1. ESTABLISHMENT OF FUND The RPH Global Sovereign Bond Pooled Fund [the "Fund"] is an Investment trust established under the laws of the Province of Ontario, commencing operations on April 1, 2011. The trustee of the Fund is CIBC Mellon Trust Company (the Trustee ). River Plate House Capital Management Inc. (the Manager ), a corporation incorporated under the laws of the Province of Ontario, has been appointed as the investment manager to the Fund pursuant to an investment management agreement dated February 18 th, 2011 (as amended from time to time, the Investment Management Agreement ) between the Fund and the Manager. The Manager will be solely responsible for providing investment management services to the Fund and or the trading and investment of the Fund s assets, as well as marketing support. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements, prepared in accordance with Canadian generally accepted accounting principles [ GAAP ], include estimates and assumptions used by management that affect the reported amounts of assets, liabilities, income and expenses during the reporting period. Actual results may differ from these estimates. The following is a summary of the significant accounting policies followed by the Fund: Valuation of Investments For financial reporting purposes, investments are valued at their fair values in accordance with CICA Handbook Section 3855, Financial Instruments Recognition and Measurement [ Section 3855 ]. Investments are valued at the bid price recorded by the securities exchanges on which such investments are principally traded at the financial reporting date. Securities not traded on the valuation date are valued at the last recorded bid price used on the previous valuation day if the former is not available. Securities not listed on an exchange, or that are traded over-the-counter, are valued at their fair values thereof as determined by the Manager in accordance with the methodologies provided in Section 3855. For all other purposes, including the processing of Unitholder ( Unitholder ) transactions, the Fund values securities using the methods prescribed in its Declaration of Trust, which are based on the last traded price of the security on the principal exchange or market on which it trades. A comparison between Net Assets per Unit ( NAV per Unit ) calculated for financial reporting purposes and NAV per Unit calculated for processing of Unitholder transactions is included in Note 7. Investment Transactions and Income Recognition The accrual method of recording income and expense is followed by the Fund, with investment transactions accounted for on the trade date basis for financial reporting purposes and dividend income recorded on the ex-dividend date. The unrealized appreciation (depreciation) in the value of a security represents the difference between its fair value and its average cost. Gains and losses on the sale of investments are determined using an average cost basis. Valuation of Fund Units Investors in the trust will become Unitholders. Units may be purchased as of the last Business Day of each week or at such other times as the Manager, in its discretion, may permit (each, a Subscription Day ) at the applicable subscription price (the Subscription Price ). The Net Asset Value (the NAV ) of the Fund means the assets of the Fund, at fair value, less the liabilities of the Fund, at fair value, and any accrued expenses. The NAV per Unit will be the NAV of those assets of the Fund, which are properly attributable to the series of Units of which that Unit forms a part, divided by the number of Units of that series which are issued and outstanding. The NAV of the Fund and NAV per Unit will be calculated on a weekly basis. Cost of Investments The cost of investments represent the amount paid for each security and is determined on an average cost basis excluding commissions and other transaction costs.
Distribution of Income Each Unitholder's share of income, net of the Fund's expenses, and net realized capital gains, as calculated in accordance with the Income Tax Act (Canada), is distributed, and either paid or reinvested annually. Foreign Currency Translation Certain of the Fund's transactions are affected in foreign currencies. Fair value of investment securities, assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the London closing daily rate of exchange. Purchases and sales of foreign securities and the related income are translated into Canadian dollars at the rate of exchange on the transaction date. Transaction Costs Commissions and other transaction costs are incremental costs that are directly attributable to the acquisition, issue, or disposal of an investment, which include fees and commissions paid to agents, advisors, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Financial Instruments The Fund s financial instruments include investments, receivables for portfolio securities sold, receivable for units issued, foreign tax reclaims receivable, accrued interest and dividends receivable and payable for portfolio securities purchased. Investments are classified as held for trading and carried at fair value. All other financial instruments are designated as loans and receivables or financial liabilities, as applicable, and reported at amortized cost. 3. EXPENSES Management Fees Management fees are calculated based on the NAV of each series on the last Business Day of each calendar month, and are payable to the Manager at the end of each month, in arrears. The management fee is calculated at the rate of 1.0% per annum based on the NAV of each series for Series A Units and Series C Units. Management fees in respect of Series I Units will be charged by the Manager, and not the Fund. Operating Fees The Fund is responsible for the payment of all costs, charges, and expenses incurred in connection with the operating and marketing and investigating potential investments and due diligence of the Fund, which include custodial fees, trustee fees, accounting fees, audit fees, registration and filing fees, printing costs, marketing costs, etc. Performance Fees The Fund also pays the Manager a performance fee (the Performance Fee ), payable on an annual basis at its fiscal year-end. The Manager may change the frequency of this payment upon prior notification to the Unitholders. The Performance Fee will be equal to 10% of the increase in the NAV of the investment of each Unitholder at its fiscal year-end. To the extent that the Performance Fee in respect of the investment in any period is negative, then the negative amount will be carried forward and deducted from any positive Performance Fee in respect of the Unitholder s investment in future periods. In certain cases related to Unitholder redemptions, a Performance Fee will be realized and paid on the portion of the accrued Performance Fees attributable to the net gains relating to the specific assets withdrawn pursuant to such redemptions. 4. UNITS OUTSTANDING The capital of the Fund is divided into an unlimited number of Units, issuable in series. An unlimited number of Series A Units, Series C Units and Series I Units are being offered hereby. Each Unit entitles the holder to the same obligations as a holder of any other Unit of the same series. The Fund may from time to
time create and issue Units in different series with differing Management fees, Performance Fees, distribution and redemption provisions and other features particular to each series. The following table summarizes the changes in the number of units for the period ended June 30, 2011: Series A Series C 2011 2011 Units outstanding - beginning of period - - Units issued and paid during this period 180,054 105,816 Units redeemed during the period - - Units issued in reinvestment of distributions - - Units outstanding end of period 180,054 105,816 5. INCOME TAXES Pursuant to the Income Tax Act (Canada) as presently enacted the Fund is taxable entities in Canada. All income earned by the Fund for tax purposes is allocated to its Unitholders. As a result, no Canadian income taxes are reflected in financial statements. 6. BROKERAGE COMMISSIONS Total commissions paid on securities transactions for the period ended June 30, 2011 were $208. These commissions were paid to brokerage firms providing both execution and research services. 7. COMPARISON OF NET ASSETS PER UNIT AND NET ASSET VALUE PER UNIT The Net Assets per Unit ( Net Assets per Unit ) as reported in the Statement of Net Assets is determined by using the valuation policies described in Note 2. The NAV per Unit used for processing Unitholder transactions differs in that investments that are traded in active markets are valued at their last-traded price as reported by a principal securities exchange. The following is a comparison of Net Assets per Unit and NAV per Unit as at June 30, 2011. Net Assets per Unit NAV per Unit 2011 2011 Series A 9.73 9.73 Series C 9.71 9.71 8. Forward foreign exchange contracts The Fund has the following forward foreign exchange contracts outstanding as at June 30, 2011: S&P Credit Settlement Unrealized Sale Amount Purchase Amount Counterparty Rating Date Gain (loss) $ USD 500,000 CNY 3,215,000 Bank of New York Mellon Corp (The) A-1+ 2011/12/05 (420) Payable on forward foreign exchange contracts (420)
9. Futures contracts The Fund has the following futures contracts outstanding as at June 30, 2011. Futures Contracts Maturity Number Contract Market Value Unrealized Type of Contract Date of Contracts Price of Contract Gain (Loss) $ $ $ British LIF LONG GILT Bond September 2011 (10) (1,876,425) (1,861,628) 14,797 United States Treasury Bond September 2011 (20) (2,402,873) (2,374,749) 28,124 Total (4,279,298) (4,236,377) 42,921 10. RISK DISCLOSURE The Fund's activities expose it to a variety of financial risks including market risk (which includes currency risk, interest risk, and other price risk), credit risk and liquidity risk. Financial Instrument Risk The investment objective of the Fund is to provide long-term growth through capital appreciation by investing primarily in sovereign fixed income securities of global industrial, emerging and developed countries, and exchange traded and over-the-counter derivatives. The Fund s overall risk management program seeks to minimize the potentially adverse effect of risk on the Fund s financial performance in a manner consistent with the Fund s investment objective. Currency Risk Investments denominated in currencies other than the Canadian dollar, which is the Fund s functional currency, expose the Fund to fluctuations in foreign exchange rates. Equities trading in foreign markets are also exposed to currency risk as the price in local terms on the foreign securities exchanges are converted to Canadian dollars to determine fair value. The table below indicates the currencies to which the Fund had significant exposure as at June 30, 2011. Currency risk exposed holdings Forward foreign exchange contracts Net Exposure As a % of Net Assets Australia, Dollars 1,006,661 1,024,547 2,031,208 73 Britain, Pound (20,440) - (20,440) (1) China, Renminbi - 484,036 484,036 17 United States, Dollars 462,572 (484,456) (21,884) (1) Total 1,448,793 1,024,127 2,472,920 88 As at June 30, 2011, had the Canadian dollar strengthened or weakened by 5% in relation to all currencies, with all other variables held constant, net assets would have decreased or increased, respectively, by approximately $131,775. In practice, the actual trading results may differ from this sensitivity analysis and the difference could be material.
Interest Rate Risk Interest rate risk refers to the effect on the fair value of the Fund s assets and liabilities due to fluctuations in interest rates. As at June 30, 2011, the Fund did not have significant exposure to interest rate risk, given that the majority of the Fund s financial instruments are in short-term investments. Credit Risk The Fund is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. All transactions in listed securities are settled upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligations. The main concentration of credit risk would be where a fund invests in debt instruments and derivatives. The fair value includes consideration of the credit worthiness of the issuer and therefore represents the maximum credit exposure of the Fund. The Fund also invests in derivative instruments such as forward contracts; therefore, it is subject to credit risk if the counterparty fails to meet its obligation. The Manager may choose to utilize multiple counterparties and those that have a high credit rating in order to minimize credit risk. The following ratings were primarily based on ratings issued by Standard & Poor s and DBRS. The maximum exposures to credit risk relating to financial assets and liabilities are as reflected on the Statement of Net Assets. Ratings for securities that subject the Fund to credit risk at June 30, 2011 are noted below: Portfolio by category As a % of Net Assets Rating 2011 AAA 74 AA - A - Below BBB - Total 74 Other Price Risk Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market conditions (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual investment, or factors affecting all securities traded in the market. The maximum risk resulting from financial instruments held long is determined by the fair value of the instrument. The maximum risk resulting from financial instruments held short is unlimited. As at June 30, 2011, a 5% change in stock prices would have no change to the Fund's net assets with all other factors held constant. In practice, the actual results may differ from this sensitivity analysis and the difference could be material. Liquidity Risk Liquidity risk exists when a Fund may not be able to settle or meet its obligation on time or at a reasonable price. The Fund is exposed to daily cash redemptions of redeemable units. The units of the Fund are issued and redeemed on demand at the then current NAV per Unit at the option of the Unitholder. Liquidity risk is managed by investing the majority of the Fund s assets in investments that are traded in an active market and can be readily disposed. The Fund retains sufficient cash and cash equivalent positions to maintain adequate liquidity. All liabilities of the Fund mature in three months or less. 11. FAIR VALUE MEASUREMENTS The Manager has categorized the Fund s financial instruments, based on the priority of the inputs to the valuation technique into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities [Level 1] and the lowest priority to unobservable inputs [Level 3]. If the inputs used to measure the financial instruments
fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Financial assets and liabilities are recorded based on the three levels of the fair value hierarchy under CICA Handbook Section 3862 Financial Instruments Disclosures as follows: Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date; Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; Level 3 Inputs for the asset or liability that are unobservable. Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes observable requires significant judgment by the Manager. The Manager considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Manager's perceived risk of that instrument. Investments whose values are based on quoted market prices in active markets, and are therefore classified within Level 1, include active listed equities and certain money market securities. The investments classified within Level 1 are valued at the bid price recorded by the securities exchanges on which such investments are principally traded at the financial reporting date. Securities not traded on the valuation date are valued at the last recorded bid price used on the previous valuation day if the former is not available. The Manager does not adjust these prices for such instruments, even in situations where the Funds hold a large position and a sale could reasonably impact the quoted price. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently or not at all. The Fund did not hold any investments classified within Level 3 as at June 30, 2011. The following tables summarize the inputs used as at June 30, 2011 in valuing the Funds investments at fair value. Description Level 1 Level 2 Level 3 Total Short-Term Investments - 2,054,989-2,054,989 Total Investments - 2,054,989-2,054,989 Derivative assets 45,334 1,524,237-1,569,571 Derivative liabilities - (1,549,988) - (1,549,988 ) During the period ended June 30, 2011, no financial assets and liabilities were transferred between Level 1 and Level 2.
12. NOTICE OF FILING EXEMPTION On behalf of the Fund, the Manager has advised the Ontario Securities Commission ["OSC"] that the Fund is relying on the filing exemption in accordance with part 2.11 of National Instrument 81-106. Consequently, these financial statements will not be filed with the OSC. 13. INTERNATIONAL FINANCIAL REPORTING STANDARDS The Canadian Accounting Standards Board [ CASB ] originally confirmed January 1, 2011 as the date IFRS will replace Canadian GAAP for publicly accountable enterprises, which include investment funds and other reporting issuers. On January 12, 2011, CASB amended the requirement to prepare financial statements in accordance with IFRS as issued by the International Accounting Standards Board, permitting investment companies, which include investment funds, to defer adoption of IFRS to fiscal years beginning on or after January 1, 2013. The Fund has elected to defer adoption of IFRS to January 1, 2013. In preparing to meet the requirements, the Manager has taken the following steps in managing the transition to IFRS: Established a working group to identify key differences between Canadian GAAP and IFRS and to coordinate the implementation of the transition plan, Identified areas where changes in disclosure will be required under IFRS standards, Evaluated current information technology & reporting systems for readiness in IFRS implementation, Assessed the likely impacts on business activity and operational areas such as internal controls, staffing and training requirements. The major changes identified for IFRS financial statements include the addition of a statement of cash flows and the classification of Unitholders equity (puttable instruments) as a liability within the Statement of Net Asset s, unless certain conditions are met. Based on the current evaluation of the differences between Canadian GAAP and IFRS, the adoption of IFRS is expected to have no impact on the calculation of net assets or NAV. IFRS is expected to affect the overall presentation of financial statements and result in additional disclosure in the accompanying notes. However, the Manager s assessment may change if new standards are issued or if the interpretations of current standards are revised.