Merrill Lynch Factor Index Fund

Transcription

1 Merrill Lynch Factor Index Fund INVEST FUNDS September 2011 INVEST UCITS FUNDS

2 INVEST UCITS FUNDS Important Note This brochure is supplied for information purposes only to the addressee and is not intended, and may not without the express consent of Merrill Lynch, be distributed to, and may not be relied upon by, any other party. A Prospectus for Torrus Funds SICAV and an accompanying Supplement Prospectus for the Fund is available with respect to the offering for subscription of shares in the Fund. This brochure does not form part of these documents and does not constitute and may not be construed as an offer to sell, or an invitation to purchase shares in the Fund or the provision of investment advice. Potential investors should read the Risk Factors and other disclosures in the Important Investor Information section on page 8 of the brochure carefully.

3 The Merrill Lynch Factor Model As the hedge fund industry has matured, it has become increasingly diffi cult for the average manager to generate alpha consistently. Additionally, as the asset class has grown rapidly, beta has become more evident. The Merrill Lynch Factor Model ( MLFM ) is designed to emulate the beta performance of broad-based hedge fund indices. The MLFM uses liquid, tradable instruments to achieve this goal. The creation of the MLFM was motivated by a growing body of academic research demonstrating that a substantial component of hedge fund returns can be replicated with widely available and transparent trading instruments. The Merrill Lynch Factor Index Fund The investment objective of the Merrill Lynch Factor Index Fund (the "Fund") is to provide investors with a return linked to the performance of the Merrill Lynch Factor Model, net of fees and expenses. The Fund allows investors to include hedge fund beta as part of their asset allocation strategy. Potential uses include: Core alternative investment holding for outright investors Hedge fund beta exposure for traditional asset managers and asset allocation funds Alternative engine in portable alpha strategies Liquidity management tool for funds of funds 3

4 The Merrill Lynch Factor Model - How Does It Work? The MLFM seeks to emulate hedge fund beta performance by replicating the returns of a major diversified hedge fund index: Hedge Fund Research Inc. Fund Weighted Composite Index (the HFRI Index ). The HFRI Index consists of over 2,000 equally weighted constituent funds. The HFRI Index is non-investable, but is a widely used performance benchmark. Merrill Lynch seeks to replicate this non-investable hedge fund index by using a basket of well-known and liquid index components: the S&P 500, the Russell 2000, MSCI EAFE, MSCI Emerging Markets, the Euro/US Dollar Spot Exchange Rate and onemonth LIBOR 1. Every month the weight of each component is rebalanced using a discretion-free, rules-based algorithm that provides the optimal fit of the MLFM to the returns of the HFRI Index. These weights can be either positive or negative (except for MSCI Emerging Markets which can only be positive) yielding either a long or a short position in the specific component. Merrill Lynch chose the index components in order to, in its view, maximize the statistical power, predictability and stability of the MLFM correlation with the HFRI Index under a variety of market conditions. HFRI Fund Weighted Composite Index Potential Index Components MLFM Algorithm 1,800 hedge funds USD400 billion AUM Equally Weighted Event Driven Commodities Corporate and Government Debt S&P 500 Russell 2000 Equity Hedge Interest Rates Fixed Income High Yield Debt Equities MSCI EAFE MSCI EMF Macro Market Timing Exotic Examples: Momentum/Volatility EUR/USD Spot 1 Emerging Markets Currencies One-month LIBOR The correlation between the Merrill Lynch Factor Model and the HFRI Index was 0.90 from June 2006 through August Up until November 2009, the MLFM included the US Dollar Index, the value of a basket of six major world currencies expressed in US Dollars. As of December 2009 the US Dollar Index was replaced with the Euro/US Dollar Spot Exchange Rate. 2. Correlation is calculated using the monthly returns of the Merrill Lynch Factor Model and HFRI Fund Weighted Composite Index from July 2003 to December

5 Historical Performance Relative performance of the Merrill Lynch Factor Model 3 vs Benchmarks 4 HFRI Weighted Composite Index (non-investable) HFRI Fund of Funds Index (non-investable) HFRX Global Hedge Fund Index (investable) Merrill Lynch Factor Model (investable) CS Tremont Investable Hedge Fund Index (investable) ` Jun-06 Dec-06 Jun-07 Dec-08 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Source: Bloomberg The Merrill Lynch Factor Model has returned 3.5% annualised from June 2006 through August The annualised standard deviation of the MLFM has been 6.6%, comparable to levels attained by the benchmark HFRI Index (7.4%). 3. The performance of the indices shown above is based on information obtained from various third party sources (including Bloomberg L.P.). Merrill Lynch does not take any responsibility for, or make any express or implied warranties or any representation, as to the accuracy or the completeness of this information and has not separately verified such information. All performances are calculated in USD. The value of the Merrill Lynch Factor Model can go down as well as up. Past performance is not a guide to future performance. Please see page 8 of this brochure for additional important information, including a summary of relevant risk factors. The MLFM returns used for the period from July 2003 through April 2006 are back-tested data. For the period after the MLFM launch in April 2006 actual MLFM returns are used). The simulated, back-tested results used in these comparisons are not actual results of the MLFM. These results are based upon publicly available information on the component indexes in the MLFM and retroactive application of a model designed with the benefit of hindsight to the HFRI Index. The back-testing was based on assumptions made by Merrill Lynch and applied in a manner decided by Merrill Lynch. Back-tested performance numbers are inherently limited and should not be relied upon as a guarantee of future performance. Results may not reflect the effect that material economic and market factors might have had on Merrill Lynch s decision-making had the MLFM actually been offered during the back-tested period. Please see page 8 of this brochure for additional important information, including a summary of relevant risk factors. 4. Summary descriptions and tickers of the comparative hedge fund indexes can be found in the Important Investor Information section of this brochure, on page 8. 5

6 Performance Metrics 5 Return Metrics 6 Composition of the Index The Merrill Lynch Factor Model is a dynamically re-balanced basket of liquid market index components. Components Descriptions Investable? The following information was taken from publicly available information and Merrill Lynch takes no responsibility for the accuracy thereof: Historical Annualized Return 2010 Return Volatility Historical Sharpe Ratio HFRI Fund Weighted Composite Index 4.2% 10.2% 7.4% 0.30 Merrill Lynch Factor Model 3.5% 5.8% 6.6% 0.24 HFRI Fund of Funds Index 1.0% 5.7% 6.6% (0.14) CS Tremont Investable Hedge Fund Index 2.5% 16.5% 8.9% 0.06 HFRIX Global Hedge Fund Index -0.9% 5.2% 7.5% (0.38) Source: Bloomberg, Bank of America Merrill Lynch; monthly data from June 2006 to August 2011 Correlations Merrill Lynch High Yield Bond Index Merrill Lynch Corporate & Government Bond Index Merrill Lynch Commodity Index Extra Total Return S&P 500 Total Return Index HFRI Fund Weighted Composite Index Merrill Lynch Factor Model HFRI Fund Weighted Composite Index Source: Bloomberg, Bank of America Merrill Lynch; monthly data from June 2006 to August 2011 Annualised Standard Deviation, Historical Sharpe Ratio and Correlations are calculated using monthly returns from 30 June 2006 to 31 August S&P 500 Total Return Index (Bloomberg: SPTR) is a capitalization-weighted total return index measuring the performance of 500 U.S. stocks across all sectors. Russell 2000 Total Return Index (Bloomberg: RU20INTR) is composed of 2000 U.S. small capitalization stocks in the broad-based Russell 3000 stock index. MSCI EAFE Net Total Return Index (Bloomberg: NDDUEAFE) is a free float-adjusted market capitalization stock index that is designed to measure developed market equity performance, excluding the United States and Canada. MSCI Emerging Markets Free Total Return Index (Bloomberg: NDUEEGF) is a free float-adjusted market capitalisation index designed to measure equity performance in the global emerging markets. Euro/US Dollar (Bloomberg: EUR) is the spot exchange rate for the US Dollar against the Euro 7. BBA One-Month USD LIBOR (Bloomberg: US0001M) is the one-month USD interest rate fixed on a daily basis by the British Bankers Association. Index weights as of August 2011 Index Component Factor Weight S&P 500 Total Return Index 12.3% Russell 2000 Total Return Index 4.2% MSCIEAFE US Dollar Net Total Return Index 9.5% MSCI Emerging Markets Free US Dollar Net Total Return Index 7.7% EUR Spot Exchange Rate 4.7% One-month USD LIBOR 66.3% 6 5. See footnote 3 on page 5. Sharpe Ratios have been calculated by using the Federal Funds Effective Rate (FEDL0I <Index>) as the benchmark riskless asset. 6. See footnote 4 on page Up until November 2009, the MLFM included the US Dollar Index, an average of the US Dollar exchange rate with 6 major world currencies, including the Euro. As of December 2009 the US Dollar Index was replaced with the Euro/US Dollar Spot Exchange Rate. The exposure of the MLFM is to the inverse of the Euro/US Dollar Spot Exchange Rate; as such, a positive factor weight represents a long exposure to US Dollars and a short exposure to Euros respectively. The MLFM also includes an adjustment reflecting the difference between the short term interest rates on US Dollars and Euros respectively.

7 The Merrill Lynch Factor Index Fund The Merrill Lynch Factor Index Fund is a sub-fund of the Torrus Funds, a Luxembourg SICAV platform that is UCITS III compliant. The investment objective of the Merrill Lynch Factor Index Fund is to provide investors with a return linked to the performance of the MLFM, net of fees and expenses. Summary terms of the Fund are set forth below. The Fund utilizes a passive investment management strategy in seeking to achieve the MLFM return. The Fund will be invested in two general pools of assets: one or more total return swaps on the MLFM and one or more securities repurchase agreements. Under the total return swaps, the Fund pays a LIBORbased return to the swap counterparty and receives the total return of the MLFM. Under the securities repurchase agreements, the Fund purchases from time-to-time a diversified pool of fixed income and equity securities subject to a repurchase agreement that effectively pays a LIBORbased return to the Fund. The Fund will pay a periodic Management Fee and a periodic Expense Fee to Merrill Lynch International ( MLI ) as Investment Manager of the Fund. For more details on the Fund, its investment objective, terms of investment and risk factors, please refer to the Prospectus for Torrus Funds SICAV and the Supplement Prospectus for the Fund. Key Terms The Fund The Merrill Lynch Factor Index Fund Issuer Torrus Funds SICAV, Luxembourg Share Classes (Institutional) USD - USD I EUR - EUR IH (Hedged) GBP - GBP IH (Hedged) Launch Date March 2007 Initial Subscription Price USD 1,000 Minimum Subscription Amount USD 1,000,000 Upfront Sales Charge Nil Management Fee 0.60% per annum Expense Fee 0.15% per annum Total Expense Ratio (TER) 0.75% per annum maximum Valuation Day Each Fund Business Day (as defined in the Supplement Prospectus to the Fund) Subscriptions/Redemptions request deadline 5pm Luxembourg time, two Luxembourg Banking days prior to the relevant Valuation Day Redemption Charge USD - Nil EUR % maximum GBP - Nil Index Publication Bloomberg Page MLEIFCTR <Index> Index Website NAV Publication ISIN USD I LU EUR IH LU GBP IH LU Investment Manager Merrill Lynch International A full description of the Merrill Lynch Factor Index Fund and Torrus Funds SICAV can be found in the Prospectus of the Torrus Funds SICAV which is available from [email protected], your local distributor or from: Merrill Lynch International, Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1A 1HQ 7

8 Important Investor Information Risk Factors An investment in the Fund is designated to be a medium to long-term investment. Investors should not expect to obtain short-term gains from such investment. The Fund is suitable for investors who can afford to set aside the capital for the medium to long-term and who seek a medium investment risk. This is a complex product where typical investors are expected to be informed and to especially have a good knowledge of derivative instruments. The Fund is designed to track the performance of the Merrill Lynch Factor Model however investors should be aware that all returns will be reduced by any fees paid at the fund level. The value of the Fund s assets is linked to the Merrill Lynch Factor Model, the performance of which may rise and fall. Hence, investors should note that the value of their investment could fall as well as rise and they should accept that there is no guarantee that they will recover their initial investment. Investors may very well lose the whole of their initial investment. As explained under section 1 Investment Objectives and Strategies of the Supplement Prospectus for the Fund, the Fund will have to make a payment to MLI as swap counterparty in the event that there is negative performance of the MLFM, such payment being equivalent to the negative performance of the MLFM. This payment will be made from the proceeds received from the repurchase agreement. Investors should note that the entering by the Fund into the OTC swap transaction with MLI involves a counterparty risk. This risk is however limited to 5% of the net assets of the Sub-Fund in accordance with paragraph of the Prospectus. The Merrill Lynch Factor Model is denominated in USD. The performance of the MLFM and subsequently the net asset value of the share classes of the MLFI Fund may be affected by currency exchange rate fluctuations between the USD and the currencies of the MLFI constituents. As the MLFI Fund is available in share classes denominated in USD and other currencies investors may be adversely affected by exchange rate fluctuations. Past performance is not necessarily a guide to future performance. The value of the Shares can go down as well as up. An investment in the Shares of the Fund may not be suitable for all investors. Investors with any doubts about the suitability of the Fund should consult their independent investment adviser. Prospective investors in the Fund should understand the risks involved and should reach an investment decision after careful consideration, with their advisors, of the suitability of such Fund in light of their particular financial circumstances. Investors with questions regarding the tax treatment of Fund should consult their independent tax adviser. The securities comprising the MLFM may change substantially over the life of the investment. In particular, it is possible that the initial constituent securities will increase substantially in value but that the MLFM will decline in value. Investors in the Fund should have regard to this when considering the importance of the identity of the initial securities comprising the MLFM No investigation or review of the underlying indices comprising the MLFM from time to time, including without limitation, any public filings made by the issuers of the underlying securities in the indices have been made for the purposes of forming a view as to the merits of an investment linked to the MLFM. Nor is any guarantee or express or implied warranty in respect of the selection of the underlying securities comprised within the MLFM or the methodology of calculating the MLFM made nor is any assurance or guarantee as to the performance of the MLFM given. An extensive outline of the risk factors applicable to the Fund can be found in the Prospectus. Investors considering in the Fund s offering materials the purchase of Shares in the Fund should consult their own tax and other professional advisors concerning the application of the laws of any state, local or foreign taxing jurisdictions to their particular situations. Distribution Restrictions The Fund has been registered for public distribution in Luxembourg, Germany, Italy, Spain and Sweden. The Fund may be registered in other jurisdictions over time. For an up to date list of those jurisdictions contact your distributor. The Fund may only be offered and distributed to investors in accordance with all relevant local laws and regulations. The distribution of this brochure and the offering or purchase of Shares may be restricted in certain jurisdictions. This brochure does not constitute an offer of or invitation or solicitation to subscribe for or acquire any Shares in any jurisdiction. Persons receiving a copy of this brochure in any jurisdiction may not treat this brochure as constituting an offer, invitation or solicitation to them to subscribe for Shares notwithstanding that, in the relevant jurisdiction, such an offer, invitation or solicitation could lawfully be made to them without compliance with any registration or other legal requirement. It is the responsibility of any persons in possession of this brochure and any persons wishing to apply for Shares to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Prospective applicants for Shares should inform themselves as to the legal requirements of so applying, and any applicable exchange control regulations and taxes in the countries of their respective citizenship, residence or domicile. The Shares have not been, and will not be, registered under the U.S. Securities Act of 1933 or the securities laws of any of the states of the United States and neither Torrus Funds nor the Fund have been, or will be, registered under the U.S. Investment Company Act of 1940 or the laws of any of the states of the United States. Accordingly the Shares may not be offered, sold directly or indirectly in the United States or to or for the account or benefit of any U.S. Person (as defined in Regulation S under U.S. Securities Act of 1933), except pursuant to an exemption from, or in a transaction not subject to the requirements of, the U.S. Securities Act of 1933 and any applicable US state securities laws. Merrill Lynch International and/or any of its affiliates has or may have a position or a material interest in any investment referred to in this material, or related investments. Merrill Lynch, as a full service firm, may have, or may have had within the previous 12 months, business relationships, including investment banking relationships, with, or provided significant advice to, companies referred to in this material or related investments. Past Performance is not necessarily a guide to future performance of the Fund. The value of an investment in the Fund can go down as well as up. UK Disclosure This brochure is directed at persons to whom, and is distributed only to persons to whom Merrill Lynch may promote unregulated collective investment schemes in accordance with the rules of FSA, including in particular Rule 3.11 of the conduct of Business sourcebook ("Relevant Persons"). Such investments are available only to, and an invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely solely on this document or any of its contents. Torrus Funds have no place of business in the UK and are not authorized or regulated by the UK Financial Services Authority ("FSA"). The UK rules for the protection of private customers and the UK Financial Services Compensation Scheme do not apply to such business. As against the Torrus Funds, the regulatory regime governing an investor's rights will be different to that of the UK. Investors may, however, be entitled to similar protection in the jurisdiction in which the relevant entity is organized or resident. This brochure is issued in the UK by Merrill Lynch, Pierce, Fenner & Smith Limited, whose Registered Office is at Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1A 1HQ. Information on Comparative Hedge Fund Indexes The following information relating to pages 5 and 6 of this brochure was taken from publicly available information, and Merrill Lynch takes no responsibility for the accuracy of such information. The HFRX Global Hedge Fund Index (Bloomberg Ticker HFRXGL <Index>) is designed to be representative of the overall composition of the hedge fund universe. It is comprised of eight strategies; convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset-weighted based on the distribution of assets in the hedge fund industry. The HFRI Fund Weighted Composite Index (Bloomberg Ticker HFRIFWI <Index>) is an equally weighted index of over 1,800 constituent hedge funds. The HFRI Composite Index includes both U.S. domestic and off-shore funds but excludes any fund of funds. The HFRI Fund of Funds Index (Bloomberg Ticker HFRIFOF <Index>) represents Fund of Funds that invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The investor has the advantage of diversification among managers and styles with significantly less capital than investing with separate managers. CS Tremont Investable Hedge Fund (Bloomberg Ticker INVXNAV <Index>) Index includes 60 member funds from 10 different sectors chosen among a universe of eligible funds. The 60 member funds are determined in order of size as the largest six eligible funds by AUM in each of the ten Sectors comprising the Original Index. The weight of each member fund is calculated per their AUM in accordance with a predetermined procedure. 10 8