Lazard/Wilmington Capital Allocator Managed Global Income Portfolio Annual Report December 31, 2015

Transcription

1 Lazard/Wilmington Capital Allocator Managed Global Income Portfolio Annual Report

2 Table of Contents Page Independent Auditor s Report 1 Portfolio of Investments 2 Statement of Assets and Liabilities 3 Statement of Operations 4 Statement of Changes in Net Assets 5 Financial Highlights 6 Notes to Financial Statements 7-14

3 Independent Auditor s Report To the Trustee of Lazard/Wilmington Capital Allocator Managed Global Income Portfolio: We have audited the accompanying financial statements of Lazard/Wilmington Capital Allocator Managed Global Income Portfolio ( the Portfolio ), which comprise the statement of assets and liabilities, including the portfolio of investments, as of, and the related statements of operations, of changes in net assets and the financial highlights for the year then ended. These financial statements and financial highlights are hereafter collectively referred to as "financial statements". Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Portfolio s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolio s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lazard/Wilmington Capital Allocator Managed Global Income Portfolio at December 31, 2015, and the results of its operations, changes in its net assets and the financial highlights for the year then ended, in accordance with accounting principles generally accepted in the United States of America. April 13, 2016 PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, MA T: (617) , F: (617) , 1

4 Portfolio of Investments Description Shares Value Exchange-Traded Note 0.7% VelocityShares Daily Inverse VIX Short-Term ETN (Identified cost $97,578) 3,620 $ 93,396 Exchange-Traded Funds 85.1% Equity Funds 31.8% First Trust NASDAQ Global Auto Index Fund 4, ,423 Guggenheim S&P 500 Equal Weight ETF 3, ,697 ishares Currency Hedged MSCI Eurozone ETF 9, ,809 ishares MBS ETF 13,165 1,417,870 ishares MSCI Europe Small-Cap ETF 4, ,591 ishares MSCI Eurozone ETF 9, ,581 ishares MSCI Japan ETF 17, ,131 ishares MSCI Japan Small-Cap ETF 4, ,596 ishares North American Tech ETF 4, ,497 ishares U.S. Consumer Services ETF 1, ,398 PowerShares Aerospace & Defense Portfolio 7, ,608 SPDR Barclays Convertible Securities ETF 3, ,056 4,154,257 Description Shares Value Fixed-Income Funds 53.3% ishares Agency Bond ETF 1,325 $ 149,924 ishares CMBS ETF 2, ,114 ishares Core U.S. Aggregate Bond ETF 22,850 2,468,028 ishares Core U.S. Credit Bond ETF 13,840 1,476,866 ishares Core U.S. Treasury Bond ETF 72,975 1,828,753 PowerShares Fundamental High Yield Corporate Bond Portfolio 29, ,096 Vanguard Short-Term Corporate Bond ETF 4, ,101 6,946,882 Total Exchange-Traded Funds (Identified cost $11,266,318) 11,101,139 Closed-End Management Investment Company 1.9% Eaton Vance Limited Duration Income Fund (Identified cost $251,514) 19, ,737 Short-Term Investment 12.2% SSGA U.S. Government Money Market Fund (Identified cost $1,590,921) 1,590,921 1,590,921 Total Investments l 99.9% (Identified cost $13,206,331) (a) $ 13,030,193 Cash and Other Assets in Excess of Liabilities l 0.1% 18,587 Net Assets l 100.0% $ 13,048,780 Forward Currency Sale Contracts open at : Currency Counterparty Settlement Date Quantity Cost on Origination Date^ Unrealized Depreciation EUR SSB 02/18/16 102, ,000 $ 2,428 EUR SSB 02/18/16 253, ,403 5,040 Total Forward Currency Sale Contracts $ 7,468 ^ In USD unless otherwise indicated. Notes to Portfolio of Investments: (a) The Portfolio, at all times, maintains portfolio securities in sufficient (a) amount to cover its obligations related to investments in forward (a) currency contracts. Abbreviations: ETF Exchange-Traded Fund ETN Exchange-Traded Note EUR Euro SSB State Street Bank and Trust Co. USD United States Dollar The accompanying notes are an integral part of these financial statements. 2

5 Statement of Assets and Liabilities Assets Investments in securities, at value (cost $13,206,331) $ 13,030,193 Receivables for: Units sold 59,133 Dividends 6,894 Amount due from Sub-Advisor (Note 4) 1,178 Total Assets 13,097,398 Liabilities Payables for: Professional fees 23,220 Custodian fees (Note 5) 8,708 Units redeemed 5,245 Unitholders' services fees (Note 5) 3,476 Gross unrealized depreciation on forward currency contracts 7,468 Other accrued expenses and payables 501 Total Liabilities 48,618 Net Assets $ 13,048,780 Class 6 Net Assets $ 13,048,780 Units Outstanding 1,298,221 Net Asset Value per Unit $ The accompanying notes are an integral part of these financial statements. 3

6 Statement of Operations For the Year Ended Investment Income Income Dividends $ 302,836 Total investment income 302,836 Expenses Investment advisory fees (Note 4) 60,883 Custodian fees (Note 5) 33,626 Professional fees 27,364 Unitholders' services fees (Note 5) 15,977 Other 500 Total gross expenses 138,350 Investment advisory fees waived (Note 4) (59,202) Total net expenses 79,148 Net investment income 223,688 Net Realized and Unrealized Gain (Loss) on Investments, Foreign Currency Transactions and Forward Currency Contracts Net realized gain on: Investments 109,573 Foreign currency transactions and forward currency contracts 4,070 Total net realized gain on investments, foreign currency transactions and forward currency contracts 113,643 Net change in unrealized appreciation (depreciation) on: Investments (451,753) Forward currency contracts (7,468) Total net change in unrealized appreciation (depreciation) on investments and forward currency contracts (459,221) Net realized and unrealized loss on investments, foreign currency transactions and forward currency contracts (345,578) Net decrease in net assets resulting from operations $ (121,890) The accompanying notes are an integral part of these financial statements. 4

7 Statement of Changes in Net Assets For the Year Ended Increase (Decrease) in Net Assets Operations: Net investment income $ 223,688 Net realized gain on investments, foreign currency transactions and forward currency contracts 113,643 Net change in unrealized appreciation (depreciation) on investments and forward currency contracts (459,221) Net decrease in net assets resulting from operations (121,890) Unitholder Transactions: Proceeds from units sold 2,171,533 Cost of units redeemed (7,218,496) Net decrease in net assets from unitholder transactions (5,046,963) Total decrease in net assets (5,168,853) Net assets at beginning of year 18,217,633 Net assets at end of year $ 13,048,780 Changes in Units: Class 6 Units outstanding at beginning of year 1,793,301 Units sold 214,410 Units redeemed (709,490) Net decrease in units (495,080) Units outstanding at end of year 1,298,221 The accompanying notes are an integral part of these financial statements. 5

8 Financial Highlights - Class 6 Selected data per unit outstanding throughout the year ended Net asset value, beginning of year $ Income (loss) from investment operations: Net investment income (a) 0.15 Net realized and unrealized loss (0.26) Total from investment operations (0.11) Net asset value, end of year $ Total Return (b) % Ratios and Supplemental Data: Net assets, end of year (in thousands) $ 13,049 Ratios to average net assets (c): Net expenses 0.52 % Gross expenses 0.91 % Net investment income 1.47 % (a) (b) (c) Net investment income has been computed based on the average daily units outstanding. Certain expenses of the Portfolio have been waived by the Sub-Advisor; without such waiver of expenses, the Portfolio's return would have been lower. Total return calculation is based on the value of a single unit of participation outstanding throughout the year. It represents the percentage change in the net asset value per unit between the beginning of the year and end of the year and assumes reinvestment of all distributions, if any. The calculation includes only those expenses charged directly to the Portfolio. Individual unitholders may incur administration or other fees related to the management or maintenance of their individual unitholder accounts, which would have the effect of reducing a unitholder's net return on their investments in the Portfolio. An individual unitholder s return may also vary based on the timing of capital transactions and fees. Ratios to average net assets do not reflect expenses charged directly to the unitholders. An individual unitholder s ratios to average net assets may vary based on the timing of capital transactions and fees. The accompanying notes are an integral part of these financial statements. 6

9 Notes to Financial Statements (1) Organization Lazard/Wilmington Capital Allocator Series Collective Trust (the "Trust") is a trust formed pursuant to a Declaration of Trust dated February 13, 2007, as amended and/or restated from time to time and governed by the laws of the State of Delaware. The Trust is currently comprised of three portfolios: Lazard/Wilmington Capital Allocator Managed Global Equity Portfolio, Lazard/Wilmington Capital Allocator Managed Global Diversified Portfolio and Lazard/Wilmington Capital Allocator Managed Global Income Portfolio (the Portfolio ). This report includes only the results of the Portfolio. The financial statements of Lazard/Wilmington Capital Allocator Managed Global Equity Portfolio and Lazard/Wilmington Capital Allocator Managed Global Diversified Portfolio are presented separately. The Portfolio's investment objective is to achieve preservation of capital with current income by investing all of its assets in ETFs, ETNs and open-end and closed-end investment companies ( Underlying Funds ) that invest primarily in the fixed-income asset class, and the remaining portion of its assets in the Underlying Funds that invest in domestic small-, mid- and large-cap equity asset classes and international equity asset classes, including emerging markets. Please refer to the financial statements of each fund in which the Portfolio invests for disclosure of its investment objective, accounting policies and investment holdings. From January 1, 2015 through October 31, 2015, Wilmington Trust Retirement and Institutional Services Company (the Trustee ), a subsidiary of Wilmington Trust, National Association ( WTNA ), was the Trustee of the Trust and was responsible for maintaining and administering the Trust and the Portfolio. On November 1, 2015, the Trustee was merged with and into its parent and WTNA became the Trustee of the Trust. Lazard Asset Management LLC (the "Sub-Advisor"), a subsidiary of Lazard Frères & Co. LLC, provides sub-advisory services for the investment assets of the Portfolio. State Street Bank and Trust Company (the Custodian ) is the Custodian of the Portfolio and is responsible for custody of the Portfolio's assets and providing transfer agent, recordkeeping and accounting functions. According to the Offering Memorandum, the Portfolio is divided into four classes, which shall be identical except as to expenses to be borne by a particular class. Additional classes may be added by the Trustee in its discretion. As of, the Portfolio had one funded class, Class 6. (2) Significant Accounting Policies The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America ( GAAP ). The Portfolio is an investment company and therefore applies specialized accounting guidance in accordance with Accounting Standards Codification Topic 946. The following is a summary of significant accounting policies consistently followed by the Portfolio in the preparation of the financial statements: (a) Valuation of Investments Market values for securities listed on the New York Stock Exchange (the NYSE ), NASDAQ national market or other US or foreign exchanges or markets are generally based on the last reported sales price on the exchange or market on which the security is principally traded on each valuation date; securities not traded on the valuation date are valued at the most recent quoted bid price. The Portfolio values NASDAQ-traded securities at the NASDAQ Official Closing Price, which may not be the last reported sales price in certain instances. Forward currency contracts generally are valued using quotations from an independent pricing service. Investments in money market funds are valued at the fund s net asset value ( NAV ) per share. The Sub-Advisor may evaluate a variety of factors to determine the fair value of securities for which market quotations are determined not to be readily available or reliable. These factors include, but are not limited to, the type of security, the value of comparable securities, observations from financial institutions and relevant news events. Input from the Sub-Advisor s portfolio managers/analysts also will be considered. 7

10 Notes to Financial Statements (continued) If a significant event materially affecting the value of securities occurs between the close of the exchange or market on which the security is principally traded and the time when the Portfolio s NAV is calculated, or when current market quotations otherwise are determined not to be readily available or reliable (including restricted or other illiquid securities such as certain derivative instruments), such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Sub-Advisor. Non-US securities may trade on days when the Portfolio is not open for business, thus affecting the value of the Portfolio s assets on days when Portfolio unitholders may not be able to buy or sell Portfolio units. (b) Portfolio Securities Transactions and Investment Income Portfolio securities transactions are accounted for on trade date. Realized gain (loss) on sales of investments are recorded on a specific identification basis. Dividend income is recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Portfolio. Interest income, if any, is accrued daily. The Portfolio may be subject to taxes imposed by foreign countries in which it invests. Such taxes are generally based upon income earned or capital gains (realized or unrealized). The Portfolio accrues and applies such taxes to net investment income, net realized gains and net unrealized gains concurrent with the recognition of income earned or capital gains (realized and unrealized) from the applicable portfolio securities. (c) Foreign Currency Translation and Forward Currency Contracts The accounting records of the Portfolio are maintained in US dollars. Portfolio securities and other assets and liabilities denominated in a foreign currency are translated daily into US dollars at the prevailing rates of exchange. Purchases and sales of securities, income receipts and expense payments are translated into US dollars at the prevailing exchange rates on the respective transaction dates. The Portfolio does not isolate the portion of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in their market prices. Such fluctuations are included in net realized and unrealized gain (loss) on investments. Net realized gain (loss) on foreign currency transactions and forward currency contracts represents net foreign currency gain (loss) from forward currency contracts, disposition of foreign currencies, currency gain (loss) realized between the trade and settlement dates on securities transactions, and the difference between the amount of dividends, interest and foreign withholding taxes recorded on the Portfolio s accounting records and the US dollar equivalent amounts actually received or paid. Net change in unrealized appreciation (depreciation) on foreign currency translations reflects the impact of changes in exchange rates on the value of assets and liabilities, other than investments in securities, during the period. A forward currency contract is an agreement between two parties to buy or sell currency at a set price on a future date. Upon entering into these contracts, risks may arise from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the foreign currency relative to the US dollar. The US dollar value of forward currency contracts is determined using quotations provided by an independent pricing service. Daily fluctuations in the value of such contracts are recorded as unrealized appreciation (depreciation) on forward currency contracts. When the contract is closed, the Portfolio records a realized gain (loss) equal to the difference between the value at the time it was opened and the value at the time it was closed. 8

11 Notes to Financial Statements (continued) (d) Tax Reclaims Receivable Tax reclaims receivable, if any, are recorded on the ex-dividend date based upon the interpretation of country-specific taxation of dividend income, which may be subject to change due to changes in country-specific tax regulations regarding amounts reclaimable or the interpretation of country-specific taxation of dividend income and related amounts reclaimable. (e) Income Taxes The Portfolio intends to continue to be exempt from taxation under section 501(a) of the Internal Revenue Code and qualify as a group trust under IRS Revenue Ruling and any amendments thereto, and other applicable IRS rules and regulations. The unitholders are required to report their respective portion of the Portfolio s US taxable income or loss in their own income tax returns and are liable for any related taxes thereon. Accordingly, no provision for federal income taxes is made in the financial statements of the Portfolio. Management has analyzed the Portfolio s tax positions in its major jurisdictions. Based on this review, the Portfolio has identified uncertain tax positions which may give rise to exposure in various non-us jurisdictions in which it trades, such exposure principally arising from capital gains withholding taxes. In each case, the application of the tax law is uncertain. Management concluded that such uncertain tax positions are more-likely-than-not to be sustained upon examination. Therefore, management has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on tax returns filed for open tax year (2014), or expected to be taken in the Portfolio s 2015 tax returns. (f) Distributions to Unitholders Net investment income and net realized gains are retained by the Portfolio. (g) Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets resulting from operations during the reporting period. Actual results could differ from those estimates. (h) Net Asset Value NAV per unit is determined on each day the NYSE is open for business, generally as of the close of regular session trading on the NYSE (normally 4:00 p.m. Eastern time, the Regular Closing Time ). When trading on the NYSE is unexpectedly closed prior to the Regular Closing Time, or an earlier scheduled close (such as on certain days around holidays when the NYSE is scheduled to close before 4:00 p.m.), and remains closed through the time of the Regular Closing Time (or an earlier scheduled close), the NAV of the Portfolio may nonetheless be calculated as of the Regular Closing Time (or an earlier scheduled close) if, in the judgment of the Sub-Advisor, there is sufficient trading in other markets between the unexpected close and the Regular Closing Time (or an earlier scheduled close) for securities for which the NYSE is usually considered the primary market. NAV per unit is determined by dividing the value of the total assets of the Portfolio, less all liabilities, by the total number of Portfolio units outstanding. 9

12 Notes to Financial Statements (continued) (3) Short Term Investment Cash is held by the Custodian which, as contracted on behalf of the Portfolio, sweeps on each business day into the SSGA U.S. Government Money Market Fund, a registered open-end management investment company under the Investment Company Act of 1940 (the 1940 Act ), which is included in the Portfolio of Investments. (4) Sub-Advisor Fees and Expenses Under the Sub-Advisor Agreement, the Sub-Advisor provides the Portfolio with investment research, advice and supervision and furnishes continuously an investment program consistent with the Portfolio s investment objectives and policies, including the purchase, retention and disposition of securities. The Portfolio pays the Sub-Advisor an investment advisory fee at an annual rate of 0.40% of the average daily net assets of Class 6. The investment advisory fees are accrued daily and paid quarterly. The Sub-Advisor has voluntarily agreed to reduce its fees and, if necessary, reimburse the Portfolio if annualized operating expenses (exclusive of taxes, brokerage, interest on borrowings, fees and expenses of Acquired Funds and extraordinary expenses, and excluding other transaction fees) exceed 0.52% of the average daily net assets of Class 6. The Trustee is responsible for certain administrative and financial reporting functions. For these services, the Portfolio pays the Trustee a per annum fee of 0.08% on the first $1 billion of net assets and 0.06% on net assets in excess of $1 billion, subject to a minimum quarterly fee of $75,000 for the aggregate of the Portfolio, Lazard/Wilmington Capital Allocator Managed Global Equity Portfolio, Lazard/Wilmington Capital Allocator Managed Global Diversified Portfolio, Lazard/Wilmington Emerging Markets Portfolio and Lazard/Wilmington Emerging Markets Sudan Free Portfolio. The Trustee does not charge any annual fee with respect to assets attributable to Class 6 of the Portfolio. The trustee fees are accrued daily and paid quarterly. (5) Custody Agreement The Custodian is responsible for the custody of the Portfolio s assets and providing transfer agent, recordkeeping and accounting functions. For these services the Portfolio pays the Custodian a per annum fee of 0.03% on the first $50 million of net assets and 0.01% on net assets in excess of $50 million. The minimum annual fee for the Portfolio is $24,000. The Portfolio also pays the Custodian holding fees and transaction fees for its global custody services. In addition, the Custodian receives a monthly account services fee computed on the basis of the number of unitholder accounts it maintains for the Portfolio during the month, and is reimbursed for certain out-of-pocket expenses. The custodian and unitholders' services fees are accrued daily and paid monthly. (6) Unitholders' Transactions The Portfolio offers units for sale and redemption of its units at the NAV of Class 6 as of the close of each business day. The issuance and redemption terms of the Portfolio are consistent with those of the Underlying Funds. Refer to Statement of Changes in Net Assets for unitholder activities for the year. (7) Investment Risks (a) Non-US Securities Risk The Portfolio invests in securities of foreign entities and in instruments denominated in foreign currencies which involve risks not typically associated with investments in US securities. The Portfolio s performance will be influenced by political, social and economic factors affecting the non-us countries and companies in which the Portfolio invests. Non-US securities carry special 10

13 Notes to Financial Statements (continued) risks, such as less developed or less efficient trading markets, political instability, a lack of company information, differing auditing and legal standards, and, potentially, less liquidity. In addition, investments denominated in currencies other than US dollars may experience a decline in value, in US dollar terms, due solely to fluctuations in currency exchange rates. The Portfolio s investments could be adversely affected by delays in, or a refusal to grant, repatriation of funds or conversion of emerging market currencies. Emerging market countries can generally have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed countries. The economies of countries with emerging markets may be based predominately on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme debt burdens or volatile inflation rates. The securities markets of emerging market countries have historically been extremely volatile. These market conditions may continue or worsen. Significant devaluation of emerging market currencies against the US dollar may occur subsequent to acquisition of investments denominated in emerging market currencies. Investments in these countries may be subject to political, economic, legal, market and currency risks. The risks may include less protection of property rights and uncertain political and economic policies, the imposition of capital controls and/or foreign investment limitations by a country, nationalization of businesses and the imposition of sanctions by other countries, such as the US. (b) Underlying Funds Risk Shares of Underlying Funds in which the Portfolio invests may trade at prices that vary from their NAVs, sometimes significantly. The shares of ETFs and closed-end funds may trade at prices at, below or above their most recent NAV. Shares of closed-end funds, in particular, frequently trade at persistent discounts to their NAV. In addition, the performance of an ETF pursuing a passive index based strategy may diverge from the performance of the index. ETNs may trade in secondary markets, but typically are redeemable by the issuer. The Portfolio s investments in Underlying Funds are subject to the risks of Underlying Funds investments, as well as to the general risks of investing in Underlying Funds. Portfolio shares will bear not only the Portfolio s management fees and operating expenses, but also their proportional share of the management fees and operating expenses of the ETFs and closed-end funds in which the Portfolio invests. While ETNs do not have management fees, they are subject to certain investor fees. ETNs are debt securities that, like ETFs, typically are listed on exchanges and their terms generally provide for a return that tracks specified market indexes. However, unlike ETFs and closed-end funds, ETNs are not registered investment companies and thus are not registered under the 1940 Act. In addition, as debt securities, ETNs are subject to the additional risk of the creditworthiness of the issuer. ETNs typically do not make interest payments. (c) Unitholder Concentration Risk Units in excess of 10% of Portfolio units at were held by two of the Portfolio s unitholders and aggregated to % of the Portfolio s total units outstanding. (d) Counterparty Default Risk Certain investment techniques the Portfolio may employ involve risk that the counterparty to such instruments will become insolvent or otherwise default on its obligation to perform as agreed. In the event of such default, the Portfolio may have limited recourse against the counterparty and may experience delays in the recovery (or loss) of collateral. (8) Contractual Obligations The Portfolio enters into contracts in the normal course of business that contain a variety of indemnifications. The Portfolio's maximum exposure under these arrangements is unknown. Management has reviewed the Portfolio's existing contracts and expects the risk of loss to be remote. 11

14 Notes to Financial Statements (continued) (9) Fair Value Measurements Fair value is defined as the price that the Portfolio would receive to sell an asset, or would pay to transfer a liability, in an orderly transaction between market participants at the date of measurement. The Fair Value Measurements and Disclosures provisions of GAAP also establish a framework for measuring fair value, and a three-level hierarchy for fair value measurement that is based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer, broadly, to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Portfolio. Unobservable inputs reflect the Portfolio's own assumptions about the assumptions that market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances. Each investment's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the overall fair value measurement. The three-level hierarchy of inputs is summarized below: Level 1 unadjusted quoted prices in active markets for identical investments Level 2 other significant observable inputs (including unadjusted quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) Level 3 significant unobservable inputs (including the Portfolio s own assumptions in determining the fair value of investments) Changes in valuation technique may result in transfer into or out of the current assigned level within the hierarchy. The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in these securities. The following table summarizes the valuation of the Portfolio s investments by each fair value hierarchy level as of December 31, 2015: Unadjusted Quoted Prices in Active Markets for Identical Investments (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance as of Description Assets: Exchange-Traded Note $ 93,396 $ $ $ 93,396 Exchange-Traded Funds 11,101,139 11,101,139 Closed-End Management Investment Company 244, ,737 Short-Term Investment 1,590,921 1,590,921 Total $ 13,030,193 $ $ $ 13,030,193 Liabilities: Other Financial Instrument* Forward Currency Contracts $ $ (7,468) $ $ (7,468) * Other financial instruments are derivative instruments which are valued at their respective unrealized appreciation (depreciation). The Portfolio recognizes all transfers between levels as though they were transferred at the beginning of the reporting period. There were no transfers into or out of Levels 1, 2 or 3 during the year ended. 12

15 Notes to Financial Statements (continued) (10) Derivative Instruments The Portfolio may use derivative instruments, including forward currency contracts. Forward currency contracts may be used for hedging purposes or to seek to increase returns. During the year ended, the Portfolio had an average monthly notional exposure of approximately $400,000 for forward currency contracts. The following table summarizes the fair value of derivative instruments on the Statement of Assets and Liabilities as of December 31, 2015: Liability Derivatives Fair Value Foreign Exchange Risk: Gross unrealized depreciation on forward currency contracts $ 7,468 The effect of derivative instruments on the Statement of Operations for the year ended was: Realized Gain (Loss) on Derivatives Amount Foreign Exchange Risk: Net realized gain on foreign currency transactions and forward currency contracts $ 4,310 Net Change in Unrealized Appreciation (Depreciation) on Derivatives Foreign Exchange Risk: Net change in unrealized appreciation (depreciation) on forward currency contracts $ (7,468) As of, the Portfolio holds derivative instruments that are eligible for offset in the Statement of Assets and Liabilities and are subject to master netting arrangements. A master netting arrangement is an agreement between two counterparties who have multiple contracts with each other that provides for the net settlement of all contracts, as well as any cash collateral, through a single payment in the event of default on, or termination of, any one contract. 13

16 Notes to Financial Statements (concluded) The required information for the Portfolio is presented in the below table, as of : (11) Subsequent Events Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statement of Assets and Liabilities Net Amounts of Liabilities Presented in the Statement of Assets and Liabilities Description Forward Currency Contracts $ 7,468 $ $ 7,468 Counterparty Net Amounts of Liabilities Presented in Statement of Assets and Liabilities Amounts Not Offset in the Statement of Assets and Liabilities Financial Instruments Collateral Pledged Net Amounts State Street Bank and Trust Co. $ 7,468 $ $ $ 7,468 Management has evaluated subsequent events affecting the Portfolio through April 13, 2016, the date that these financial statements were available to be issued, and has determined that there were no subsequent events that required adjustment or disclosure. 14