are as follows: Conservative 30 July 2002 Balanced 30 July 2002 Growth 30 July 2002 High Growth 30 July 2002 Diversified Bond 17 December 2010 The Responsible Entity of the Wholesale (Diversified) Funds is Investments Australia Ltd (the Responsible Entity ). The Responsible Entity s registered office is Level 34, Freshwater Place, 2 Southbank Boulevard, Southbank Vic 3006. The Funds invest in accordance with the investment policy of the Funds as set out in their respective Product Disclosure Statements (PDSs) and in accordance with the Fund Constitutions. The Funds seek to track the weighted average return of the various indices of the underlying Wholesale Funds in which they invest, in proportion to their strategic asset allocation, before taking into account fees, expenses and tax. The weights used are the strategic asset allocations to each asset class, for each individual Fund. The financial statements were authorised for issue by the directors on 31 August. The directors of the Responsible Entity have the power to amend and reissue the financial statements. Wholesale Funds 15
Notes to the financial statements For the year ended 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated in the following text. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Accounting Standards Board and the Corporations Act 2001 in Australia. The Funds are for profit unit trusts for the purpose of preparing the financial statements. The financial statements are prepared on the basis of fair value measurement of assets and liabilities except where otherwise stated. The balance sheet is presented on a liquidity basis. Assets and liabilities are presented in decreasing order of liquidity and do not distinguish between current and non current. All material balances are expected to be recovered or settled within twelve months, except for investments in financial assets and net assets attributable to unitholders. The amount expected to be recovered or settled within twelve months after the end of each reporting period cannot be reliably determined. The Funds manage financial assets at fair value through profit or loss based on the economic circumstances at any given point in time, as well as to meet any liquidity requirements. As such it is expected that a portion of the portfolio will be realised within 12 months, however, an estimate of that amount cannot be determined as at balance date. In the case of net assets attributable to unitholders, the units are redeemed on demand at the unitholder s option. However, holders of these instruments typically retain them for the medium to long term. As such, the amount expected to be settled within 12 months cannot be reliably determined. (i) Compliance with International Financial Reporting Standards The financial statements of the Funds also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. (ii) New and amended standards adopted by the Funds There are no standards, interpretations or amendments to existing standards that are effective for the first time for the financial year beginning 1 July that have a material impact on the Funds. 16 Annual Report
Notes to the financial statements (continued) For the year ended 2. Summary of significant accounting policies (continued) (b) Financial instruments (i) Classification The Funds investments are classified as at fair value through profit or loss. They comprise: Financial instruments designated at fair value through profit or loss upon initial recognition These include financial assets that are not held for trading purposes and which may be sold. These are investments in unlisted trusts. Financial assets and financial liabilities designated at fair value through profit or loss upon initial recognition are those that are managed and their performance evaluated on a fair value basis in accordance with the Funds documented investment strategy. The Funds policy is for the Responsible Entity to evaluate the information about these financial instruments on a fair value basis together with other related financial information. (ii) Recognition/derecognition The Funds recognise financial assets and financial liabilities on the date they become party to the contractual agreement (trade date) and recognise changes in fair value of the financial assets or financial liabilities from this date. Investments are derecognised when the right to receive cash flows from the investments has expired or the Funds have transferred substantially all risks and rewards of ownership. (iii) Measurement Financial assets and liabilities held at fair value through profit or loss At initial recognition, the Funds measure a financial asset at its fair value. Transaction costs of financial assets carried at fair value through profit and loss are expensed in the statement of comprehensive income. Subsequent to initial recognition, all financial assets and financial liabilities at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in the fair value of the financial assets or financial liabilities at fair value through profit or loss category are presented in the statement of comprehensive income within net gains/(losses) on financial instruments held at fair value through profit or loss in the period in which they arise. For further details on how the fair value of the financial instruments is determined are disclosed in note 4. (iv) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (c) Net assets attributable to unitholders Units are redeemable at the unitholders option, however, applications and redemptions may be suspended by the Responsible Entity if it is in the best interests of the unitholders. The units are classified as financial liabilities as the Funds are required to distribute their distributable income, in accordance with the Fund Constitutions. The units can be put back to the Funds at any time for cash based on the redemption price, which is equal to a proportionate share of the Funds net asset value attributable to the unitholders. The units are carried at the redemption amount that is payable at balance sheet date if the holder exercises the right to put the unit back to the Funds. Wholesale Funds 17
Notes to the financial statements (continued) For the year ended 2. Summary of significant accounting policies (continued) (d) Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less from the date of acquisition that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Payments and receipts relating to the purchase and sale of investment securities are classified as cash flows from operating activities, as movements in the fair value of these securities represent the Funds main income generating activity. (e) Investment income Trust distributions are recognised on an entitlements basis as the Funds are presently entitled to the distributable income of their investee trusts. (f) Expenses All expenses, including Responsible Entity s fees, are recognised in the statement of comprehensive income on an accruals basis. (g) Income tax Under current legislation, the Funds are not subject to income tax as unitholders are presently entitled to the income of the Funds. The benefits of imputation credits and foreign tax paid are passed on to unitholders. (h) Distributions In accordance with the Fund Constitutions, the Funds distribute income adjusted for amounts determined by the Responsible Entity, to unitholders by cash or reinvestment. The distributions are recognised in the statement of comprehensive income as finance costs attributable to unitholders. (i) Increase/decrease in net assets attributable to unitholders Income not distributed is included in net assets attributable to unitholders. Movements in net assets attributable to unitholders are recognised in the statement of comprehensive income as finance costs. (j) Functional and presentation currency Items included in the Funds financial statements are measured using the currency of the primary economic environment in which it operates (the functional currency ). This is the Australian dollar, which reflects the currency of the economy in which the Funds compete for funds and is regulated. The Australian dollar is also the Funds presentation currency. 18 Annual Report
Notes to the financial statements (continued) For the year ended 2. Summary of significant accounting policies (continued) (k) Receivables and accrued income Receivables may include amounts for trust distributions. Trust distributions are accrued when the right to receive payment is established. Amounts are generally received within 30 days of being recorded as receivables. (l) Payables Payables include liabilities and accrued expenses owing by the Funds which are unpaid as at the end of the reporting period. As the Funds have a contractual obligation to distribute their distributable income, a separate distribution payable is recognised in the balance sheet as at the end of each reporting period where this amount remains unpaid as at the end of the reporting period. (m) Applications and redemptions Applications received for units in the Funds are recorded net of any entry fees payable prior to the issue of units in the Funds. Redemptions from the Funds are recorded gross of any exit fees payable after the cancellation of units redeemed. (n) Goods and Services Tax (GST) The GST incurred on the costs of various services provided to the Responsible Entity by third parties have been passed onto the Funds. The Funds qualify for Reduced Input Tax Credit recovery rate of between 55% and 75%, hence Responsible Entity s fees, custodial fees and other expenses have been recognised in the statement of comprehensive income net of the amount of GST recoverable from the Australian Taxation Office (ATO). Accounts payable are inclusive of GST. The net amount of GST recoverable from the ATO is included in receivables in the balance sheet. Cash flows relating to GST are included in the statement of cash flows on a gross basis. (o) Comparative revisions Comparative information has been revised where appropriate to enhance comparability. Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. (p) Use of estimates The Funds make estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. For the majority of the Funds financial instruments, quoted market prices are readily available. However, certain financial instruments, for example, over the counter derivatives or unquoted securities, are fair valued using valuation techniques. Where valuation techniques (for example, pricing models) are used to determine fair values, they are validated and periodically reviewed by experienced personnel of the Responsible Entity, independent of the area that created them. Models use observable data, to the extent practicable. However, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments. For certain other financial instruments, including amounts due from/to brokers and payables, the carrying amounts approximate fair value due to the immediate or short term nature of these financial instruments. Wholesale Funds 19
Notes to the financial statements (continued) For the year ended 2. Summary of significant accounting policies (continued) (q) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for the reporting period and have not been adopted early by the Funds. The directors assessment of the impact of these new standards (to the extent relevant to the Funds) and interpretations is set out below: (i) AASB 9 Financial Instruments (and applicable amendments), (effective from 1 January 2018) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. It has now also introduced revised rules around hedge accounting. The standard is not applicable until 1 January 2018 but is available for early adoption. The directors do not expect this to have a significant impact on the recognition and measurement of the Funds financial instruments as they are carried at fair value through profit or loss. The derecognition rules have not been changed from the previous requirements, and the Funds do not apply hedge accounting. AASB 9 introduces a new impairment model. However, as the Funds investments are all held at fair value through profit or loss, the change in impairment rules will not impact the Funds. The Funds have not yet decided when to adopt AASB 9. (ii) AASB 15 Revenue from Contracts with Customers (effective from 1 January 2018) The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer so the notion of control replaces the existing notion of risks and rewards. The Funds main sources of income are interest, dividends and gains on financial instruments held at fair value. All of these are outside the scope of the new revenue standard. As a consequence, the directors do not expect the adoption of the new revenue recognition rules to have a significant impact on the Funds accounting policies or the amounts recognised in the financial statements. (r) Rounding of amounts The Funds are registered schemes of the kind referred to in ASIC Corporations (Rounding in Financial/Directors Reports) Instrument /191, relating to the rounding off amounts in the financial statements. Amounts in the financial statements have been rounded off to the nearest thousand dollars unless otherwise indicated. 20 Annual Report
Notes to the financial statements (continued) For the year ended 3. Financial risk management The Funds activities expose them to a variety of financial risks: market risk (including price risk, foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Funds overall risk management programme focuses on ensuring compliance with the Funds Product Disclosure Statement and seeks to maximise the returns derived for the level of risk to which the Funds are exposed. Financial risk management is carried out by the investment management department of the Responsible Entity under policies approved by the Board of Directors of the Responsible Entity (the Board ). The Funds use different methods to measure different types of risks to which they are exposed. These methods are explained below. (a) Market risk (i) Price risk The Funds are exposed to price risk whereby the future prices of the Funds securities are uncertain. Where non monetary financial instruments are denominated in currencies other than the Australian dollar, the price in the future will also fluctuate because of changes in foreign exchange rates. Paragraph (ii) Foreign exchange risk below sets out how this component of price risk is managed and measured. In any asset sector the returns of individual securities are a combination of the market return and returns specific to each security. By diversifying their holdings across the market, index Funds are generally well protected from the specific risk of individual securities. employs an indexing investment strategy in all asset classes in which the Funds invest. At, the fair value of equities exposed to price risk were as follows: Conservative Balanced Growth High Growth Diversified Bond $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Unlisted unit trusts designated at fair value through profit or loss 1,197,240 864,668 2,259,732 1,648,733 2,121,254 1,603,944 1,107,175 973,743 153,622 108,608 Total exposure to price risk from equities 1,197,240 864,668 2,259,732 1,648,733 2,121,254 1,603,944 1,107,175 973,743 153,622 108,608 The table presented in note 3(b) summarises the impact on operating profit before finance costs attributable to unitholders and liabilities attributable to unitholders from possible changes in market prices that were reasonably based on the risk that the Funds were exposed to at reporting date. Wholesale Funds 21
Notes to the financial statements (continued) For the year ended 3. Financial risk management (continued) (a) Market risk (continued) (ii) Foreign exchange risk The Wholesale International Funds are exposed to foreign exchange risk as a result of investments in financial instruments denominated in foreign currencies. Fluctuations in the value of the Australian dollar and foreign currencies can affect the returns from overseas investments. This is because losses or gains must be converted back to Australian dollars. The Funds have no significant direct exposure to foreign exchange risk. However, the Funds are indirectly exposed to foreign exchange risk via their investment strategy of investing in the Wholesale Funds where those Funds may have a direct foreign exchange exposure. Of the Wholesale Funds, the International Shares, Emerging Markets Shares Index Fund, and the International Small Companies do not hedge any of their exposure to foreign currencies. Accordingly, these Funds are affected by currency fluctuations. The International Fixed Interest (Hedged), International Credit Securities (Hedged) and International Property Securities (Hedged) invest on a fully hedged basis (to Australian dollars), reducing their exposure to currency risk. Foreign currency exposure is accounted for by marking to market in a manner consistent with the valuation of the underlying securities. (iii) Cash flow and fair value interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Funds have insufficient direct exposure to interest rate risk to be material. The Funds are indirectly exposed to interest rate risk via their investment strategy of investing in the Wholesale Funds. All financial liabilities are non interest bearing. 22 Annual Report
Notes to the financial statements (continued) For the year ended 3. Financial risk management (continued) (b) Summarised sensitivity analysis The following tables summarise the sensitivity of the Funds operating profit and net assets attributable to unitholders to interest rate risk, foreign exchange risk and price risk. The reasonably possible movements in the risk variables have been determined based on management s best estimate, having regard to a number of factors, including historical levels of changes in interest rates and foreign exchange rates as well as the indices that the individual Funds are designed to track. However, actual movements in the risk variables may be greater or less than anticipated due to a number of factors, including unusually large market shocks resulting from changes in the performance of the economies, markets and securities in which the Funds invest. As a result, historic variations in risk variables are not a definitive indicator of future variations in the risk variables. Price risk movement represents the range of historical index returns from the average return minus one standard deviation to the average return plus one standard deviation. For a normal distribution approximately two thirds of the outcomes are expected to fall within plus or minus one standard deviation of the mean. Outcomes are expected to occur outside these ranges, approximately one third of the time. The Funds have a limited direct exposure to interest rate risk which is considered to be immaterial. The Funds do not have direct exposure to foreign exchange risk. However, the Funds have an indirect exposure to interest rate risk and foreign exchange rate risk via their investments in Wholesale Funds. No sensitivity analysis tables for interest rate risk and foreign exchange risk have been prepared on look through basis. Conservative Impact on operating profit/(loss) and net assets attributable to unitholders Balanced Growth High Growth Diversified Bond Price Risk Price Risk Price Risk Price Risk Price Risk $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 0% +2% 1% +2% 2% +3% 2% +4% 0% +1% 23,945 (22,597) 45,195 (42,425) 63,638 (22,144) 44,287 1,536 0% +2% 1% +2% 2% +3% 2% +3% 2% +4% 17,293 (16,487) 32,975 (32,079) 48,118 (19,475) 29,212 (2,172) 4,344 (c) Credit risk Credit risk is the risk that the Funds trading counterparties become insolvent or cannot otherwise meet their obligations of the Funds in full when they fall due. For Funds which invest in fixed interest and debt securities there is a credit risk. This is the risk that an issuer of a fixed interest or debt security may not meet its payment obligations to the Funds. The Responsible Entity seeks to minimise this risk by diversifying a Fund s holdings across issuers. There are no financial assets that are passed due or impaired. For Funds which invest in forward exchange contracts there is risk associated with unrealised profits. Credit risk is most applicable to the Funds with significant exposure to fixed interest and debt securities such as the Conservative, Balanced and Diversified Bond. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets. There were no significant concentrations of credit risk to counterparties at or. Wholesale Funds 23
Notes to the financial statements (continued) For the year ended 3. Financial risk management (continued) (d) Liquidity risk Liquidity risk is the risk that the Funds may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Funds financial instruments are predominantly investments in the Wholesale Funds, a group of unlisted unit trusts which are also managed by the Responsible Entity. The Wholesale Funds financial instruments include investments in equity investments, fixed interest securities and derivative contracts traded over the counter. The Wholesale Funds listed securities are considered to be readily realisable as they are all listed on major stock exchanges. The Wholesale Funds may use futures to gain market exposure without investing directly in the securities. This allows the Wholesale Funds to maintain liquidity without being under invested in their respective investment policies. The derivatives are not used to leverage the Wholesale Funds portfolios. The table below analyses the Funds financial liabilities into relevant maturity groupings based on the remaining period at the end of the reporting period. The amounts in the table are contractual undiscounted cash flows. Less than 1 month 1 6 months Conservative As at As at 6 12 months 1 2 years Total Less than 1 month 1 6 months 6 12 months 1 2 years $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Distribution payable 32,466 32,466 62,602 62,602 Payables 453 453 486 486 Due to brokers payables for securities purchased 3,088 3,088 503 503 Net assets attributable to unitholders 1,189,249 1,189,249 819,631 819,631 Total liabilities 1,225,256 1,225,256 883,222 883,222 Total Less than 1 month 1 6 months Balanced As at As at 6 12 months 1 2 years Total Less than 1 month 1 6 months 6 12 months 1 2 years $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Distribution payable 94,380 94,380 111,462 111,462 Payables 1,114 1,114 358 358 Due to brokers payables for securities purchased 6,345 6,345 1,534 1,534 Net assets attributable to unitholders 2,226,351 2,226,351 1,573,391 1,573,391 Total liabilities 2,328,190 2,328,190 1,686,745 1,686,745 Total 24 Annual Report
Notes to the financial statements (continued) For the year ended 3. Financial risk management (continued) (d) Liquidity risk (continued) Less than 1 month 1 6 months Growth As at As at 6 12 months 1 2 years Total Less than 1 month 1 6 months 6 12 months 1 2 years $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Distribution payable 125,036 125,036 111,201 111,201 Payables 1,122 1,122 504 504 Due to brokers payables for securities purchased 6,039 6,039 1,684 1,684 Net assets attributable to unitholders 2,064,246 2,064,246 1,526,674 1,526,674 Total liabilities 2,196,443 2,196,443 1,640,063 1,640,063 Total Less than 1 month 1 6 months High Growth As at As at 6 12 months 1 2 years Total Less than 1 month 1 6 months 6 12 months 1 2 years $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Distribution payable 68,257 68,257 38,684 38,684 Payables 998 998 456 456 Due to brokers - payables for securities purchased 4,195 4,195 807 807 Net assets attributable to unitholders 1,081,205 1,081,205 955,045 955,045 Total liabilities 1,154,655 1,154,655 994,992 994,992 Total Less than 1 month 1 6 months Diversified Bond As at As at 6 12 months 1 2 years Total Less than 1 month 1 6 months 6 12 months 1 2 years $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Distribution payable 3,076 3,076 4,857 4,857 Payables 80 80 7 7 Due to brokers - payables for securities purchased 376 376 41 41 Net assets attributable to unitholders 152,569 152,569 106,496 106,496 Total liabilities 156,101 156,101 111,401 111,401 Total Wholesale Funds 25
Notes to the financial statements (continued) For the year ended 4. Fair value measurement The Funds measure and recognise the following assets and liabilities at fair value on a recurring basis: Financial assets / liabilities designated at fair value through profit or loss (FVTPL) (see note 6) The Funds have no assets or liabilities at fair value on a non recurring basis in the current reporting period. AASB 13 requires disclosure of fair value measurements by level of the following fair value hierarchy; (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly (level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3) (i) Fair value in an active market (level 1) The fair value of financial assets and liabilities traded in active markets is based on their quoted market prices at the end of the reporting period without any deduction for estimated future selling costs. The Funds value their investments in accordance with the accounting policies set out in note 2(b) to the financial statements. For the majority of investments, the Funds rely on information provided by independent pricing services for the valuation of investments. The quoted market price used for financial assets held by the Funds is the current bid price; the appropriate quoted market price for financial liabilities is the current asking price. When the Funds hold derivatives with offsetting market risks, they use mid market prices as a basis for establishing fair values for the offsetting risk positions and applies this bid or asking price to the net open position, as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm s length basis. 26 Annual Report
Notes to the financial statements (continued) For the year ended 4. Fair value measurement (continued) (ii) Fair value in an inactive or unquoted market (level 2 and level 3) The fair value of financial assets and liabilities that are not traded in an active market is determined using valuation techniques. These include the use of recent arm s length market transactions, reference to the current fair value of a substantially similar other instrument, discounted cash flow techniques, option pricing models or any other valuation technique that provides a reliable estimate of prices obtained in actual market transactions. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate used is a market rate at the balance sheet date applicable for an instrument with similar terms and conditions. For other pricing models, inputs are based on market data at the balance sheet date. Fair values for unquoted equity investments are estimated, if possible, using applicable price/earnings ratios for similar listed companies adjusted to reflect the specific circumstances of the issuer. The fair value of derivatives that are not exchange traded is estimated at the amount that the Funds would receive or pay to terminate the contract at the balance sheet date taking into account current market conditions (volatility and appropriate yield curve) and the current creditworthiness of the counterparties. The fair value of a forward contract is determined as a net present value of estimated future cash flows, discounted at appropriate market rates as at the valuation date. The fair value of an option contract is determined by applying the Black Scholes option valuation model. Investments in other unlisted unit trusts are recorded at the redemption value per unit as reported by the investment managers of such funds. Wholesale Funds 27
Notes to the financial statements (continued) For the year ended 4. Fair value measurement (continued) Recognised fair value measurements The following tables present the Funds financial assets and liabilities (by class) measured at fair value according to the fair value hierarchy at and. Conservative Balanced Growth Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Financial assets Financial assets designated at fair value through profit or loss: Unlisted unit trusts 1,197,240 1,197,240 2,259,732 2,259,732 2,121,254 2,121,254 Total 1,197,240 1,197,240 2,259,732 2,259,732 2,121,254 2,121,254 Financial assets Financial assets designated at fair value through profit or loss: Unlisted unit trusts 864,668 864,668 1,648,733 1,648,733 1,603,944 1,603,944 Total 864,668 864,668 1,648,733 1,648,733 1,603,944 1,603,944 High Growth Diversified Bond Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Financial assets Financial assets designated at fair value through profit or loss: Unlisted unit trusts - 1,107,175-1,107,175-153,622-153,622 Total - 1,107,175-1,107,175-153,622-153,622 Financial assets Financial assets designated at fair value through profit or loss: Unlisted unit trusts - 973,743-973,743-108,608-108,608 Total - 973,743-973,743-108,608-108,608 The Funds policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period. Transfers between levels There were no transfers between levels during the reporting period. 28 Annual Report
Notes to the financial statements (continued) For the year ended 5. Net gains/(losses) on financial instruments held at fair value through profit or loss Net gains/(losses) recognised in relation to financial assets and financial liabilities held at fair value through profit or loss: Conservative Balanced Growth High Growth Diversified Bond $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Net unrealised gain/(loss) on financial instruments designated at fair value through profit or loss (26,469) (49,517) (36,497) (182,607) (14,405) (137,426) (16,987) (62,296) (8,192) (9,422) Net realised gain/(loss) on financial instruments designated at fair value through profit or loss 6,031 84,270 25,316 219,957 40,135 131,054 51,762 37,153 872 21,734 Total net gains/(losses) on financial instruments held at fair value through profit or loss (20,438) 34,753 (11,181) 37,350 25,730 (6,372) 34,775 (25,143) (7,320) 12,312 Wholesale Funds 29
Notes to the financial statements (continued) For the year ended 6. Financial assets held at fair value through profit or loss Conservative Balanced Growth High Growth Diversified Bond Designated at fair value through profit or loss $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Unlisted unit trusts 1,197,240 864,668 2,259,732 1,648,733 2,121,254 1,603,944 1,107,175 973,743 153,622 108,608 Total designated at fair value through profit or loss 1,197,240 864,668 2,259,732 1,648,733 2,121,254 1,603,944 1,107,175 973,743 153,622 108,608 Total financial assets held at fair value through profit or loss 1,197,240 864,668 2,259,732 1,648,733 2,121,254 1,603,944 1,107,175 973,743 153,622 108,608 Comprising: Unlisted unit trusts Units in Cash trusts 122,445 87,471 Units in Fixed interest trusts 724,133 518,738 1,149,976 824,889 652,503 483,325 118,214 97,705 153,622 108,608 Units in Australian shares trusts 156,968 113,596 502,415 365,339 673,413 500,043 453,975 390,936 Units in International shares trusts 156,094 110,958 497,702 360,018 664,707 492,933 448,865 387,084 Units in Property securities trusts 37,600 33,905 109,639 98,487 130,631 127,643 86,121 98,018 Total unlisted unit trusts 1,197,240 864,668 2,259,732 1,648,733 2,121,254 1,603,944 1,107,175 973,743 153,622 108,608 Total financial assets held at fair value through profit or loss 1,197,240 864,668 2,259,732 1,648,733 2,121,254 1,603,944 1,107,175 973,743 153,622 108,608 An overview of the risk exposures relating to financial assets at fair value through profit or loss is included in note 3. 30 Annual Report
Notes to the financial statements (continued) For the year ended 7. Net assets attributable to unitholders Movement in number of units and net assets attributable to unitholders during the year were as follows: Conservative Balanced Growth No. '000 No. '000 $'000 $'000 No. '000 No. '000 $'000 $'000 No. '000 No. '000 $'000 $'000 Opening balance 699,693 1,246,613 819,631 1,509,030 1,187,510 2,121,445 1,573,391 2,913,811 1,151,216 1,531,798 1,526,674 2,139,496 Applications 441,461 343,699 521,815 421,573 728,768 492,964 988,388 682,952 651,758 369,356 900,926 516,302 Redemptions (120,418) (915,761) (142,169) (1,125,121) (240,126) (1,478,300) (325,205) (2,045,029) (271,506) (786,130) (371,998) (1,090,669) Units issued upon reinvestment of distributions 15,480 25,142 18,141 30,526 26,307 51,401 35,062 70,433 30,140 36,192 40,380 50,159 Increase/(decrease) in net assets attributable to unitholders (28,169) (16,377) (45,285) (48,776) (31,736) (88,614) Closing balance 1,036,216 699,693 1,189,249 819,631 1,702,459 1,187,510 2,226,351 1,573,391 1,561,608 1,151,216 2,064,246 1,526,674 High Growth Diversified Bond No. '000 No. '000 $'000 $'000 No. '000 No. '000 $'000 $'000 Opening balance 640,324 685,890 955,045 1,060,351 106,919 254,670 106,496 277,984 Applications 305,703 173,317 485,270 265,454 76,486 69,018 74,880 75,257 Redemptions (249,996) (237,593) (388,063) (354,407) (25,253) (244,184) (24,528) (255,961) Units issued upon reinvestment of distributions 14,080 18,710 21,274 28,538 4,215 27,415 4,116 28,206 Increase/(decrease) in net assets attributable to unitholders 7,679 (44,891) (8,395) (18,990) Closing balance 710,111 640,324 1,081,205 955,045 162,367 106,919 152,569 106,496 Each unit represents a right to an individual share in the Funds and does not extend to a right to the underlying assets of the Funds. There are no separate classes of units and each unit has the same rights attaching to it as all other units of the Funds. Capital risk management The Funds consider their net assets attributable to unitholders as capital, notwithstanding net assets attributable to unitholders are classified as a liability. The amount of net assets attributable to unitholders can change significantly on a daily basis as the Funds are subject to daily applications and redemptions at the discretion of unitholders. Daily applications and redemptions are reviewed relative to the liquidity of the Funds underlying assets on a daily basis by the Responsible Entity. Under the terms of the Fund Constitutions, the Responsible Entity has the discretion to reject an application for units and to defer or adjust a redemption of units if the exercise of such discretion is in the best interests of unitholders. Wholesale Funds 31
Notes to the financial statements (continued) For the year ended 8. Distributions to unitholders paid and payable Distributions paid Conservative Balanced Growth $'000 CPU $'000 CPU $'000 CPU $'000 CPU $'000 CPU $'000 CPU - 30 September 4,797 0.6026 9,058 0.6830 10,277 0.8029 19,869 0.8814 11,279 0.9566 16,573 1.0198-31 December 5,033 0.5739 12,245 0.8912 10,966 0.7813 25,532 1.0809 11,800 0.9443 19,328 1.1510-31 March 25,256 2.6405 10,921 0.7998 41,762 2.7290 22,979 0.9407 28,282 2.0699 15,560 0.9795 Distributions payable - 32,466 3.1331 62,602 8.9470 94,380 5.5438 111,462 9.3862 125,036 8.0068 111,201 9.6594 67,552 6.9501 94,826 11.3210 157,385 9.8570 179,842 12.2892 176,397 11.9776 162,662 12.8097 Distributions paid High Growth Diversified Bond $'000 CPU $'000 CPU $'000 CPU $'000 CPU 30 September 6,861 1.2435 9,178 1.2665 387 0.3145 1,185 0.4427 31 December 7,400 1.2545 10,172 1.3606 394 0.2908 1,894 0.8435 31 March 9,642 1.5863 8,210 1.0599 4,743 3.1768 28,767 12.4638 Distributions payable 68,257 9.6121 38,684 6.0413 3,076 1.8948 4,857 4.5433 9. Cash and cash equivalents Conservative Balanced 92,160 13.6964 66,244 9.7283 8,600 5.6769 36,703 18.2933 Growth High Growth Diversified Bond $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Domestic cash at bank 8 (1) 1,635 (17) 1,037 (1) 976 351 229 8 (1) 1,635 (17) 1,037 (1) 976 351 229 32 Annual Report
Notes to the financial statements (continued) For the year ended 10. Reconciliation of profit/(loss) to net cash inflow/(outflow) from operating activities (a) Reconciliation of profit/(loss) to net cash inflow/(outflow) from operating activities Conservative Balanced Growth High Growth Diversified Bond $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Profit/(loss) for the year Increase/(decrease) in net assets attributable to unitholders (28,169) (16,377) (45,285) (48,776) (31,736) (88,614) 7,679 (44,891) (8,395) (18,990) Distribution to unitholders 67,552 94,826 157,385 179,842 176,397 162,662 92,160 66,244 8,600 36,703 Proceeds from sale of financial instruments held at fair value through profit or loss 84,556 1,022,259 232,473 1,901,915 292,865 945,073 326,036 281,401 15,196 247,849 Purchases of financial instruments held at fair value through profit or loss (381,389) (300,872) (749,584) (500,242) (693,202) (325,424) (376,381) (167,798) (59,085) (59,491) Net (gains)/losses on financial instruments held at fair value through profit or loss 20,438 (34,753) 11,181 (37,350) (25,730) 6,372 (34,775) 25,143 7,320 (12,312) Net change in receivables (6,922) 1,292 (24,708) 8,774 (34,128) 3,525 (21,446) 645 493 493 Net change in payables 19 (40) 45 (102) 47 (62) 9 (13) 3 (10) Non-cash items (53,592) (45,979) (100,260) (105,047) (86,888) (86,442) (44,924) (48,631) (8,110) (6,046) Net cash inflow/(outflow) from operating activities (297,507) 720,356 (518,753) 1,399,014 (402,375) 617,090 (51,642) 112,100 (43,978) 188,196 (b) Non-cash financing activities During the year, the following distribution payments were satisfied by the issue of units under the distribution reinvestment plan 18,141 30,526 35,062 70,433 40,380 50,159 21,274 28,538 4,116 28,206 Wholesale Funds 33
Notes to the financial statements (continued) For the year ended 11. Remuneration of auditors The auditor s remuneration is borne by the Responsible Entity. During the year, the following fees were paid or payable for services provided by the auditor of the Funds. Conservative Balanced Growth High Growth Diversified Bond PricewaterhouseCoopers Audit and other assurance services $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Audit and review of financial statements 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 13,500 Audit of compliance plan 1,933 1,933 1,933 1,933 1,933 1,933 1,933 1,933 1,933 1,933 Total remuneration for audit and other assurance services 13,433 13,433 13,433 13,433 13,433 13,433 13,433 13,433 13,433 15,433 Taxation services Tax compliance services 8,335 5,745 8,335 5,745 8,335 5,745 8,335 5,745 8,335 5,745 Total remuneration for taxation services 8,335 5,745 8,335 5,745 8,335 5,745 8,335 5,745 8,335 5,745 Total remuneration of PricewaterhouseCoopers 21,768 19,178 21,768 19,178 21,768 19,178 21,768 19,178 21,768 21,178 34 Annual Report
Notes to the financial statements (continued) For the year ended 12. Related party transactions Responsible Entity The Responsible Entity of the Wholesale (Diversified) Funds is Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263), which is a wholly owned subsidiary of The Group, Inc. Key management personnel Key management personnel includes persons who were directors of Responsible Entity at any time during the financial year as follows: J M Norris G W Reed (Resigned 31 July ) C R Comegys (Resigned 31 August ) C Kelton M Lovett (Resigned 6 December ) L Carr (Appointed 6 December ) No other person had authority and responsibility for planning, directing and controlling the activities of the Funds, directly or indirectly during the financial year. Transactions with key management personnel Key management personnel services are provided by Investments Australia Ltd and included in the management fees. There is no separate charge for these services. There was no compensation paid directly by the Funds to any of the key management personnel. Key management personnel unitholdings The key management personnel of Investments Australia Ltd (VIA) did not hold any units in the Funds during the period. Key management personnel remuneration Key management personnel are paid by the Responsible Entity. Payments made from the Funds do not include any amounts directly attributable to key management personnel remuneration. Key management personnel loan disclosures The Funds have not made, guaranteed or secured, directly or indirectly, any loans to the key management personnel or their personally related entities at any time during the reporting period. Wholesale Funds 35
Notes to the financial statements (continued) For the year ended 12. Related party transactions (continued) Responsible Entity s fees and other transactions During the year ended, the Responsible Entity received an all inclusive management fee (inclusive of GST, net of RITC available to the Funds) over the Funds average net assets attributable to unitholders for the year as follows: Management costs Management cost deducted directly from the Fund Management cost deducted from underlying Funds % per annum % per annum % per annum % per annum % per annum % per annum Conservative 0.33 0.33 0.07 0.07 0.26 0.26 Balanced 0.34 0.34 0.09 0.09 0.25 0.25 Growth 0.36 0.36 0.12 0.12 0.24 0.24 High Growth 0.37 0.37 0.14 0.14 0.23 0.23 Diversified Bond 0.34 0.34 0.08 0.07 0.26 0.27 All related party transactions are conducted on normal commercial terms and conditions. The transactions during the year and amounts payable at year end between the Funds and the Responsible Entity are as follows: Conservative Balanced Growth High Growth Diversified Bond $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Responsible Entity s fees for the year 741 1,046 1,779 2,646 2,159 2,571 1,348 1,522 99 163 Fees earned by the Responsible Entity in respect of investments by the Funds in other schemes managed by the Responsible Entity * 2,648 3,856 4,727 7,181 4,253 5,131 2,220 2,518 355 623 Total fees payable to the Responsible Entity at year end 72 53 177 132 215 168 128 119 10 7 * Where monies are invested into other Funds managed by the Responsible Entity, the Responsible Entity fee is calculated taking into account the fees charged in the underlying Funds. Related party unitholdings Investments Australia Ltd did not hold any units in the Funds during the year. Parties related to the Funds including the Responsible Entity, its affiliates or other funds managed by the Responsible Entity did not held units in the Funds during the year. 36 Annual Report
Notes to the financial statements (continued) For the year ended 12. Related party transactions (continued) Investments The Funds held investments in the following schemes which were also managed by Responsible Entity or its related parties: Fair value of investment Interest held Conservative Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Cash Plus Fund 122,445,162 10.11 2,189,038 35,741,211 1,456,244 197,535 Australian Fixed Interest 292,278,764 5.99 7,752,493 98,586,097 18,263,189 2,127,464 International Fixed Interest (Hedged) 277,810,785 9.37 17,987,557 90,525,481 12,480,279 3,673,689 International Credit Securities (Hedged) 154,043,325 10.95 9,837,116 50,647,930 9,205,936 3,753,236 Australian Property Securities 17,753,499 0.47 905,426 8,316,331 6,315,260 218,260 International Property Securities (Hedged) 19,846,324 1.61 4,845,943 9,213,041 608,273 4,084,316 International Small Companies 20,477,731 5.11 1,409,631 6,691,165 1,672,084 1,241,074 Australian Shares 156,967,827 1.88 7,343,832 24,797,761 8,128,474 2,748,975 International Shares 117,098,086 1.09 7,554,488 17,312,191 5,023,304 6,000,073 Emerging Markets Shares 18,518,514 1.65 699,135 2,164,539 486,493 1,197,240,017 60,524,659 343,995,747 63,153,043 24,531,115 Fair value of investment Interest held Conservative Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Cash Plus Fund 87,470,790 11.79 3,259,909 28,725,478 91,709,866 207,862 Australian Fixed Interest 208,391,378 5.26 15,024,195 64,442,398 207,468,963 3,908,608 International Fixed Interest (Hedged) 200,658,671 7.68 3,437,418 44,427,665 173,743,086 3,437,418 International Credit Securities (Hedged) 109,686,987 9.39 4,688,965 29,315,492 111,898,469 4,688,965 Australian Property Securities 17,596,224 0.43 1,383,230 5,547,200 23,361,765 308,992 International Property Securities (Hedged) 16,308,566 1.28 1,066,863 7,872,423 24,537,954 1,066,863 International Small Companies 11,770,491 3.97 857,079 4,113,721 9,391,303 660,730 Australian Shares 113,596,312 1.53 10,088,266 45,407,378 83,794,552 1,101,433 International Shares 86,661,201 0.75 4,026,465 21,805,377 51,731,194 1,724,970 Emerging Markets Shares 12,526,902 1.26 856,052 5,680,706 10,496,538 492,242 864,667,522 44,688,442 257,337,838 788,133,690 17,598,083 Wholesale Funds 37
Notes to the financial statements (continued) For the year ended 12. Related party transactions (continued) Investments The Funds held investments in the following schemes which were also managed by Responsible Entity or its related parties: Fair value of investment Interest held Balanced Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Australian Fixed Interest 460,552,730 9.44 12,003,415 157,708,547 33,572,515 3,352,312 International Fixed Interest (Hedged) 444,142,969 14.98 28,043,661 155,049,911 29,318,257 5,873,218 International Credit Securities (Hedged) 245,279,941 17.43 15,291,749 85,630,699 19,244,016 5,976,199 Australian Property Securities 53,795,733 1.42 2,581,099 32,046,042 23,372,352 661,359 International Property Securities (Hedged) 55,842,951 4.53 13,567,313 27,769,269 5,547,657 11,492,318 International Small Companies 56,824,190 14.17 3,937,274 10,731,444 1,443,165 3,443,890 Australian Shares 502,415,363 6.02 22,932,193 83,296,743 30,856,054 8,798,793 International Shares 385,018,183 3.58 24,531,893 62,328,329 19,338,716 19,728,223 Emerging Markets Shares 55,859,831 4.97 2,103,438 7,371,308 2,606,946 1,467,473 2,259,731,892 124,992,035 621,932,292 165,299,678 60,793,785 Fair value of investment Interest held Balanced Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Australian Fixed Interest 331,170,290 8.36 24,311,894 105,887,041 340,125,584 6,211,460 International Fixed Interest (Hedged) 319,556,803 12.23 5,474,223 65,674,961 282,230,842 5,474,223 International Credit Securities (Hedged) 174,162,419 14.90 7,445,200 23,965,474 160,747,090 7,445,200 Australian Property Securities 50,643,764 1.22 3,958,375 15,845,644 65,209,227 889,312 International Property Securities (Hedged) 47,842,645 3.75 3,129,738 17,445,845 61,877,347 3,129,738 International Small Companies 39,017,185 13.17 2,834,361 13,186,188 31,644,110 2,190,207 Australian Shares 365,339,043 4.93 33,255,104 94,568,544 224,292,982 3,542,338 International Shares 280,270,525 2.44 13,169,156 68,963,798 173,081,437 5,578,716 Emerging Markets Shares 40,730,021 4.10 2,700,364 12,217,340 26,039,650 1,600,477 1,648,732,695 96,278,415 417,754,835 1,365,248,269 36,061,671 38 Annual Report
Notes to the financial statements (continued) For the year ended 12. Related party transactions (continued) Investments The Funds held investments in the following schemes which were also managed by Responsible Entity or its related parties: Fair value of investment Interest held Growth Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Australian Fixed Interest 263,391,772 5.40 6,660,091 97,499,147 30,359,506 1,917,199 International Fixed Interest (Hedged) 249,745,361 8.42 15,550,364 89,014,784 23,208,461 3,302,560 International Credit Securities (Hedged) 139,365,427 9.90 8,510,800 46,886,518 12,840,255 3,395,612 Australian Property Securities 62,002,774 1.64 3,069,511 37,009,524 34,047,128 762,256 International Property Securities (Hedged) 68,627,740 5.57 16,627,322 35,188,405 11,206,992 14,123,390 International Small Companies 73,151,423 18.24 5,062,392 12,090,084 1,761,804 4,433,419 Australian Shares 673,413,426 8.07 30,077,214 111,188,056 46,322,329 11,793,479 International Shares 517,506,051 4.81 32,669,561 88,690,962 36,625,322 26,516,863 Emerging Markets Shares 74,050,334 6.58 2,797,499 9,459,637 2,802,219 1,945,348 2,121,254,309 121,024,754 527,027,117 199,174,016 68,190,126 Fair value of investment Interest held Growth Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Australian Fixed Interest 193,838,640 4.89 11,329,462 46,062,176 110,959,018 3,635,655 International Fixed Interest (Hedged) 186,023,973 7.12 3,186,716 20,443,812 84,055,480 3,186,716 International Credit Securities (Hedged) 103,462,484 8.85 4,422,877 15,437,122 56,038,428 4,422,877 Australian Property Securities 65,580,358 1.59 4,015,648 12,478,193 46,265,600 1,151,600 International Property Securities (Hedged) 62,063,150 4.86 4,060,006 11,855,835 40,992,168 4,060,006 International Small Companies 52,459,080 17.70 3,609,592 4,409,935 18,849,435 2,944,760 Australian Shares 500,042,832 6.75 33,897,083 93,751,950 162,223,493 4,848,430 International Shares 387,049,805 3.36 15,215,385 50,639,884 107,651,609 7,704,131 Emerging Markets Shares 53,423,892 5.38 3,184,401 9,073,401 16,039,693 2,099,280 1,603,944,214 82,921,170 264,152,308 643,074,924 34,053,455 Wholesale Funds 39
Notes to the financial statements (continued) For the year ended 12. Related party transactions (continued) Investments The Funds held investments in the following schemes which were also managed by Responsible Entity or its related parties: Fair value of investment Interest held High Growth Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Australian Fixed Interest 43,739,462 0.90 1,157,191 19,995,293 14,855,925 318,375 International Fixed Interest (Hedged) 47,188,336 1.59 2,929,269 21,830,564 11,463,363 624,005 International Credit Securities (Hedged) 27,286,321 1.94 1,605,182 13,262,509 7,011,775 664,826 Australian Property Securities 41,275,386 1.09 2,008,662 24,705,218 29,776,827 507,435 International Property Securities (Hedged) 44,846,154 3.64 10,844,808 26,846,968 17,882,020 9,229,209 International Small Companies 48,933,613 12.20 3,388,486 10,710,940 8,490,231 2,965,673 Australian Shares 453,974,663 5.44 20,404,208 78,710,149 63,165,198 7,950,451 International Shares 350,862,410 3.26 22,171,018 61,168,495 48,092,088 17,978,090 Emerging Markets Shares 49,068,647 4.36 1,863,519 5,547,517 5,678,673 1,289,064 1,107,174,991 66,372,343 262,777,653 206,416,100 41,527,128 Fair value of investment Interest held High Growth Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Australian Fixed Interest 39,114,552 0.99 2,023,307 16,992,006 21,779,510 733,636 International Fixed Interest (Hedged) 37,823,543 1.45 647,943 9,738,213 16,335,107 647,943 International Credit Securities (Hedged) 20,766,015 1.78 887,718 3,889,345 7,690,756 887,718 Australian Property Securities 50,876,773 1.23 2,697,638 4,584,739 15,894,874 893,403 International Property Securities (Hedged) 47,140,981 3.69 3,083,837 3,180,172 14,519,673 3,083,837 International Small Companies 41,513,755 14.01 2,745,705 8,524,338 10,978,432 2,330,350 Australian Shares 390,937,196 5.28 22,606,491 43,858,232 51,631,981 3,790,538 International Shares 302,592,800 2.63 10,903,482 35,455,058 43,545,621 6,023,035 Emerging Markets Shares 42,977,224 4.33 2,390,362 7,136,964 6,173,415 1,688,781 973,742,839 47,986,483 133,359,067 188,549,369 20,079,241 40 Annual Report
Notes to the financial statements (continued) For the year ended 12. Related party transactions (continued) Investments The Funds held investments in the following schemes which were also managed by Responsible Entity or its related parties: Fair value of investment Interest held Diversified Bond Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Australian Fixed Interest 61,624,058 1.26 1,665,780 24,533,453 7,289,718 448,555 International Fixed Interest (Hedged) 59,091,254 1.99 3,855,385 20,361,595 3,256,937 781,406 International Credit Securities (Hedged) 32,906,853 2.34 2,100,116 11,581,444 2,374,718 801,769 153,622,166 7,621,281 56,476,492 12,921,373 2,031,730 Fair value of investment Interest held Diversified Bond Distribution received/ receivable Number of units acquired Number of units disposed Distribution receivable unpaid $ % $ Units Units $ Australian Fixed Interest 43,581,816 1.10 3,850,630 25,182,273 85,973,098 817,425 International Fixed Interest (Hedged) 42,028,112 1.61 719,970 20,992,606 76,476,537 719,970 International Credit Securities (Hedged) 22,997,494 1.97 983,111 8,924,544 42,692,325 983,111 108,607,422 5,553,711 55,099,423 205,141,960 2,520,506 The fair value of financial assets held in the investee fund is included in financial assets at fair value through profit or loss in the balance sheet. Interest held represents the entity s average percentage interest in the Wholesale class of the investee funds. The Funds maximum exposure to loss from its interest in investee funds is equal to the total fair value of its investments in the investee funds as there are no off balance sheet exposure relating to any of the investee funds. Once the Fund has disposed of its shares in an investee fund, it ceases to be exposed to any risk from that investee fund. The proportion of ownership interest is equal to the proportion of the voting power held. The Funds did not hold any investments in Investments Australia Ltd during the year. Other transactions within the Funds Apart from those details disclosed in this note, no directors have entered into a material contract with the Funds during the financial year and there were no material contracts involving directors interests subsisting at year end. Wholesale Funds 41
Notes to the financial statements (continued) For the year ended 13. Events occurring after the reporting period There are no significant events that have occurred since balance date which would impact on the financial position of the Funds as disclosed in the balance sheet as at or on the results and cash flows of the Funds for the year ended on that date. 14. Contingent assets, contingent liabilities and commitments There are no outstanding contingent assets, liabilities or commitments as at (: Nil). 42 Annual Report
Directors Declaration Directors Declaration In the opinion of the directors of the Responsible Entity: (a) the financial statements and notes set out on pages 11 to 42 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of each Funds financial position as at and of its performance for the financial year ended on that date; and (b) there are reasonable grounds to believe that the Funds will be able to pay their debts as and when they become due and payable. (c) Note 2(a) confirms that the financial statements comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. This declaration is made in accordance with a resolution of the directors. C Kelton Managing Director Melbourne 31 August Wholesale Funds 43
Independent Auditor's Report 44 Annual Report
Independent Auditor's Report Wholesale Funds 45
Independent Auditor's Report 46 Annual Report