THREADNEEDLE SPECIALIST INVESTMENT FUNDS ICVC. threadneedle.com

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1 Unaudited Interim Report and Accounts Threadneedle Specialist Investment Funds ICVC October 2014 THREADNEEDLE SPECIALIST INVESTMENT FUNDS ICVC threadneedle.com

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3 Contents Company Information... 2 Director s Statement... 3 Aggregated Financial Statements for Threadneedle Specialist Investment Funds ICVC... 4 Notes to the Aggregated Financial Statements for Threadneedle Specialist Investment Funds ICVC... 5 UK Mid 250 Fund... 6 UK Extended Alpha Fund... 7 UK Equity Alpha Income Fund UK Absolute Alpha Fund Absolute Return Bond Fund Target Return Fund Pan European Focus Fund Pan European Equity Dividend Fund American Extended Alpha Fund China Opportunities Fund Global Emerging Markets Equity Fund Emerging Market Local Fund Global Extended Alpha Fund Global Equity Income Fund Portfolio Statements: UK Mid 250 Fund UK Extended Alpha Fund UK Equity Alpha Income Fund UK Absolute Alpha Fund Absolute Return Bond Fund Target Return Fund Pan European Focus Fund Pan European Equity Dividend Fund American Extended Alpha Fund China Opportunities Fund Global Emerging Markets Equity Fund Emerging Market Local Fund Global Extended Alpha Fund Global Equity Income Fund Comparative Tables Performance Summary Ongoing Charges Figure Summary Risk and Reward Profiles Shares Issued and Redeemed Summary Total Purchases and Sales Further Information Directory Important Information

4 Company Information Company Threadneedle Specialist Investment Funds ICVC (the Company) Registered Number IC Registered Office 60 St Mary Axe, London EC3A 8JQ Director There is a sole director, the Authorised Corporate Director (the ACD), which is Threadneedle Investment Services Limited. Board of Directors of the ACD Chairman and Chief Executive C D Fleming Other Directors T N Gillbanks D Jordison (Appointed to the Board 29 July 2014) P J W Reed (Resigned from the Board 30 June 2014) N J Ring A Roughead (Appointed to the Board 7 July 2014) 2

5 Director s Statement The ACD, Threadneedle Investment Services Limited, has pleasure in presenting the Interim Report and Accounts for Threadneedle Specialist Investment Funds ICVC for the six months to 31 October The financial statements have been presented on an aggregated basis. However, separate financial information is also provided on a sub-fund basis to enable investors to review the status and performance of those funds for the period under review. We hope that you find the report informative. Should you require any further information regarding any aspect of your investment, or about other Threadneedle products, we would be pleased to help. Alternatively, you may find it helpful to visit threadneedle.com for further information about Threadneedle. Thank you for your continued support. Campbell Fleming Director 3

6 Aggregated Financial Statements for Threadneedle Specialist Investment Funds ICVC STATEMENT OF TOTAL RETURN Income Net capital gains 95, ,540 Revenue 69,702 45,737 Expenses (25,395) (22,379) Finance costs: Derivative expense (5,251) (2,457) Interest (16) (1) Net revenue before taxation 39,040 20,900 Taxation (4,649) (2,029) Net revenue after taxation 34,391 18,871 Total return before distributions 129, ,411 Finance costs: s (48,341) (25,576) Change in net assets attributable to shareholders from investment activities 81, ,835 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 4,103,498 2,837,506 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 999,141 1,230,062 Amounts payable on the cancellation of shares (954,537) (603,775) Amounts payable on inspecie transfers (23,121) 21, ,287 Dilution adjustment 1,667 1,434 Stamp duty reserve tax (68) (245) Change in net assets attributable to shareholders from investment activities (see statement of total return above) 81, ,835 Retained distribution on accumulation shares 13,084 8,064 Closing net assets attributable to shareholders 4,221,259 3,679,881 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 3,853,150 3,764,568 Other assets Debtors 84,088 81,204 Cash and bank balances 382, ,125 Total other assets 466, ,329 Total assets 4,319,719 4,197,897 Liabilities Derivative liabilities (16,897) (11,945) Other liabilities Creditors (56,563) (56,327) Bank overdrafts (204) (87) payable on income shares (24,796) (26,040) Total other liabilities (81,563) (82,454) Total liabilities (98,460) (94,399) Net assets attributable to shareholders 4,221,259 4,103,498 The aggregated financial statements represent the sum of the individual funds within the umbrella company. Further analysis of the distribution and the net asset position can be found within the financial statements of the individual funds. We hereby certify the Interim Report and Accounts on behalf of the Directors of Threadneedle Investment Services Limited. N J Ring Director 10 December 2014 T N Gillbanks Director The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October

7 Notes to the Aggregated Financial Statements for Threadneedle Specialist Investment Funds ICVC Notes to the financial statements 1 ACCOUNTING POLICIES (1) Basis of accounting The financial statements have been prepared under the historical cost basis, as modified by the revaluation of investments and in accordance with UK Generally Accepted Accounting Practice ( UKGAAP ), and in accordance with the Statement of Recommended Practice (the SORP ) for Financial Statements of Authorised Funds issued by the Investment Management Association (IMA) in October The accounting policies applied are consistent with those of the annual financial statements for the year ended 30 April 2014 and are described in those financial statements. (2) Aggregation The aggregated accounts represent the sum of the individual funds within the umbrella company. Further analysis of the distribution and the net asset position can be found within the financial statements of the individual funds. (3) Notes In accordance with the guidelines of the SORP the funds have taken advantage of the facility not to provide further notes to the financial statements. 5

8 Threadneedle UK Mid 250 Fund Investment Report Investment Objective The investment objective of the UK Mid 250 Fund is to achieve capital growth from a portfolio of UK mid cap equities. Investment Policy The ACD s investment policy is to invest the assets of the Fund primarily in a selection of medium sized companies which are constituents of the FTSE 250 (ex Investment Trusts) Index. If the ACD considers it desirable, it may also invest in companies which are not included in that index, and may hold cash and/or money market instruments. Performance of Net Accumulation Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle UK Mid 250 Fund has risen from p to p. For comparison, using noon prices, the performance of the Class 1 share class was +0.19% and +0.48% for the Class 2 share class compared to a return of -1.93% for the Morningstar UK Unit Trusts/OEICs - (IMA) UK All Companies Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, using global close prices, the total return of the FTSE Mid 250 (ex Investment Trusts) Index was -1.63%. Portfolio Activity The UK equity market posted a negative return over the six months under review. The FTSE All-Share fell 1.58% while the FTSE 250 (ex-investment Trusts) portion of the index was off by 1.63%. October proved particularly volatile, with the market falling sharply mid-month, as investors focused on global concerns, before rallying into the month-end, buoyed by the Bank of Japan s decision to significantly expand its quantitative easing programme. Investors were heartened by the strength of the UK economic recovery and the pick-up in corporate mergers and acquisitions (M&A) activity. GDP growth in the third quarter was 3% higher than for the corresponding period of 2013, with higher levels of activity across the manufacturing, construction and service sectors. This stronger economic activity has been accompanied by further job creation, with the level of unemployment falling below 1.97m in the three months to the end of August. However, wage growth has continued to lag inflation, with the result that there has been no surge in high street spending. Although the domestic environment remained supportive, UK equities faced growing external headwinds including the economic slowdown in the eurozone and China, key destinations for many UK exporters. Geopolitical risks increased with the spread of hostilities in the Middle East and the problems in Ukraine, while the market was also unsettled ahead of the Scottish independence referendum. The divergent fortunes of the UK economy and those in Europe and Asia had an important impact on the earnings of many UK companies. The country s biggest firms operate in a global marketplace and have therefore proved susceptible to slower growth in several regions. Moreover, the strength of sterling has proved a challenge for companies operating internationally and has resulted in some currency-related downgrades to corporate earnings. Towards the lower end of the market, good quality cheap companies have continued to outperform in the quarter. The period saw upward revisions to profitability levels, though they are still negative overall. The underperformance of UK smalland mid-caps has now flattened and M&A activity has picked up somewhat, albeit from very depressed levels. In terms of activity, we opened a position in Keller (ground engineering), whose shares have been weak recently, pushing the valuation to very compelling levels. We added to Howden Joinery over the period, as we felt it had been oversold and represented excellent value. We sold out of Kentz (engineering), where a takeover bid was finalised, and Cobham (aerospace), whose stock had bounced on its acquisition of peer Aeroflex. STATEMENT OF TOTAL RETURN Income Net capital (losses)/gains (936) 15,605 Revenue 1,488 2,899 Expenses (683) (854) Net revenue before taxation 805 2,045 Taxation (34) Net revenue after taxation 771 2,045 Total return (165) 17,650 Finance costs: Equalisation (74) 9 Change in net assets attributable to shareholders from investment activities (239) 17,659 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 101, ,301 Other assets Debtors 943 2,453 Cash and bank balances 448 3,570 Total other assets 1,391 6,023 Total assets 102, ,324 Liabilities Other liabilities Creditors (913) (4,679) Total other liabilities (913) (4,679) Total liabilities (913) (4,679) Net assets attributable to shareholders 101, ,645 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 136, ,101 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 6,860 11,742 Amounts payable on the cancellation of shares (41,791) (8,389) (34,931) 3,353 Dilution adjustment 43 Stamp duty reserve tax (8) (46) Change in net assets attributable to shareholders from investment activities (see statement of total return above) (239) 17,659 Closing net assets attributable to shareholders 101, ,067 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. *In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. 6

9 Threadneedle UK Extended Alpha Fund Investment Report Investment Objective The investment objective of the UK Extended Alpha Fund is to achieve above average capital growth from a concentrated portfolio of UK equities. Investment Policy The ACD s investment policy is to actively manage an exposure primarily to a concentrated portfolio of UK equities, i.e. equities of companies domiciled in the UK, or which have significant UK operations, by investing directly or indirectly in such securities. This approach means that the ACD has the flexibility to take significant stock and sector positions which may lead to increased levels of volatility. If the ACD considers it desirable it may further invest up to one third of the assets of the Fund in markets outside the United Kingdom. The Fund s exposure may be gained through long and short positions. The ACD may take long and short positions through the use of derivatives and forward transactions. In addition in order to gain long exposure, the ACD may invest in equities, collective investment schemes including exchange traded funds and/or related indices. If the ACD considers it desirable, it may hold a substantial proportion or all of the Fund in cash and/or other securities (including fixed interest securities and money market instruments). Performance of Net Accumulation Class 1 Shares* Over the six months to 31 October 2014, the published share price of limited issue shares in the Threadneedle UK Extended Alpha Fund has risen from p to p. For comparison, using noon prices, the performance of the Class 1 share class was +1.72% and +1.93% for the Class 2 share class compared to a return of -1.93% for the Morningstar UK Unit Trusts/OEICs (IMA) UK All Companies Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, using global close prices, the total return of the FTSE All-Share Index was -1.58%. Portfolio Activity The UK equity market posted a negative return over the six months under review with the FTSE All-Share falling 1.58%. October proved particularly volatile, with the market falling sharply midmonth, as investors focused on global concerns, before rallying into the month-end, buoyed by the Bank of Japan s decision to significantly expand its quantitative easing programme. Investors were heartened by the strength of the UK economic recovery and the pick-up in corporate mergers and acquisitions (M&A) activity. GDP growth in the third quarter was 3% higher than for the corresponding period of 2013, with higher levels of activity across the manufacturing, construction and service sectors. This stronger economic activity has been accompanied by further job creation, with the level of unemployment falling below 1.97m in the three months to the end of August. However, wage growth has continued to lag inflation, with the result that there has been no surge in high street spending. Although the domestic environment remained supportive, UK equities faced growing external headwinds including the economic slowdown in the eurozone and China, key destinations for many UK exporters. Geopolitical risks increased with the spread of hostilities in the Middle East and the problems in Ukraine, while the market was also unsettled ahead of the Scottish independence referendum. The divergent fortunes of the UK economy and those in Europe and Asia had an important impact on the earnings of many UK companies. The country s biggest firms operate in a global marketplace and have therefore proved susceptible to slower growth in several regions. Moreover, the strength of sterling has proved a challenge for companies operating internationally and has resulted in some currency-related downgrades to corporate earnings. In terms of activity, we initiated a position in pharmaceutical AstraZeneca following Pfizer s failed takeover bid. We see increasing value in AstraZeneca s pipeline, and a possible revised approach from Pfizer once the Takeover Panel s six-month restriction has expired. We increased our position in Rio Tinto (mining) and strong-performing defensive stock BT. Rio Tinto has an attractive valuation and a more stable financial position than its peers. We moved out of a position in broadcaster BSkyB, as the company faces uncertainty around its retention of rights to football matches. At the sector level, we moved from an overweight to an underweight position in healthcare, and increased our overweight position in consumer discretionary by adding to favoured names such as advertising company WPP and Informa. The fund s gross and net exposure finished the period at 131% and 103%, respectively. STATEMENT OF TOTAL RETURN Income Net capital gains 188 2,379 Revenue Expenses (389) (245) Finance costs: Derivative expense (42) Interest (1) Net revenue before taxation Taxation (1) Net revenue after taxation Total return 662 2,584 Finance costs: Equalisation 107 (4) Change in net assets attributable to shareholders from investment activities 769 2,580 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 47,156 24,128 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 19, Amounts payable on the cancellation of shares (8,080) (1,437) 10,992 (678) Dilution adjustment 107 Stamp duty reserve tax (5) Change in net assets attributable to shareholders from investment activities (see statement of total return above) 769 2,580 Closing net assets attributable to shareholders 59,024 26,025 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October BALANCE SHEET as at 31 October 2014 April Assets Investment assets 57,094 43,380 Other assets Debtors 657 2,593 Cash and bank balances 2,074 2,688 Total other assets 2,731 5,281 Total assets 59,825 48,661 Liabilities Derivative liabilities (2) Other liabilities Creditors (799) (1,503) Bank overdrafts (2) Total other liabilities (799) (1,505) Total liabilities (801) (1,505) Net assets attributable to shareholders 59,024 47,156 Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. *In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. 7

10 Threadneedle UK Equity Alpha Income Fund Investment Report Investment Objective The investment objective of the UK Equity Alpha Income Fund is to achieve a reasonable and growing income with the prospects of capital growth from a concentrated portfolio of UK equities. Investment Policy The ACD s investment policy is to invest the assets of the Fund in a concentrated portfolio of predominantly UK equities. The Alpha Income investment approach is a highly focused management style, which gives the ACD the flexibility to take significant stock and sector positions, which may lead to increased levels of volatility. The portfolio will consist primarily of equities of companies domiciled in the UK, or which have significant UK operations. Performance of Net Income Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle UK Equity Alpha Income Fund has fallen from 64.85p to 64.06p. For comparison, using noon prices, the performance of the Class 1 share class was -1.21% and -0.93% for the Class 2 share class compared to a return of -1.14% for the Morningstar UK Unit Trusts/OEICS (IMA) UK Equity Income Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, using global close prices, the total return of the FTSE All-Share Index was -1.58%. Portfolio Activity The UK equity market posted a negative return over the six months under review with the FTSE All-Share falling 1.58%. October proved particularly volatile, with the market falling sharply mid-month, as investors focused on global concerns, before rallying into the month-end, buoyed by the Bank of Japan s decision to significantly expand its quantitative easing programme. Investors were heartened by the strength of the UK economic recovery and the pick-up in corporate mergers and acquisitions (M&A) activity. GDP growth in the third quarter was 3% higher than for the corresponding period of 2013, with higher levels of activity across the manufacturing, construction and service sectors. This stronger economic activity has been accompanied by further job creation, with the level of unemployment falling below 1.97m in the three months to the end of August. However, wage growth has continued to lag inflation, with the result that there has been no surge in high street spending. Although the domestic environment remained supportive, UK equities faced growing external headwinds including the economic slowdown in the eurozone and China, key destinations for many UK exporters. Geopolitical risks increased with the spread of hostilities in the Middle East and the problems in Ukraine, while the market was also unsettled ahead of the Scottish independence referendum. The divergent fortunes of the UK economy and those in Europe and Asia had an important impact on the earnings of many UK companies. The country s biggest firms operate in a global marketplace and have therefore proved susceptible to slower growth in several regions. Moreover, the strength of sterling has proved a challenge for companies operating internationally and has resulted in some currency-related downgrades to corporate earnings. In terms of activity, we initiated a position in energy utility Centrica; the shares are now attractively valued and the company has a new management team in place. We also opened a position in HSBC, thus reducing our underweight stance in the banking giant; HSBC has been affected by emerging-market headwinds, but the valuation arguably gives it the most attractive risk-adjusted upside potential in the sector. We exited transport firm National Express, as we see better opportunities in sector peer Stagecoach, where we initiated a holding. We took profits in GKN (engineering) as the shares have performed well since they were purchased by the fund. STATEMENT OF TOTAL RETURN Income Net capital (losses)/gains (17,457) 68,586 Revenue 15,998 11,501 Expenses (4,442) (3,020) Finance costs: Interest (2) Net revenue before taxation 11,554 8,481 Taxation Net revenue after taxation 11,554 8,481 Total return before distributions (5,903) 77,067 Finance costs: s (15,676) (11,328) Change in net assets attributable to shareholders from investment activities (21,579) 65,739 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 794, ,987 Other assets Debtors 10,529 17,874 Cash and bank balances 26,347 3,393 Total other assets 36,876 21,267 Total assets 831, ,254 Liabilities Other liabilities Creditors (7,214) (11,237) payable on income shares (17,091) (15,338) Total other liabilities (24,305) (26,575) Total liabilities (24,305) (26,575) Net assets attributable to shareholders 806, ,679 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 732, ,090 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 114,845 97,773 Amounts payable on the cancellation of shares (19,112) (3,898) 95,733 93,875 Dilution adjustment 80 Stamp duty reserve tax (10) (75) Change in net assets attributable to shareholders from investment activities (see statement of total return above) (21,579) 65,739 Closing net assets attributable to shareholders 806, ,709 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October *In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. DISTRIBUTION TABLE Dividend distribution in pence per share Class 1 Shares Net Income Period Net Revenue Equalisation Payable Paid Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period Class 2 Shares Net Income Period Net Revenue Equalisation Payable Paid Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period

11 Threadneedle UK Equity Alpha Income Fund DISTRIBUTION TABLE (continued) Class Z Shares Net Income Period Net Revenue Equalisation Payable Paid Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period Group 2: shares purchased during a distribution period Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. 9

12 Threadneedle UK Absolute Alpha Fund Investment Report Investment Objective The investment objective of the UK Absolute Alpha Fund is to achieve an absolute return, irrespective of market conditions, over the long term and a positive return over a 12 month period. There is a risk to capital, and there is no guarantee that such a return will be achieved within 12 months, or any other timescale. Investment Policy The ACD s investment policy is to principally invest in: equity securities, or equity related derivatives, of corporate issuers headquartered in the United Kingdom (or corporate issuers who exercise a predominant part of their activity in the United Kingdom) fixed interest securities, cash, or money market instruments. If the ACD considers it desirable, the ACD may invest in securities and derivatives related to corporate issuers headquartered outside the United Kingdom. The Fund s exposure to any equities may be gained through long and short positions. The ACD may take long and short positions through the use of derivatives and forward transactions. In addition in order to gain long exposure the ACD may invest in equities, collective investment schemes including exchange traded funds and/or related indices. Performance of Net Accumulation Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle UK Absolute Alpha Fund has risen from p to p. For comparison, using noon prices, the performance of the Class 1 share class was +2.84% and +3.07% for the Class 2 share class compared to a return of +0.98% for the Morningstar UK Unit Trusts/OEICS (IMA) UK Absolute Return Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, the UK LIBOR 3 Month returned +0.28%. Portfolio Activity The UK equity market posted a negative return over the six months under review with the FTSE All-Share falling 1.58%. October proved particularly volatile, with the market falling sharply midmonth, as investors focused on global concerns, before rallying into the month-end, buoyed by the Bank of Japan s decision to significantly expand its quantitative easing programme. Investors were heartened by the strength of the UK economic recovery and the pick-up in corporate mergers and acquisitions (M&A) activity. GDP growth in the third quarter was 3% higher than for the corresponding period of 2013, with higher levels of activity across the manufacturing, construction and service sectors. This stronger economic activity has been accompanied by further job creation, with the level of unemployment falling below 1.97m in the three months to the end of August. However, wage growth has continued to lag inflation, with the result that there has been no surge in high street spending. Although the domestic environment remained supportive, UK equities faced growing external headwinds including the economic slowdown in the eurozone and China, key destinations for many UK exporters. Geopolitical risks increased with the spread of hostilities in the Middle East and the problems in Ukraine, while the market was also unsettled ahead of the Scottish independence referendum. The divergent fortunes of the UK economy and those in Europe and Asia had an important impact on the earnings of many UK companies. The country s biggest firms operate in a global marketplace and have therefore proved susceptible to slower growth in several regions. Moreover, the strength of sterling has proved a challenge for companies operating internationally and has resulted in some currency-related downgrades to corporate earnings. In terms of activity, we initiated a position in Howden Joinery, which is taking significant market share and benefitting from the strong domestic economy. More recently, we bought a holding in the tour operator Tui Travel. The shares have fallen a lot in recent months due to fears over the Ebola epidemic and yet we believe the impending merger with its parent company Tui AG will bring useful cost and tax savings. New positions in the period were funded through disposals of names such as Shire, whose risk-reward equation we no longer find favourable, and BSkyB, where we feel that our original thesis of strong execution and capital discipline is no longer valid. Following the sharp fall in the market during the first half of October, several of our short positions hit our price targets and so we decided to close all of our positions in the food retailing sector, our short position in a global testing firm along with our short in a property company. STATEMENT OF TOTAL RETURN Income Net capital gains 4,923 6,387 Revenue 2,107 1,031 Expenses (2,773) (1,825) Finance costs: Derivative expense (1,308) (386) Interest (1) Net expenses before taxation (1,975) (1,180) Taxation Net expenses after taxation (1,975) (1,180) Total return 2,948 5,207 Finance costs: Equalisation 2 59 Change in net assets attributable to shareholders from investment activities 2,950 5,266 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 123, ,953 Other assets Debtors 5,048 6,298 Cash and bank balances 110, ,578 Total other assets 115, ,876 Total assets 238, ,829 Liabilities Derivative liabilities (103) (1,541) Other liabilities Creditors (6,630) (1,375) Total other liabilities (6,630) (1,375) Total liabilities (6,733) (2,916) Net assets attributable to shareholders 231, ,913 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 266,913 86,637 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 78,700 46,503 Amounts payable on the cancellation of shares (116,939) (12,327) (38,239) 34,176 Dilution adjustment Stamp duty reserve tax (12) (62) Change in net assets attributable to shareholders from investment activities (see statement of total return above) 2,950 5,266 Closing net assets attributable to shareholders 231, ,024 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October *In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. 10

13 Threadneedle Absolute Return Bond Fund Investment Report Investment Objective The investment objective of the Absolute Return Bond Fund is to achieve a total positive return over a 12 month period in all market conditions. There is a risk to capital, and there is no guarantee that such a return will be achieved within 12 months, or any other timescale. Investment Policy The ACD s investment policy is to invest the assets of the Fund so as to gain exposure to global bond and currency markets. The ACD will invest primarily in derivatives, cash and near cash, fixed interest securities, index linked securities, money market instruments and deposits. At times the portfolio may be concentrated in any one or a combination of such assets. The ACD may take long and short positions through derivatives in such issues. Performance of Net Accumulation Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle Absolute Return Bond Fund has risen from 63.13p to 63.83p. Using noon prices, the performance of the Class 1 share class was +1.11% and +1.45% for the Class 2 share class compared to a return of +0.98% for the Morningstar UK Unit Trusts/OEICS (IMA) Absolute Return Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, the LIBOR 3 Month Deposit Rate returned +0.28%. Portfolio Activity In terms of currency strategies we maintained a significant US dollar overweight over the period, which proved beneficial. The long US dollar position against European currencies was rewarding as the European Central Bank (ECB) moved to ease monetary policy, whilst labour market data in the United States indicated a further reduction in slack. The ensuing divergence in monetary policy expectations between the two drove one of the biggest US dollar Bull markets of recent years. We also held a notable US dollar overweight against commodity currencies. While the fund s long US dollar position versus the New Zealand dollar initially detracted, as the Reserve Bank of New Zealand continued its rate hiking cycle, the bank subsequently signalled a pause in the hiking cycle contrary to market expectations and this position added value. In addition, the long position in the Norwegian krone versus the Swedish krona proved beneficial, as these countries divergent inflation profiles made the market reprice their central bank responses. Toward the end of the period, we became concerned over the outlook for risk assets as well as the extent of the move in the dollar. Accordingly, we moved to a short dollar position and initiated a short sterling versus yen position, which has a high correlation to risk assets. The fund remained long of peripheral eurozone debt as we anticipated the need for further stimulatory action by the ECB, which proved the case. The fund s long exposure therefore proved rewarding, with the compression of yield spreads as interest in the asset class continued to revive and investors added these countries back into their bond benchmarks. On the negative side, the long protection position on European high yield proved unhelpful as investors continued to look for ways to augment their portfolio returns. However, we felt that valuations had moved significantly out of line with fundamentals, largely due to the influx of liquidity from quantitative easing, to warrant holding this in the event of a setback to risk markets as extraordinary central bank support was removed in the US. There was also a negative impact from the short duration position across core government bond markets as they priced in accommodative policy from the ECB, whilst Federal Reserve officials pushed back on rate hike expectations, and global disinflationary trends intensified. The fund s yield-convergence trade on positions in Europe and the US proved unhelpful. At the end of October the Federal Reserve ended its quantitative easing programme and we believe this to have been a key support for risk assets. Consequently, we consider that the outlook for risk assets has deteriorated, particularly when viewed against the poorer outlook for global growth. We therefore remain short of risk assets expressed through the European high-yield market. Given our concerns as to how much the US economy can diverge from the rest of the world, we remain long of US rates relative to European rates. STATEMENT OF TOTAL RETURN Income Net capital gains/(losses) 4,611 (67) Revenue 2,324 4,311 Expenses (1,407) (2,036) Finance costs: Derivative expense (2,851) (770) Interest (5) Net (expenses)/revenue before taxation (1,939) 1,505 Taxation (147) Net (expenses)/revenue after taxation (1,939) 1,358 Total return 2,672 1,291 Change in net assets attributable to shareholders from investment activities 2,672 1,291 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 263, ,746 Other assets Debtors 8,711 6,979 Cash and bank balances 9,117 25,249 Total other assets 17,828 32,228 Total assets 281, ,974 Liabilities Derivative liabilities (12,447) (7,419) Other liabilities Creditors (4,448) (7,737) Bank overdrafts (29) (23) Total other liabilities (4,477) (7,760) Total liabilities (16,924) (15,179) Net assets attributable to shareholders 264, ,795 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 281, ,972 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 39,957 41,617 Amounts payable on the cancellation of shares (59,856) (61,766) (19,899) (20,149) Dilution adjustment Change in net assets attributable to shareholders from investment activities (see statement of total return above) 2,672 1,291 Closing net assets attributable to shareholders 264, ,145 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October *In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. 11

14 Threadneedle Target Return Fund Investment Report Investment Objective The investment objective of the Target Return Fund is to achieve a total positive return in Euros over a 12 month period in all market conditions. There is a risk to capital, and there is no guarantee that such a return will be achieved within 12 months, or any other timescale. Investment Policy The ACD s investment policy is to invest the assets of the Fund to gain exposure to global bond and currency markets. The ACD will invest in derivatives, cash and near cash, fixed interest securities, index linked securities, money market instruments and deposits. At times the portfolio may be concentrated in any one or a combination of such assets. The ACD may take long and short positions through derivatives in such issues. Where securities are non-euro denominated they may be hedged into Euros on a Portfolio Currency level. Performance of Gross Accumulation Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle Target Return Fund has risen from to Euros. The performance of the Class 1 gross accumulation share class was +1.09% and +1.44% for the Class 2 gross accumulation share class, in EUR terms. For information purposes, the Euribor 3 Month Deposit Rate returned +0.10%. Portfolio Activity In terms of currency strategies we maintained a significant US dollar overweight over the period, which proved beneficial. The long US dollar position against European currencies was rewarding as the European Central Bank (ECB) moved to ease monetary policy, whilst labour market data in the United States indicated a further reduction in slack. The ensuing divergence in monetary policy expectations between the two drove one of the biggest US dollar Bull markets of recent years. We also held a notable US dollar overweight against commodity currencies. While the fund s long US dollar position versus the New Zealand dollar initially detracted, as the Reserve Bank of New Zealand continued its rate hiking cycle, the bank subsequently signalled a pause in the hiking cycle contrary to market expectations and this position added value. In addition, the long position in the Norwegian krone versus the Swedish krona proved beneficial, as these countries divergent inflation profiles made the market reprice their central bank responses. Toward the end of the period, we became concerned over the outlook for risk assets as well as the extent of the move in the dollar. Accordingly, we moved to a short dollar position and initiated a short sterlingversus-yen position, which has a high correlation to risk assets. The fund remained long of peripheral eurozone debt as we anticipated the need for further stimulatory action by the ECB, which proved the case. The fund s long exposure therefore proved rewarding, with the compression of yield spreads as interest in the asset class continued to revive and investors added these countries back into their bond benchmarks. On the negative side, the long protection position on European high yield proved unhelpful as investors continued to look for ways to augment their portfolio returns. However, we felt that valuations had moved significantly out of line with fundamentals, largely due to the influx of liquidity from quantitative easing, to warrant holding this in the event of a setback to risk markets as extraordinary central bank support was removed in the US. There was also a negative impact from the short duration position across core government bond markets as they priced in accommodative policy from the ECB, whilst Federal Reserve officials pushed back on rate hike expectations, and global disinflationary trends intensified. The fund s yield-convergence trade on positions in Europe and the US proved unhelpful. At the end of October the Federal Reserve ended its quantitative easing programme and we believe this to have been a key support for risk assets. Consequently, we consider that the outlook for risk assets has deteriorated, particularly when viewed against the poorer outlook for global growth. We therefore remain short of risk assets expressed through the European high-yield market. Given our concerns as to how much the US economy can diverge from the rest of the world, we remain long of US rates relative to European rates. STATEMENT OF TOTAL RETURN Income Net capital (losses)/gains (1,173) 1,520 Revenue 307 1,622 Expenses (204) (622) Finance costs: Derivative expense (381) (325) Interest (1) Net (expenses)/revenue before taxation (279) 675 Taxation Net (expenses)/revenue after taxation (279) 675 Total return (1,452) 2,195 Finance costs: s (675) Change in net assets attributable to shareholders from investment activities (1,452) 1,520 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 31,522 46,065 Other assets Debtors 807 1,159 Cash and bank balances 2,819 6,392 Total other assets 3,626 7,551 Total assets 35,148 53,616 Liabilities Derivative liabilities (1,621) (1,593) Other liabilities Creditors (74) (2,334) Bank overdrafts (1) (4) Total other liabilities (75) (2,338) Total liabilities (1,696) (3,931) Net assets attributable to shareholders 33,452 49,685 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 49, ,937 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 8,664 39,135 Amounts payable on the cancellation of shares (23,469) (53,354) (14,805) (14,219) Dilution adjustment Change in net assets attributable to shareholders from investment activities (see statement of total return above) (1,452) 1,520 Retained distribution on accumulation shares 673 Closing net assets attributable to shareholders 33, ,978 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October *In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. DISTRIBUTION TABLE Interest distribution in pence per share Class 1 Shares Net Accumulation There is no distribution, as expenses exceed revenue (2013: ). Class 1 Shares Gross Accumulation There is no distribution, as expenses exceed revenue (2013: ). Class 1 CHF Hedged Shares Gross Accumulation There is no distribution, as expenses exceed revenue (2013: ). Class 1 USD Hedged Shares Gross Accumulation There is no distribution, as expenses exceed revenue (2013: ). Class 2 Shares Gross Income There is no distribution, as expenses exceed revenue (2013: ). 12

15 Threadneedle Target Return Fund DISTRIBUTION TABLE (continued) Class 2 Shares Gross Accumulation There is no distribution, as expenses exceed revenue (2013: ). Class X Shares Gross Accumulation There is no distribution, as expenses exceed revenue (2013: ). Class Z Shares Net Accumulation There is no distribution, as expenses exceed revenue (2013: ). Class Z Shares Gross Accumulation There is no distribution, as expenses exceed revenue (2013: Nil). Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. 13

16 Threadneedle Pan European Focus Fund Investment Report Investment Objective The investment objective of the Pan European Focus Fund is to achieve above average capital growth. Investment Policy The ACD s investment policy is to actively manage a concentrated portfolio of primarily European equities including UK Equities with the ability to hold cash and/or money market securities in order to enable the pursuit of the fund s investment objective. This approach means that the ACD has the flexibility to take significant stock and sector positions, which may lead to increased levels of volatility. The portfolio will primarily consist of equities of companies domiciled in Europe including the UK or which have a significant part of their economic activities in Europe and/or the UK. Where securities are non-euro denominated they may be hedged into Euros. If the ACD considers it desirable it may hold a substantial proportion or all of the funds in cash and/or money market instruments. Performance of Net Accumulation Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle Pan European Focus Fund has fallen from p to p in sterling terms and risen from to Euros. For comparison, using noon prices, the sterling performance of the Class 1 share class was -3.26% and -2.97% for the Class 2 share class compared to a return of -3.19% for the Morningstar UK Unit Trusts/OEICs - (IMA) Europe Including UK Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, using global close prices, the total return of the MSCI Europe Index was -3.44%. Portfolio Activity European equities, as measured by the MSCI Europe Index, were lower in sterling and euro terms over the reporting period as Europe grappled with the problems of anaemic growth, low inflation and geopolitical worries. Sanctions against Russia, in response to the Ukraine conflict, prompted concerns over gas supplies and companies with Russian exposure. German exports to Russia fell by over 26% in August. The eurozone economy continued to experience low growth and inflation reached a five-year low of 0.3% in September, well below the European Central Bank s (ECB s) 2% target. In June, the ECB unveiled further measures to encourage growth and fend off deflation, cutting official interest rates to 0.15% and deposit rates to -0.1%. Monetary policy was loosened further in September: the ECB reduced benchmark interest rates by a further 10 basis points and announced an asset purchase programme, although this fell short of full scale quantitative easing (QE). The UK is performing better, producing higher levels of growth, but there are concerns around the excesses in the housing market. The portfolio was focused on high quality defensive growth stocks, with low exposure to cyclical and domestic companies. Purchases included the UK pharmaceutical group AstraZeneca, which has been the subject of take-over interest and has a good drugs portfolio and strong long-term prospects, and Anheuser- Busch InBev, the global brewing business which holds around half the growing US markets. We took profits in Bank of Ireland and sold Intesa San Paolo, the Italian bank, reducing our exposure to peripheral eurozone financial stocks in the face of low growth. We also sold temporary-employment agency Adecco, which is sensitive to a weak French economy. Our move to a more defensive positioning boosted returns, which nevertheless fell slightly behind the benchmark index over the period. We welcome the ECB s stimulus package, although the benefits of further interest-rate cuts are limited; rates have been low for a prolonged period without stimulating growth or inflation, and we need a mechanism to move liquidity from the ECB into the real economy. The ECB s action has weakened the euro, which will help companies with sales and operations outside the euro area. Full QE in the eurozone may be necessary, but will depend on future economic growth and inflation; there are few signs that the Germans will agree to this yet. Many companies in Europe (outside the financial sector) have strong balance sheets and cash flow, potentially boosting dividend growth; valuations, in our view, are not stretched. We favour companies with robust earnings prospects and pricing power, and continue to find attractive investment opportunities. STATEMENT OF TOTAL RETURN Income Net capital (losses)/gains (2,822) 8,012 Revenue Expenses (512) (960) Net revenue/(expenses) before taxation 319 (112) Taxation (58) (57) Net revenue/(expenses) after taxation 261 (169) Total return (2,561) 7,843 Finance costs: Equalisation (40) (1) Change in net assets attributable to shareholders from investment activities (2,601) 7,842 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 72,772 83,303 Other assets Debtors 1,214 8,934 Cash and bank balances Total other assets 1,271 9,119 Total assets 74,043 92,422 Liabilities Other liabilities Creditors (1,070) (8,785) Bank overdrafts (47) Total other liabilities (1,070) (8,832) Total liabilities (1,070) (8,832) Net assets attributable to shareholders 72,973 83,590 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 83,590 66,943 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 2,709 8,296 Amounts payable on the cancellation of shares (10,731) (10,425) (8,022) (2,129) Dilution adjustment 6 11 Stamp duty reserve tax (3) Change in net assets attributable to shareholders from investment activities (see statement of total return above) (2,601) 7,842 Closing net assets attributable to shareholders 72,973 72,664 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October * In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. 14 Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5.

17 Threadneedle Pan European Equity Dividend Fund Investment Report Investment Objective The investment objective of the Pan European Equity Dividend Fund is to achieve a growing income combined with prospects for capital growth from a portfolio of Pan European equities. Investment Policy The ACD s investment policy is to invest the assets of the Fund primarily in the equities of companies domiciled in Continental Europe and the UK or with significant Continental European and UK activities. The ACD will look to invest in companies that exhibit a high potential for paying above average dividends. If the ACD considers it desirable it may further invest up to one third of the total assets of the Fund in other securities (including fixed interest securities, other equities, money market securities, cash and near cash). Performance of Net Income Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle Pan European Equity Dividend Fund has fallen from 81.33p to 78.67p in sterling terms and risen from to Euros. For comparison, using noon prices, the performance of the Class 1 share class was -3.34% and -3.06% for the Class 2 share class compared to a return of -3.19% for the Morningstar UK Unit Trusts/OEICS (IMA) Europe Including UK Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, using global close prices, the total return of the MSCI Europe Index was -3.44%. Portfolio Activity European equities, as measured by the MSCI Europe Index, were lower in sterling and euro terms over the reporting period as Europe grappled with the problems of anaemic growth, low inflation and geopolitical worries. Sanctions against Russia, in response to the Ukraine conflict, prompted concerns over gas supplies and companies with Russian exposure. German exports to Russia fell by over 26% in August. The eurozone economy continued to experience low growth, and inflation reached a five-year low of 0.3% in September, well below the European Central Bank s (ECB s) 2% target. In June, the ECB unveiled further measures to encourage growth and fend off deflation, cutting official interest rates to 0.15% and deposit rates to -0.1%. Monetary policy was loosened further in September: the ECB reduced benchmark interest rates by a further 10 basis points and announced an asset purchase programme, although this fell short of full scale quantitative easing (QE). The UK is performing better, producing higher levels of growth, but there are concerns around the excesses in the housing market. The portfolio was focused on high quality defensive growth stocks, with low exposure to cyclical and domestic companies. Purchases included the UK pharmaceutical group AstraZeneca, which has been the subject of take-over interest and has a good drugs portfolio and strong long-term prospects, and BT, the UK telecommunications business, which also offers stable and predictable growth prospects. We sold Edenred, the vouchers business, which has Latin American interests that are sensitive to the economic problems in that area, and also because low interest rates reduce the company s returns on cash balances from uncashed vouchers. We sold Syngenta, the crop protection and seeds business, after disappointing results; it may suffer from lower crop prices. This defensive positioning boosted returns, which were ahead of the benchmark index over the period. We welcome the ECB s stimulus package, although the benefits of further interest-rate cuts are limited; rates have been low for a prolonged period without stimulating growth or inflation, and we need a mechanism to move liquidity from the ECB into the real economy. The ECB s action has weakened the euro, which will help companies with sales and operations outside the euro area. Full QE in the eurozone may be necessary, but will depend on future economic growth and inflation; there are few signs that the Germans will agree to this yet. Many companies in Europe (outside the financial sector) have strong balance sheets and cash flow, potentially boosting dividend growth; in our view, valuations are not stretched. We favour companies with robust earnings prospects and pricing power, and continue to find attractive investment opportunities. STATEMENT OF TOTAL RETURN Income Net capital (losses)/gains (4,969) 2,767 Revenue 1, Expenses (386) (251) Net revenue before taxation 1, Taxation (119) (37) Net revenue after taxation 1, Total return before distributions (3,625) 3,052 Finance costs: s (1,677) (508) Change in net assets attributable to shareholders from investment activities (5,302) 2,544 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 42,744 92,114 Other assets Debtors 242 1,044 Cash and bank balances Total other assets 1,206 1,316 Total assets 43,950 93,430 Liabilities Other liabilities Creditors (864) (226) payable on income shares (569) (686) Total other liabilities (1,433) (912) Total liabilities (1,433) (912) Net assets attributable to shareholders 42,517 92,518 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 92,518 24,476 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 15,537 16,431 Amounts payable on the cancellation of shares (60,606) (3,793) (45,069) 12,638 Dilution adjustment Stamp duty reserve tax (1) (6) Change in net assets attributable to shareholders from investment activities (see statement of total return above) (5,302) 2,544 Retained distribution on accumulation shares Closing net assets attributable to shareholders 42,517 39,894 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October * In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. 15 DISTRIBUTION TABLE Dividend distribution in pence per share Class 1 Shares Net Income Period Net Revenue Equalisation Payable Paid Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period Class 1 Shares Net Accumulation Period Net Revenue Equalisation Net Revenue Net Revenue Accumulated Accumulated Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period

18 Threadneedle Pan European Equity Dividend Fund DISTRIBUTION TABLE (continued) Class 2 Shares Net Income Period Net Revenue Equalisation Payable Paid Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period Class 2 Shares Net Accumulation Period Net Revenue Equalisation Net Revenue Net Revenue Accumulated Accumulated Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. Class X Shares Net Income* Period Net Revenue Equalisation Payable 2014 Group 1 31/07/14 to 31/10/ Group 2 31/07/14 to 31/10/ Total distributions in the period Class X Shares Net Accumulation** Period Net Revenue Equalisation Net Revenue Accumulated 2014 Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period Class Z Shares Net Income Period Net Revenue Equalisation Payable Paid Group 1 01/05/14 to 31/10/ Group 2 01/05/14 to 31/10/ Total distributions in the period Class Z Shares Net Accumulation*** Period Net Revenue Equalisation Net Revenue Accumulated 2014 Group 1 20/08/14 to 31/10/ Group 2 20/08/14 to 31/10/ Total distributions in the period Group 2: shares purchased during a distribution period. * Class X Net income shares commenced 31 July ** Class X Net accumulation shares commenced 1 April *** Class Z Net accumulation shares commenced 20 August

19 Threadneedle American Extended Alpha Fund Investment Report Investment Objective The investment objective of the American Extended Alpha Fund is to achieve above average capital growth. Investment Policy The ACD s investment policy is to actively manage an exposure primarily to equities of companies which are domiciled in North America or which have significant North American operations, by investing directly or indirectly in such securities. If the ACD considers it desirable it may further invest up to one third of the total assets of the Fund in markets other than in North America. Exposure to North American and other markets may be gained through both long and short positions. The ACD may invest in equities, derivatives, forward transactions and collective investment schemes. The ACD may also invest in other securities (including fixed interest securities and money market securities), deposits and cash. In order to gain short exposure the ACD will invest in derivatives. The ACD may also invest in derivatives to gain long exposure. Performance of Net Accumulation Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle American Extended Alpha Fund has risen from p to p. For comparison, on a total return basis using noon prices, the performance of the Class 1 share class was % and % for the Class 2 share class compared to a return of % for the Morningstar UK Unit Trusts/OEICS (IMA) North America Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, using global close prices, the total return of the S&P 500 Composite Index was %. Portfolio Activity US equity markets posted positive returns in dollar terms over the period, despite bouts of volatility associated with market expectations around the pace of monetary policy stimulus withdrawal. Markets were supported by generally robust corporate earnings and evidence that economic recovery is gaining momentum. Slowing global growth impacted internationally exposed US stocks, and also precipitated declines in the price of oil and a further fall in bond yields. Within this context healthcare and technology stocks, that could evidence sustainable growth, outperformed, while energy, materials and industrials stocks lagged the market. The fund outperformed the S&P 500 index over the period, with outperformance driven by security selection decisions. The short book contributed strongly, but there was some detraction from the long book. Activity was driven by stock level decisions. We initiated new positions in home improvement business Home Depot, and in diversified bank Well Fargo. We also added to existing holdings including credit-card companies MasterCard and Visa, as well as diversified bank JP Morgan Chase. Conversely, we closed our positions in oil major Exxon Mobil. The net impact of our activity was to reduce exposures to consumer discretionary, energy and industrials sectors and to increase our positions in technology, financials and utilities. We believe that the fundamentals of the US economy remain positive and we are forecasting GDP growth of 2.5-3% in We believe this can support earnings growth of around 9.5% in We note slower growth in China and the eurozone, and the risk this entails for the export earnings of US multinationals. However, we view the US favourably on a relative basis and see a stronger dollar, lower energy and food prices, and continued low interest rates as part of a generally constructive backdrop for the US consumer. We also believe that these will work to the benefit of lower- and middle-income America and the domestic economy. STATEMENT OF TOTAL RETURN Income Net capital gains 78, ,671 Revenue 3,510 4,078 Expenses (5,186) (7,182) Finance costs: Derivative expense (439) (941) Interest (2) Net expenses before taxation (2,117) (4,045) Taxation (540) (480) Net expenses after taxation (2,657) (4,525) Total return 75, ,146 Finance costs: Equalisation (10) Change in net assets attributable to shareholders from investment activities 75, ,146 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 590, ,983 Other assets Debtors 19,975 15,826 Cash and bank balances 178, ,881 Total other assets 198, ,707 Total assets 789, ,690 Liabilities Derivative liabilities (961) (3) Other liabilities Creditors (9,731) (12,189) Total other liabilities (9,731) (12,189) Total liabilities (10,692) (12,192) Net assets attributable to shareholders 778, ,498 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 726, ,553 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 291, ,256 Amounts payable on the cancellation of shares (315,789) (359,783) (24,038) 106,473 Dilution adjustment Stamp duty reserve tax (19) Change in net assets attributable to shareholders from investment activities (see statement of total return above) 75, ,146 Closing net assets attributable to shareholders 778,909 1,082,209 The comparatives used within the Statement of Change in s Attributable to Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. *In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. 17

20 Threadneedle China Opportunities Fund Investment Report Investment Objective The investment objective of the China Opportunities Fund is to achieve long-term capital growth. Invest Policy The ACD s investment policy is to invest the assets of the Fund primarily in equities and equity related securities of Chinese companies. These are defined as companies domiciled in and/ or whose significant activities are in the People s Republic of China. If the ACD considers it desirable, it may further invest up to one third of the total assets of the Fund in derivatives, forward transactions and other securities (including fixed interest securities, other equities, money market securities and cash). In exceptional circumstances and on a temporary basis, the ACD may hold a substantial proportion of the Fund in cash and/or money market instruments. Performance of Net Accumulation Class 1 Shares* Over the six months to 31 October 2014, the published share price of the Threadneedle China Opportunities Fund has risen from p to p. For comparison, using noon prices, the performance of the Class 1 share class was % and % for the Class 2 share class compared to a return of % for the Morningstar UK Unit Trusts/OEICS (IMA) China Greater China Peer Group (on a bid to bid basis, with income reinvested for a UK basic rate taxpayer). For information purposes, using global close prices, the total return of the MSCI China Index was %. Portfolio Activity Chinese equities performed strongly over the reporting period, despite bouts of volatility. Initially, sentiment was buoyed by some better economic data and speculation that the authorities would loosen monetary policy. China s economy grew by 7.5% in the second quarter, manufacturing growth hit a six-month high in June, and exports grew by 14.5% (year on year) in July. By August, however, the economic news was becoming less positive, and September saw a sharp fall in Chinese equities, fuelled by worries over the political demonstrations in Hong Kong. Growth in the Chinese economy slowed to 7.3% in the third quarter, with the downturn in the property market leading to softer consumer demand. The market rallied strongly at the very end of the period, buoyed by the Bank of Japan s decision to expand its programme of quantitative easing (QE), which should help to increase global liquidity at a time when the US Federal Reserve has ended its own QE policy. During the period, the fund participated in the successful listing of Alibaba, now the largest online and mobile e-commerce business in the world in terms of gross merchandise volume. We also bought new positions in Huadian Power, which is benefitting from lower coal costs in China, and China Mobile, where improvements in the quality of its 4G network and lower marketing expenses should expand profit margins. Earlier, we established new holdings in PetroChina, the country s biggest oil and gas producer, which has started to undergo strategic reform with a greater focus on returns, and in Hong Kong Exchanges & Clearing Limited, which stands to benefit from increased market turnover when the Hong Kong Shanghai Stock Connect scheme is rolled out in November. Other new purchases included China Unicom (telecommunications), Sinotrans (logistics), Luye Pharma (drugs), Tianhe Chemicals (specialty chemicals) and JD.com (e-commerce). Sales included Guangshen Railway (railway operation in Guangdong province), CIMC Enric (engineering), Nine Dragons (paper), China Life Insurance, Biostime International (infant products) and Yashili International (infant formula). We reduced the significant overweight in Vipshop, China s leading online discount retailer, after a strong run. Given relatively subdued demand for cement, we trimmed the holdings in China Resources Cement. STATEMENT OF TOTAL RETURN Income Net capital gains 11,521 5,659 Revenue 1,759 1,201 Expenses (518) (415) Net revenue before taxation 1, Taxation (121) (46) Net revenue after taxation 1, Total return 12,641 6,399 Change in net assets attributable to shareholders from investment activities 12,641 6,399 BALANCE SHEET as at 31 October 2014 April Assets Investment assets 93,179 68,162 Other assets Debtors 1, Cash and bank balances 1,636 1,298 Total other assets 2,644 1,360 Total assets 95,823 69,522 Liabilities Other liabilities Creditors (485) (303) Total other liabilities (485) (303) Total liabilities (485) (303) Net assets attributable to shareholders 95,338 69,219 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 69,219 70,651 Movement due to sales and repurchases of shares: Amounts receivable on the issue of shares 42,526 21,613 Amounts payable on the cancellation of shares (29,155) (24,500) 13,371 (2,887) Dilution adjustment Change in net assets attributable to shareholders from investment activities (see statement of total return above) 12,641 6,399 Closing net assets attributable to shareholders 95,338 74,278 The comparatives used within the Statement Of Change In s Attributable To Shareholders are for the corresponding period of the previous year. Therefore the opening net assets attributable to shareholders for the current year are at 30 April 2014 whilst the figure disclosed in the comparatives closing net assets attributable to shareholders is at 31 October Notes to the financial statements 1 ACCOUNTING POLICIES The accounting policies for the fund are the same as those disclosed in the aggregated financial statements on page 5. *In pound Sterling and against UK peer group. Please refer to pages 63 to 69 for comparative tables. 18