Schroder International Selection Fund Audited Annual Report

Transcription

1 International Selection Fund Audited Annual Report 31 December 2012 Luxembourg R.C.S Luxembourg B 8.202

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3 International Selection Fund Société d Investissement à Capital Variable (SICAV) Audited Annual Report 31 December 2012 No subscriptions can be received on the basis of periodical reports. Subscriptions are valid only if made on the basis of the current prospectus accompanied by the last available audited annual report or unaudited semi-annual report if published thereafter. This report is based on the current prospectus. Audited annual and unaudited semi-annual reports, the current prospectus and the Articles of Incorporation of the Company are available, free of charge, at the Company s registered office, 5, rue Höhenhof, L-1736 Senningerberg, Grand Duchy of Luxembourg.

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5 International Selection Fund Audited Annual Report 31 December 2012 Page 5 Table of contents International Selection Fund Board of Directors Administration Directors Report Investment Managers Report Notes to the Financial Statements Audit Report Statement of Statement of Changes in Statement of Operations Distribution of Investments by Industry Portfolio of Investments Mainstream Funds Asian Opportunities * EURO European Large Cap Italian Japanese Swiss UK US Large Cap Specialist Funds Asia Pacific Property Securities Asian Yield Asian Smaller Companies Asian Total Return Brazilian BRIC (Brazil, Russia, India, China) China Opportunities Emerging Asia Emerging Europe Emerging s European Dividend Maximiser European Focus European Yield European Smaller Companies European Special Situations European Total Return * Frontier s * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

6 Page 6 International Selection Fund Audited Annual Report 31 December 2012 Table of contents Specialist Funds (cont) Climate Change Demographic Opportunities Dividend Maximiser Emerging Opportunities Energy Yield Property Securities Resources Small Cap Energy Smaller Companies Greater China Hong Kong Indian Japanese Opportunities * Japanese Smaller Companies Korean Latin American Middle East Swiss Opportunities Swiss Small & Mid Cap Taiwanese US Small & Mid-Cap US Smaller Companies Style Funds European Small & Mid-Cap Alpha Funds European Alpha Alpha Japanese Alpha US Alpha Quantitative Funds QEP Active QEP Blend * QEP Core QEP Emerging s * QEP Quality Asset Allocation Funds Tactical Asset Allocation Multi-Asset Funds Asian Diversified Growth * Conservative * * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

7 International Selection Fund Audited Annual Report 31 December 2012 Page 7 Table of contents Multi-Asset Funds (cont) Diversified Growth * Dynamic Balanced * Multi-Asset Income * Japan DGF * Multi Manager Funds Balanced Portfolio * Conservative Portfolio * Growth Portfolio * Absolute Return Funds Asian Bond Absolute Return Emerging Europe Debt Absolute Return Emerging s Debt Absolute Return Mainstream Bond Funds EURO Bond EURO Government Bond EURO Short Term Bond Bond Inflation Linked Bond Hong Kong Dollar Bond US Dollar Bond Specialist Bond Funds Asian Local Currency Bond EURO Corporate Bond EURO High Yield * Corporate Bond High Income Bond High Yield Strategic Bond Specialist Bond Funds (Medium-higher Risk) Asian Convertible Bond Emerging Bond * Emerging Corporate Bond * Emerging Sovereign Bond * Convertible Bond Credit Duration Hedged RMB Fixed Income * Liquidity Funds EURO Liquidity US Dollar Liquidity * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

8 Page 8 International Selection Fund Audited Annual Report 31 December 2012 Table of contents Currency Funds Currency Absolute Return EUR Currency Absolute Return Managed Currency Appendix I - Comparative Statement Appendix II - Audited TER Appendix III - exposure and leverage (unaudited)

9 International Selection Fund Audited Annual Report 31 December 2012 International Selection Fund Page 9 The Company International Selection Fund (the Company ) is an open-ended umbrella company incorporated under Luxembourg law, which enables investors to choose from Funds (specific portfolios of assets and liabilities within the Company having their own net asset value and represented by a separate class or classes of Share) offering different investment objectives. The shares of each Fund are listed on the Luxembourg Stock Exchange. Prices are also available on Bloomberg and Reuters. This report covers the year from 1 January 2012 to 31 December The financial statements are prepared in accordance with Luxembourg regulations relating to undertakings for collective investment. The last day on which prices were calculated was 31 December 2012, the last working day of the year. At the date of this report, 98 Funds were available for investment. Please refer to the current prospectus for the investment objectives of the Funds as well as details of investment restrictions. The monthly Factsheets for each Fund can be obtained from the Company s registered office and are also available on the website of Investment Management (Luxembourg) S.A. ( Hereafter, International Selection Fund will be referred to as the Company and all names of the Funds will be preceded by, e.g., Alpha. Corporate Governance The Company is subject to corporate governance based on: 1. Its obligations as defined by the UCITS Directive 2009/65/EC dated 13 July 2009, as implemented in Luxembourg law which is available for inspection at the registered office of the Company at 5, rue Höhenhof, L-1736 Senningerberg, Grand Duchy of Luxembourg. 2. Its Articles of Incorporation which are available for inspection at the registered office of the Company and at the Luxembourg corporate and trade register, Registre de Commerce et des Sociétés (RCSL). 3. The obligations in respect of the management of the Company, for which the Company has appointed Investment Management (Luxembourg) S.A., which is subject to the requirements of the Management Company Directive 2010/43/EC, as implemented in Luxembourg law. 4. The Association of the Luxembourg Fund Industry (ALFI) code of conduct, which the Company has voluntarily adopted. Internal Control and Risk Management Systems The Board of Directors is responsible for establishing and maintaining adequate internal control and risk management systems of the Company in relation to the financial reporting process. Such systems are designed to manage rather than eliminate the risk of error or fraud in achieving the Company's financial reporting objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board of Directors has contracted with the Management Company to put procedures in place to ensure all relevant accounting records are properly maintained and are readily available, including the production of annual and semi-annual reports. The annual and semiannual reports of the Company are required to be approved by the Board of Directors of the Company and filed with the Commission de Surveillance du Secteur Financier (CSSF) and the Registre de Commerce et des Sociétés (RCSL). The annual statutory financial statements are required to be audited by independent auditors who report to the Board of Directors on their findings. The Board meets at least four times a year and ensures that the Company maintains high standards of integrity and control in its operations and that it possesses adequate governance and means of control as law and regulation demand.

10 Page 10 International Selection Fund Audited Annual Report 31 December 2012 Board of Directors Chairman Massimo Tosato Executive Vice Chairman s PLC 31, Gresham Street London EC2V 7QA United Kingdom Directors Jacques Elvinger Avocat Elvinger, Hoss & Prussen 2, place Winston Churchill L-2014 Luxembourg Grand Duchy of Luxembourg Gavin Ralston Head of Product Investment Management Limited 31, Gresham Street London EC2V 7QA United Kingdom Daniel De Fernando Garcia Independent Director Agatha Christie Madrid Spain Richard Mountford* Chief Executive Officer (Asia Pacific) Investment Management (Hong Kong) Limited Suites 3301, Level 33, Two Pacific Place 88 Queensway, Hong Kong SAR Achim Kuessner Country Head Germany, Austria & CEE Investment Management GmbH Taunustor 2 (Japan Center) Frankfurt Germany Ketil Petersen Country Head Nordic Region Investment Management A/S Store Strandstraede Copenhagen K Denmark Georges-Arnaud Saier Independent Director 49, Avenue George V Paris France The Directors Fees payable to the Independent Directors for the year under review are disclosed in the Notes to the Financial Statements. * Richard Mountford resigned from the Board of Directors with effect from 30 January On the same day, Carlo Trabattoni was appointed a member of the Board of Directors.

11 Administration International Selection Fund Audited Annual Report 31 December 2012 Page 11 Registered Office Management Company, Domiciliary Agent, Principal Paying Agent, Registrar and Transfer Agent 5, rue Höhenhof, L-1736 Senningerberg, Grand Duchy of Luxembourg Investment Management (Luxembourg) S.A. 5, rue Höhenhof, L-1736 Senningerberg, Grand Duchy of Luxembourg Custodian and Fund Administrator Principal Legal Adviser Auditor Investment Managers J.P. Morgan Bank Luxembourg S.A. European Bank & Business Centre, 6, route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg Elvinger, Hoss & Prussen 2, place Winston Churchill, L-2014 Luxembourg, Grand Duchy of Luxembourg PricewaterhouseCoopers, Société coopérative 400, Route d'esch, B.P. 1443, L-1014 Luxembourg, Grand Duchy of Luxembourg Investment Management Limited 31, Gresham Street, London EC2V 7QA, United Kingdom Balanced Portfolio* BRIC (Brazil, Russia, India, China) Conservative Portfolio* Currency Absolute Return EUR Currency Absolute Return Emerging Europe Emerging Europe Debt Absolute Return Emerging s Emerging s Debt Absolute Return EURO Active * EURO Bond EURO Corporate Bond EURO Credit Duration Hedged* EURO EURO Government Bond EURO Government Liquidity* EURO High Yield * EURO Liquidity EURO Short Term Bond European Allocation* European Defensive* European Dividend Maximiser European Alpha European Focus European Yield European Large Cap European Smaller Companies European Special Situations European Total Return* Frontier s Bond Climate Change Demographic Opportunities Diversified Growth* Dividend Maximiser Emerging Opportunities Energy Alpha Yield High Income Bond Inflation Linked Bond Managed Currency Multi-Asset Income* Resources Small Cap Energy Smaller Companies * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

12 Page 12 International Selection Fund Audited Annual Report 31 December 2012 Administration (cont) Investment Managers (cont) Investment Management Limited (cont) 31, Gresham Street, London EC2V 7QA, United Kingdom Tactical Asset Allocation Growth Portfolio* Italian Latin American Middle East QEP Active QEP Blend* QEP Core QEP Emerging s* QEP Quality Strategic Bond UK Investment Management Brasil DTVM S.A. Rua Joaquim Floriano, º andar - cj. 141 / 142, São Paulo SP, Brazil Brazilian Investment Management (Hong Kong) Limited Suites 3301, Level 33, Two Pacific Place, 88 Queensway, Hong Kong SAR Asia Pacific Property Securities Asian Diversified Growth* China Opportunities Emerging Asia Greater China Hong Kong Dollar Bond Hong Kong RMB Fixed Income* Taiwanese Investment Management (Japan) Limited 21st Floor Marunouchi Trust Tower Main, Marunouchi, Chiyoda-Ku, Tokyo , Japan Japanese Japanese Alpha Japanese Opportunities* Japanese Smaller Companies Investment Management North America Inc. 875 Third Avenue, 22nd Floor, New York, New York , United States of America Emerging Bond* Emerging Sovereign Bond* Corporate Bond Credit Duration Hedged High Yield US All Cap* US Dollar Bond US Dollar Liquidity US Alpha US Large Cap US Small & Mid-Cap US Smaller Companies Investment Management (Singapore) Limited 65 Chulia Street, #46-00, OCBC Centre, Singapore , Singapore Asian Bond Absolute Return Asian Yield Asian Local Currency Bond Asian Opportunities* * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

13 Administration (cont) International Selection Fund Audited Annual Report 31 December 2012 Page 13 Investment Managers (cont) Investment Management (Singapore) Limited (cont) 65 Chulia Street, #46-00, OCBC Centre, Singapore , Singapore Asian Smaller Companies Asian Total Return Emerging Corporate Bond* Indian Japan DGF* Korean Investment Management (Switzerland) AG Central 2, CH-8021 Zurich, Switzerland European Small & Mid-Cap Conservative* Dynamic Balanced* Swiss Swiss Opportunities Swiss Small & Mid Cap European Investors Inc. 640 Fifth Avenue, 8th Floor, New York 10019, United States of America Property Securities Fisch Asset Management AG 241 Bellerive, CH-8034, Zurich, Switzerland Asian Convertible Bond Convertible Bond * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

14 Page 14 International Selection Fund Audited Annual Report 31 December 2012 Directors Report On 31 December 2012, the total net assets of International Selection Fund ( the Company ) were EUR 50,213,706,578 compared to EUR 44,787,173,717 on 31 December 2011, an increase of During the year under review, 17 new Funds were made available for investment within the Company: 29 February March March April July July July July July July July July July July July November November 2012 QEP Blend European Total Return QEP Emerging s Multi-Asset Income Asian Diversified Growth Balanced Portfolio Conservative Portfolio Conservative Diversified Growth Dynamic Balanced Growth Portfolio Japan DGF Emerging Bond Emerging Corporate Bond Emerging Sovereign Bond RMB Fixed Income EURO High Yield In addition to the 145 share classes launched in new Funds, the following share classes were also made available during the year: 11 January 2012 European Large Cap C Acc share 4 April 2012 Japanese Alpha I Acc EUR Hedged shares 25 April 2012 Emerging s I Dis GBP shares 30 May 2012 Japanese Alpha C Acc EUR Hedged shares Bond Hedged C Acc shares Asian Local Currency Bond A1 Dis and B Dis shares 5 July 2012 Multi-Asset Income I Acc shares 18 July 2012 US Dollar Bond A1 Dis shares US Alpha A Dis GBP, A1 Acc and B Acc shares 25 July 2012 European Large Cap A Dis GBP and C Dis GBP shares 1 August 2012 European Total Return A Dis GBP, A1 Acc and B Acc shares 22 August 2012 European Total Return E Acc and E Acc GBP Hedged shares US Alpha E Acc and E Acc EUR shares 29 August 2012 Emerging Bond E Acc and E Acc EUR Hedged shares Emerging Corporate Bond E Acc and E Acc EUR Hedged shares Emerging Sovereign Bond E Acc and E Acc EUR Hedged shares 5 September 2012 Tactical Asset Allocation I Acc GBP Hedged shares 12 September 2012 Asia Pacific Property Securities A Acc CHF, A Acc EUR, C Acc CHF and C Acc EUR shares Asian Yield A Acc CHF, A Acc EUR, C Acc CHF and C Acc EUR shares BRIC (Brazil, Russia, India, China) A Acc CHF and C Acc CHF shares Hong Kong A Acc CHF and C Acc CHF shares 14 September 2012 Japan DGF X Acc shares 19 September 2012 Bond I Acc GBP shares 26 September 2012 Asian Diversified Growth I Acc GBP Hedged shares 17 October 2012 Multi-Asset Income C Acc GBP Hedged shares

15 International Selection Fund Audited Annual Report 31 December 2012 Directors Report (cont) Page October 2012 Emerging Bond A1 Dis and B Dis shares Emerging Corporate Bond A1 Dis and B Dis shares Emerging Sovereign Bond A1 Dis and B Dis shares 7 November 2012 Corporate Bond A Dis RMB Hedged shares European Special Situations A Acc GBP, C Acc GBP, A Dis GBP and C Dis GBP shares 14 November 2012 BRIC (Brazil, Russia, India, China) A Acc HKD shares Emerging Asia A Acc HKD shares Emerging Opportunities A Acc HKD shares 12 December 2012 Corporate Bond C Dis EUR Hedged shares US Dollar Bond C Dis EUR Hedged shares 19 December 2012 BRIC (Brazil, Russia, India, China) A Dis EUR shares During the year under review, 2 Funds were liquidated: 19 September 2012 EURO Credit Duration Hedged EURO Government Liquidity Furthermore, the following changes took effect during the year: 9 January 2012 Pacific B1 Acc class was liquidated. 2 April 2012 The initial charges were reduced for C Shares from to of the net assets of Fund. Additionally, Japanese Large Cap changed its name to Japanese Opportunities and Pacific changed its name to Asian Opportunities. 27 April 2012 US Small & Mid-Cap was reopened to new Investors. 19 June 2012 EURO Bond B1 Acc class was liquidated. 19 July 2012 Calculation of performance fees was stopped for European Total Return and US All Cap. 25 July 2012 EURO Active was merged into European Large Cap. 3 September 2012 QEP Dynamic Blend changed its name to QEP Blend. 1 October 2012 Asian Yield C Dis class changed its distribution frequency from quarterly variable to monthly fixed 4 of Total per annum. 7 December 2012 US All Cap was merged into US Alpha. European Allocation was merged into European Total Return. European Defensive was merged into Multi-Asset Income. The Board of Directors International Selection Fund 31 December 2012 The information contained in this report is historical and not necessarily indicative of future performance.

16 Page 16 International Selection Fund Audited Annual Report 31 December 2012 Investment Managers Report economic growth remained slow in 2012, hampered by slowdown in the eurozone and weak corporate and consumer spending. However, the global economy has continued to muddle through, with much stronger activity in emerging markets than developed markets. Furthermore, investors became more confident in the second half of 2012 due to a belief that central banks are committed to helping flagging growth. The US Federal Reserve, the European Central Bank (ECB) and the Bank of Japan announced substantial supportive measures over the year, providing abundant liquidity. The eurozone debt crisis escalated through the first half of the year, causing bond yields to rise sharply in the peripheral economies. This meant that companies struggled to borrow in the financial markets, which hurt profitability and activity. European households also struggled to borrow from banks. The banks were asked to cut debt quite aggressively by the European Banking Authority and the European Central Bank (ECB). With consumers more strapped for cash, there was a substantial hit to demand for imports, which dragged on the world economy. However, investors were reassured by the ECB President s commitment to protecting the single currency announcing in July that the ECB would do whatever it takes to save the euro. This was followed in September by the Outright Monetary Transactions (OMT) bond buying programme. Towards the end of the year Greece pushed through more austerity measures and structural reforms, and fears of a Greek exit from the eurozone waned. In the US, the Federal Reserve (Fed) announced its third round of quantitative easing in September. President Obama secured a second term in November against a very unpromising economic backdrop. A fiscal cliff settlement seems to have averted a recession, but spending and debt issues remain unresolved. Uncertainty over the fiscal position has had consequences with companies suspending investment. The Fed has taken precautionary action by extending monetary easing and in total plans to purchase a combination of treasuries and mortgage-backed securities worth about $85 billion per month. Recent US quarterly corporate earnings were the weakest for three years. However, at least low interest rates are helping activity in the housing market and consumer spending. In fact one brighter spot of 2012 was the US housing market which was initially at the epicentre of the financial crisis. House prices have increased quite significantly and housing is beginning to contribute to growth again. This should have a positive impact on the overall economy. There will be more construction activity, consumers are becoming more confident as house prices rise again and the increase in prices helps bank balance sheets, making banks more willing to lend. Another bright spot in the global economy is China and the other emerging markets, with signs that the Chinese economy is beginning to bottom out. The stimulus that the authorities put into place is beginning to bear fruit and we are seeing a pick up in activity. We are also seeing a pick up in the wider emerging markets, such as Brazil. Equities performance Despite the odds against them, equities had a good 2012, with double digit gains in local currency terms. Investors have been attracted by low valuations and encouraged to take on risk by the clear commitment from central banks to support the global economy, and a belief that the worst is over in the eurozone crisis. In fact some of the best returns came from the eurozone markets. Although the underlying problems have not been solved, investors welcomed the raft of monetary and political measures taken to safeguard the euro and low equity valuations helped a recovery in most indices. Emerging markets also performed well, particularly Asian emerging markets. Along with confirmation of a smooth leadership transition recent economic developments have supported Chinese equities after a period of underperformance. While Japanese equities also performed very well, returns to non-yen investors were reduced as the yen weakened. However, this has been positive for the country s exporters. The market rallied very strongly at the year end after a landslide victory by the Liberal Democratic Party in the election for the Lower House of the Diet. A supplementary budget designed to provide stimulus to the domestic economy is already under consideration by the new government. Fixed income performance Government bonds also continued to perform in 2013 as rock bottom interest rates underpinned the asset class, despite slow global economic growth. However, corporate and high yield bonds have provided very strong returns as investors have taken on more risk. Euro high yield bonds returned more than 27*. Monetary policy announcements were significant positive catalysts for the higher risk markets. The ECB s more proactive approach under Mario Draghi, as well as significant policy announcements in early September, and a new round of quantitative easing in the US all further supported the rally. Emerging market debt also had another year of strong performance with each of the major sub-components of the asset class sovereigns, corporates and local currency posting double digit returns. Looking ahead We see a continuation of the central banks liquidity provision through quantitative easing in the US, UK and Japan. We also expect the ECB to buy short-dated peripheral bonds as part of a bailout package in the first half of the year. Such action is expected to add to investor confidence in risk assets, as should a reduction in political risk in Europe. Although there are major elections in Italy and Germany this year, neither is expected to upset the stability which has descended on Europe since Mario Draghi s whatever it takes speech last summer. The main risk to markets currently emanates from the US. Although the economy has avoided the fiscal cliff, there is uncertainty around the debt ceiling and on whether a sustainable fiscal agreement can be hammered out by politicians who remain ideologically opposed to one another. However, the key test for markets is likely to come later in the year when investors will be looking for some follow-through from loose policy to stronger growth. So far the rally in equity markets has been largely driven by a re-rating effect. Eventually, investors would need to see their faith replaced by hard earnings growth, something which may prove challenging in an environment of fiscal austerity and balance sheet repair. The Investment Managers International Selection Fund 31 December 2012 Source: Datastream Bank of America Merrill Lynch Euro High Yield index. Twelve months to 31 December The information contained in this report is historical and not necessarily indicative of future performance.

17 International Selection Fund Audited Annual Report 31 December 2012 Notes to the Financial Statements as at 31 December 2012 Page 17 The Company The Company was incorporated in Luxembourg on 5 December 1968 as a société anonyme. Pursuant to an Extraordinary General Meeting of Shareholders held on 31 January 1989, the form and name of the Company, as well as its establishment period, was changed to a société d investissement à capital variable ( SICAV ) established for an unlimited period under the name of International Selection Fund. The company qualifies as an undertaking for collective investment (UCI) regulated by the provisions of Part I of the Luxembourg Law of 17 December 2010 regarding undertaking for collective investment (the 2010 law ). Classes of Shares At the date of this report, ten classes of shares are available within the Funds: A, B, C, D, E, I, J, X, A1 & B1 shares. All Funds offer A, B and C shares, apart from the following Funds: Asian Diversified Growth* (offers only A, C, I and A1 shares); Balanced Portfolio* (offers only C, D and A1 shares); Brazilian (offers only A, C, I and A1 shares); Currency Absolute Return EUR (offers only A, C & I shares); Conservative Portfolio* (offers only C, D and A1 shares); EURO High Yield* (offers only A, C & I shares); European Focus (offers only A, C & I shares); European Small & Mid-Cap (offers only A, C & I shares); Conservative* (offers only A and A1 shares); Demographic Opportunities (offers only A & C shares); High Income Bond (offers only A, B, I & A1 shares); Small Cap Energy (offers only A, C & I shares); Tactical Asset Allocation (offers only A, C & I shares); Growth Portfolio* (offers only C, D & A1 shares); Japan DGF* (offers only C, I & X shares); Japanese Opportunities* (offers only A, C, I & A1 shares); QEP Blend* (offers only A, C, & I shares); QEP Core (offers only C & I shares); QEP Emerging s* (offers only A, C, I & A1 shares); RMB Fixed Income* (offers only A, C, E & I shares). Shares are generally issued as Accumulation shares. Distribution shares may be issued within any Fund at the Directors discretion. A list of available Distribution shares may be obtained upon request at the Management Company. In accordance with the provisions of the current prospectus, the Directors may also offer classes in multiple currency denominations. The respective Investment Managers have the ability to hedge the shares of such classes in relation to the Fund currency or in relation to currencies in which the relevant Fund's underlying assets are denominated. Where hedging of this kind is undertaken, the respective Investment Managers may engage, for the exclusive account of such share class, in currency forwards, currency futures, currency option transactions and swaps in order to preserve the value of the reference currency against the Fund currency. Where undertaken, the effects of this hedging will be reflected in the Asset and, therefore, in the performance of such additional share class. Similarly, any expenses arising from such hedging transactions will be borne by the class in relation to which they have been incurred. The classes of share available for each Fund are set out in detail in the current prospectus. The Directors may decide from time to time for some or all of the Bond Funds to issue duration hedged share classes. Duration hedged share classes utilise hedging strategies that seek to reduce the share class' sensitivity to changes in interest rate movements. There is no assurance that these hedging strategies will be successful. Where undertaken, the effects of this hedging will be reflected in the Asset and, therefore, in the performance of the share class. Similarly, any expenses arising from such hedging transactions will be borne by the duration hedged share class. The performance of the duration hedged share classes may underperform other share classes in the Bond Funds depending on interest rate movements. Duration hedged share classes can be issued in relation to any type of available share classes of Bond Funds. The naming convention used for the share classes is as follows: A Acc for base currency share class; A Acc CCY for a multicurrency share class; A Acc CCY Hedged for a hedged share class. Initial Charge The Management Company and Distributors are entitled to the initial charge, which can be partly or fully waived at the Directors discretion. A Shares Initial charge of up to of the Asset per Share A1 Shares Initial charge of up to of the Asset per Share C and E Shares Initial charge of up to of the Asset per Share B, B1, D, I, J and X Shares No initial charge * * * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

18 Page 18 International Selection Fund Audited Annual Report 31 December 2012 Notes to the Financial Statements Distribution Charge A, C, E, I, J and X Shares No distribution charge B Shares * Funds Absolute Return Funds Bond Funds Defensive Funds Liquidity Funds Currency Funds Asset Allocation Funds Multi-Asset Funds D Shares *** A1 Shares *** B1 Shares *** Distribution charge of 0.60 per annum of the net assets of Funds Distribution charge of 0.50 per annum of the net assets of Funds Distribution charge of 0.50 per annum of the net assets of Funds with the exception of: 0.10 per annum of the net assets of EURO Short Term Bond Distribution charge of 0.55 per annum of the net assets of Funds Distribution charge of 0.10 per annum of the net assets of Funds with the exception of: 0.00 per annum of the net assets of US Dollar Liquidity Distribution charge of 0.50 per annum of the net assets of Funds Distribution charge of 0.60 per annum of the net assets of Funds Distribution charge of 0.60 per annum of the net assets of Funds with the exception of: 0.80 per annum of the net assets of Diversified Growth ** Distribution charge of 1.00 per annum of the net assets of Funds Distribution charge of 0.50 per annum of the net assets of Funds with the exception of: 0.60 per annum of the net assets of Balanced Portfolio**, Conservative Portfolio** and Growth Portfolio** 0.10 per annum of the net assets of EURO Liquidity 0.00 per annum of the net assets of US Dollar Liquidity Distribution charge of 1.25 per annum of the net assets of Funds (including a shareholder servicing fee of 0.25 p.a.) with the exception of: 1.30 per annum of the net assets of Balanced Portfolio** and Growth Portfolio** 1.15 per annum of the net assets of Conservative Portfolio** 0.60 per annum of the net assets of Conservative** Minimum Subscription, Minimum Additional Subscription and Minimum Holding In accordance with the provisions of the current prospectus, minimum amounts for subscription, additional subscription and holding are as follows: A, A1, B, B1 and D Shares The minimum initial subscription, additional subscription and holding amount is EUR 1,000 or 1,000 or their near equivalent in any other freely convertible currency. **** C and E Shares The minimum initial subscription and holding amount is EUR 500,000 or 500,000 or their near equivalent in any other freely convertible currency. The minimum additional subscription amount is EUR 250,000 or 250,000 or their near equivalent in any other freely convertible currency. **** E Shares will only be available, with prior agreement of the Management Company. I & J Shares The minimum initial subscription and holding amount is EUR 5,000,000 or 5,000,000 or their near equivalent in any other freely convertible currency. The minimum additional subscription amount is EUR 2,500,000 or 2,500,000 or their near equivalent in any other freely convertible currency. **** I shares will only be offered to investors who, at the time the relevant subscription order is received, are clients of s with an agreement covering the charging structure relevant to the clients investments in such shares and who are Institutional Investors. J Shares will only be offered to and can only be acquired by Japanese Fund of Funds, which are Institutional Investors. X Shares The minimum initial subscription and holding amount is EUR 25,000,000 or 25,000,000 or their near equivalent in any other freely convertible currency. The minimum additional subscription amount is EUR 12,500,000 or 12,500,000 or their near equivalent in any other freely convertible currency. **** X shares will only be available, with prior agreement of the Management Company, to institutional investors, as may be defined from time to time by the guidelines or recommendations issued by the Luxembourg supervisory authority. Further details on specific features of the different classes of shares and the conditions under which initial and distribution fees are calculated can be found in the current prospectus. * Distribution charges in respect of B shares are payable quarterly. ** Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review. *** Distribution charges in respect of A1, B1 and D shares are paid at such intervals, as may be agreed upon from time to time between the Company and those Distributors that are appointed specifically for the purpose of distributing such shares. **** These minima may be waived from time to time at the discretion of the Directors.

19 International Selection Fund Audited Annual Report 31 December 2012 Notes to the Financial Statements Page 19 Asset Calculation of Asset per Share The Asset per share of each class is calculated on each Dealing Day in the currency of the relevant class. It is calculated by dividing the Asset attributable to each class, being the proportionate value of its assets less its liabilities, by the number of shares of such class then in issue. The resulting sum is rounded to the nearest two decimal places. Further details on rules that apply in valuing total assets can be found in the current prospectus. Valuation of the of the Company The value of securities, financial derivative instruments and assets is determined on the basis of the last available price on the stock exchange or any other regulated market on which those securities or assets are traded or admitted for trading. Where such securities or other assets are quoted or dealt in on more than one stock exchange or any other regulated market, the Directors shall make regulations for the order of priority in which stock exchanges or other regulated markets shall be used for the provision of prices of securities or other assets. If a security is not traded on or admitted to any official stock exchange or any other regulated market or, in the case of securities so traded or admitted, the last available price does not reflect their true value, the Directors are required to proceed on the basis of their expected sales price, which shall be valued with prudence and in good faith. Financial derivative instruments, which are not listed on any official stock exchange or any other regulated market, are valued in accordance with market practice. The swaps are valued at their fair value based on the underlying securities (at close of business or intraday) as well as on the characteristics of the underlying commitments. Units or shares in undertakings for collective investments are valued on the basis of their last available net asset value. Liquid assets and money market instruments held within the liquidity Funds are usually valued on an amortised cost basis. The value of any cash in hand or on deposit, bills and demand notes and accounts receivable, prepaid expenses, cash dividends and interest declared or accrued as aforesaid and not yet received shall be deemed to be the full amount thereof, unless in any case the same is unlikely to be paid or received in full, in which case the value thereof shall be arrived at after making such discount as the Company may consider appropriate in such case to reflect the true value thereof. Any assets or liabilities in currencies other than the base currencies of the Funds will be converted using the relevant spot rate quoted by a bank or other responsible financial institution. If any of the aforesaid valuation principles do not reflect the valuation method commonly used in specific markets or if any such valuation principles do not seem accurate for the purpose of determining the value of the Company s assets, the Directors may fix different valuation principles in good faith and in accordance with generally accepted valuation principles and procedures. The Directors are authorised to apply other appropriate valuation principles for the assets of the Funds and/or the assets of a given class if the aforesaid valuation methods appear impossible or inappropriate due to extraordinary circumstances or events. As of 31 December 2012, fair valuation was applied to the following securities: Security Name Fund Anglo Irish Bank QEP Core Caja de Ahorros del Mediterraneo QEP Core Chaoda Modern Agriculture QEP Active Daqing Dairy Holdings Ltd. QEP Blend * Fook Woo Group Asian Smaller Companies Jurong Technologies QEP Active Longtop Financial Hong Kong Parmalat Finanziaria EURO Parmalat Finanziaria European Alpha Parmalat Finanziaria Italian Peace Mark European Alpha Sharp SP I Interest Margin Trust 2006-HE3N NA /06/2036 Strategic Bond Teton Advisors QEP Core Valeura Energy Warrants 09/02/2016 Small Cap Energy Ya Hsin Industrial QEP Active * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

20 Page 20 International Selection Fund Audited Annual Report 31 December 2012 Notes to the Financial Statements Fair Pricing In accordance with the provisions of the current prospectus, fair value pricing may be implemented to protect the interests of the Company s shareholders against market timing practices. Accordingly, if a Fund is primarily invested in markets that are closed for business at the time the Fund is valued, the Directors may, during periods of market volatility and by derogation from the provisions above under Calculation of Asset per share, cause the Fund Administrator to allow for the Asset per share to be adjusted to reflect more accurately the fair value of the Fund s investments at the point of valuation. The level of adjustment is based upon the movement in a chosen surrogate up until the point of valuation, provided that such movement exceeds the threshold as determined by the Directors for the relevant Fund. The surrogate will usually be in the form of a futures index but might also be a basket of securities, which the Directors believe is strongly correlated to and representative of the performance of the Fund. Where an adjustment is made as per the foregoing, it is applied consistently to all classes of shares in the same Fund. During the year under review, fair value pricing was applied to 24 Funds. The Directors, however, reserve the right to extend the implementation of fair value pricing in respect of other Funds whenever they deem it appropriate. The Funds in relation to which fair value pricing was applied during the year under review as well as details of the relevant reference indices, thresholds and surrogates are shown below: Fund Threshold Surrogate Brazilian 0.50 Bovespa Futures Climate Change 0.50 S&P 500 Futures Demographic Opportunities 0.50 S&P 500 Futures Dividend Maximiser 0.50 S&P 500 Futures Energy 0.50 S&P 500 Futures 0.50 S&P 500 Futures Alpha 0.50 S&P 500 Futures Yield 0.50 S&P 500 Futures Property Securities 0.50 S&P 500 Futures Resources 0.50 S&P 500 Futures Smaller Companies 0.50 S&P 500 Futures Japanese 0.50 Nikkei 225 Futures Japanese Alpha 0.50 Nikkei 225 Futures Japanese Large Cap 0.50 Nikkei 225 Futures Japanese Smaller Companies 0.50 Nikkei 225 Futures Latin American 0.50 S&P 500 Futures QEP Active 0.50 S&P 500 Futures QEP Core 0.50 S&P 500 Futures QEP Quality 0.50 S&P 500 Futures US All Cap * 0.50 S&P 500 Futures US Alpha 0.50 S&P 500 Futures US Large Cap 0.50 S&P 500 Futures US Small & Mid-Cap 0.50 S&P 500 Futures US Smaller Companies 0.50 S&P 500 Futures On 31 December 2012, the last working date of the year under review, the following Funds were adjusted. Fund Currency Total Adjustment Climate Change 744,950 Demographic Opportunities 58,495 Dividend Maximiser 694,516 Energy 3,527, ,288 Alpha 3,605,546 Yield 272,986 Property Securities 3,077,233 Resources 18,781 Smaller Companies 1,022,481 Latin American 3,034,058 QEP Active 3,667,731 QEP Core 2,780,278 QEP Quality 5,243,367 US Alpha 230,842 US Large Cap 4,859,544 US Small & Mid-Cap 7,951,478 US Smaller Companies 3,495,199 * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.

21 International Selection Fund Audited Annual Report 31 December 2012 Notes to the Financial Statements Page 21 Exchange Rates The exchange rates used for the valuation of the Asset as at 31 December 2012 are: 1 EUR = ; 1 EUR = GBP; 1 EUR = CHF; 1 EUR = JPY; 1 EUR = HKD; 1 EUR = Renminbi. Swing Pricing Adjustment A Fund may suffer dilution of the Asset per Share due to investors buying or selling Shares in a Fund at a price that does not reflect the dealing and other costs that arise when security trades are undertaken by the Investment Manager to accommodate cash inflows or outflows. In order to counter this impact, a Swing Pricing mechanism may be adopted to protect the interests of Shareholders of the Fund. If on any Valuation Date, the aggregate net transactions in Shares of a Fund exceed a pre-determined threshold, as determined and reviewed for each Fund on a quarterly basis by the Management Company, the Asset per Share may be adjusted upwards or downwards to reflect net inflows and net outflows respectively. The net inflows and net outflows will be determined by the Management Company based on the latest available information at the time of calculation of the Asset per Share. The Swing Pricing mechanism may be applied across all Funds. The extent of the price adjustment will be set by the Management Company to reflect dealing and other costs. Such adjustment may vary from Fund to Fund and will not exceed 2 of the original Asset per Share. The swing pricing mechanism has been applied to the Company s Funds since 12 January On 31 December 2012, the last working day of the year under review, swing pricing adjustments were applied to Hong Kong Dollar Bond and Credit Duration Hedged. The official Asset s per share of those Funds following the application of the swing pricing adjustment on that date are shown in the following table. All other financial information stated in this report is shown before any adjustments for swing pricing. Hong Kong Dollar Bond HKD Credit Duration Hedged EUR Asset per Share (including swing pricing adjustment) as at 31 December 2012 Class A Dis Class B Dis Class C Dis Class I Dis Class A1 Dis Class A Acc Class B Acc Class C Acc Class I Acc Class A1 Acc Class A Acc Hedged Class A Dis Hedged Class I Acc Hedged Class A1 Acc Hedged Class I Acc GBP Hedged Class I Dis GBP Hedged Taxation The Company is not subject to any taxes in Luxembourg on income or capital gains. The only tax to which the Company in Luxembourg is subject is the taxe d abonnement to a rate of 0.05 per annum based on the net asset value of each Fund at the end of the relevant quarter, calculated and paid quarterly. In respect of any Class of Shares which comprises only institutional investors (within the meaning of the Law of 17 December 2010) and for EURO Liquidity, EURO Government Liquidity and US Dollar Liquidity, the tax levied will be at the rate of 0.01 per annum. The tax is payable quarterly in arrears on the basis of the net assets of the respective Funds at the end of the relevant quarter.

22 Page 22 International Selection Fund Audited Annual Report 31 December 2012 Notes to the Financial Statements Changes in the Funds A list specifying the total purchases and sales for each Fund, which took place during the year under review, may be obtained free of charge upon request at the Company s registered office. Transactions made for a Purpose other than Hedging In accordance with the provisions of the current prospectus, the Company may, for a purpose other than hedging, purchase and sell futures contracts, options on any kind of financial instruments and equity swaps provided that the Company will only enter into equity swap transactions with highly rated financial institutions specialised in this type of transactions. Securities Lending In accordance with the provisions of the current prospectus, the Directors may, in their sole discretion, allow the Company to lend its securities within the framework of a standardised lending system organised by a recognised securities clearing body or by a highly rated financial institution specialised in this type of transaction. After the deduction of Management Company and agent s fees, the Company received 65 of the gross income from the securities lending programme. In December 2012, the Board of Directors took the decision to stop the securities lending program. All loans were recalled effective close of business 27 December On 31 December 2012, there were no securities on loan. Disclosure of Transaction Costs The transaction costs are broker commission fees and taxes related to the purchase and sale of transferable securities. The transaction costs are shown net of the corresponding elements of the swing pricing factors that were applied when net flows in a Fund exceeded 1 on any business day during the year under review. Custodian transaction costs are not included in this table, please refer to the Custodian Fees shown in the Statement of Operations. Bond funds will generally show the figure of zero as the broker commission fees are included in the spread, which is excluded from the calculation pursuant to Annex I, Schedule B, Chapter V of Directive 2009/65/EC of the European Parliament. The transactions costs for the year under review are as follows: Funds Currency Transaction costs Asia Pacific Property Securities 22,923 Asian Bond Absolute Return - Asian Convertible Bond 7,073 Asian Diversified Growth * 3,467 Asian Yield 1,876,206 Asian Local Currency Bond - Asian Opportunities * 546,183 Asian Smaller Companies 85,516 Asian Total Return 1,753,750 Balanced Portfolio * 2,932 Brazilian 29,050 BRIC (Brazil, Russia, India, China) 3,039,025 China Opportunities 589,974 Conservative Portfolio * 2,436 Currency Absolute Return EUR EUR - Currency Absolute Return - Emerging Asia 2,428,697 Emerging Europe EUR 1,163,638 Emerging Europe Debt Absolute Return EUR - Emerging Bond * - Emerging Corporate Bond * - Emerging Sovereign Bond * - Emerging s 3,398,399 Emerging s Debt Absolute Return - EURO Active * EUR 506,239 EURO Bond EUR - EURO Corporate Bond EUR - EURO Credit Duration Hedged * EUR - EURO EUR 1,500,328 EURO Government Bond EUR - EURO Government Liquidity * EUR - EURO High Yield * EUR - EURO Liquidity EUR - EURO Short Term Bond EUR - European Allocation * EUR 10,927 * Please refer to the Directors Report for the details of all corporate actions that occurred during the year under review.