Lazard/Wilmington Capital Allocator Managed Global Equity Portfolio Annual Report
Table of Contents Page Independent Auditors Report 1 Portfolio of Investments 2 Statement of Assets and Liabilities 3 Statement of Operations 4 Statement of Changes in Net Assets 5 Financial Highlights 6-7 Notes to Financial Statements 8-16
Independent Auditor s Report To the Trustee of Lazard/Wilmington Capital Allocator Managed Global Equity Portfolio: We have audited the accompanying financial statements of Lazard/Wilmington Capital Allocator Managed Global Equity Portfolio ( the Portfolio ), which comprise the statement of assets and liabilities, including the portfolio of investments, as of, and the related statements of operations, of changes in net assets and the financial highlights for the year then ended. These financial statements and financial highlights are hereafter collectively referred to as "financial statements". Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Portfolio s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolio s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lazard/Wilmington Capital Allocator Managed Global Equity Portfolio at December 31, 2013, and the results of its operations, changes in its net assets and the financial highlights for the year then ended, in accordance with accounting principles generally accepted in the United States of America. Boston, MA April 4, 2014 PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110 T: (617) 530 5300, F: (617) 530 5001, www.pwc.com/us
Portfolio of Investments Description Shares Value Exchange-Traded Funds 96.7% Guggenheim S&P 500 Equal Weight ETF 360 $ 25,650 Health Care Select Sector SPDR Fund ETF 215 11,920 ishares 20+ Year Treasury Bond ETF 555 56,532 ishares Core MSCI Emerging Markets ETF 7,855 391,258 ishares Core S&P 500 ETF 2,200 408,430 ishares Core S&P Mid-Cap ETF 985 131,832 ishares Core S&P Small-Cap ETF 1,140 124,499 ishares Global Consumer Staples ETF 335 28,840 ishares Global Industrials ETF 550 39,276 ishares MSCI Emerging Markets Index Fund 1,285 53,674 ishares MSCI Germany ETF 1,090 34,618 ishares MSCI Japan ETF 20,540 249,150 ishares MSCI Japan Small-Cap ETF 265 14,383 ishares MSCI South Korea Capped ETF 530 34,275 ishares MSCI United Kingdom ETF 915 19,105 ishares North American Technology ETF 215 19,268 ishares S&P Europe 350 Index Fund 520 24,674 ishares U.S. Healthcare Providers ETF 130 12,123 Market Vectors-Gaming ETF 266 14,204 PowerShares Buyback Achievers Portfolio ETF 985 42,434 PowerShares Dynamic Oil & Gas Services Portfolio ETF 870 22,481 Description Shares Value Robo-Stox Global Robotics & Automation Index ETF 345 $ 9,436 SPDR Barclays Short Term High Yield Bond ETF 695 21,448 SPDR S&P 500 ETF Trust 600 110,802 Vanguard MSCI European ETF 6,830 401,604 Vanguard MSCI Pacific ETF 2,945 180,529 Vanguard Russell 2000 Growth ETF 295 29,025 Total Exchange-Traded Funds (Identified cost $2,224,466) 2,511,470 Closed-End Management Investment Companies 1.0% JPMorgan European Smaller Companies Trust PLC 910 17,239 Mexico Equity and Income Fund, Inc. 455 6,771 Total Closed-End Management Investment Companies (Identified cost $18,475) 24,010 Short-Term Investment 7.6% SSgA U.S. Government Money Market Fund (Identified cost $197,808) 197,808 197,808 Total Investments 105.3% (Identified cost $2,440,749) $ 2,733,288 Liabilities in Excess of Cash and Other Assets (5.3)% (136,528) Net Assets 100.0% $ 2,596,760 ETF Exchange-Traded Fund The accompanying notes are an integral part of these financial statements. 2
Statement of Assets and Liabilities Assets Investments in securities, at value (cost $2,440,749) $ 2,733,288 Receivables for: Dividends 1,775 Units sold 106 Amount due from Sub-Advisor (Note 3) 48,393 Total Assets 2,783,562 Liabilities Payables for: Units redeemed 82,801 Investments purchased 62,849 Custodian fees (Note 5) 11,438 Shareholders services (Note 5) 6,599 Servicing fees Class 2 (Note 4) 734 Trustee fees (Note 3) 397 Other accrued expenses and payables 21,984 Total Liabilities 186,802 Net Assets $ 2,596,760 Class 1 Net Assets $ 1,404,103 Units Outstanding 79,313 Net Asset Value per Unit $ 17.70 Class 2 Net Assets $ 1,192,657 Units Outstanding 67,417 Net Asset Value per Unit $ 17.69 The accompanying notes are an integral part of these financial statements. 3
Statement of Operations For the Year Ended Investment Income Income: Dividends $ 47,584 Total investment income 47,584 Expenses: Investment advisory fees (Note 3) Class 1 7,580 Investment advisory fees (Note 3) Class 2 5,432 Custodian fees (Note 5) 46,099 Professional fees 22,084 Shareholders' services (Note 5) 6,599 Servicing fees Class 2 (Note 4) 2,263 Trustee fees (Note 3) 1,932 Other expenses 823 Total gross expenses 92,812 Investment advisory fees waived and expenses reimbursed (Note 3) (75,010) Total net expenses 17,802 Net investment income 29,782 Net Realized and Unrealized Gain on Investments, Foreign Currency Transactions and Forward Foreign Currency Contracts Net realized gain on: Investments 100,461 Foreign currency transactions and forward foreign currency contracts 746 Total net realized gain on investments, foreign currency transactions and forward foreign currency contracts 101,207 Net change in unrealized appreciation on: Investments 183,574 Foreign currency translations 74 Total net change in unrealized appreciation on investments and foreign currency translations 183,648 Net realized and unrealized gain on investments, foreign currency transactions and forward foreign currency contracts 284,855 Net increase in net assets resulting from operations $ 314,637 The accompanying notes are an integral part of these financial statements. 4
Statement of Changes in Net Assets For the Year Ended Increase (Decrease) In Net Assets Operations: Net investment income $ 29,782 Net realized gain on investments, foreign currency transactions and forward foreign currency contracts 101,207 Net change in unrealized appreciation on investments and foreign currency translations 183,648 Net increase in net assets resulting from operations 314,637 Unitholder Transactions (Note 8): Net proceeds from units sales 1,324,148 Cost of units redeemed (794,759) Net increase in net assets from unitholder transactions 529,389 Total increase in net assets 844,026 Net assets at beginning of year 1,752,734 Net assets at end of year $ 2,596,760 Changes in Units (Note 8): Units outstanding at beginning of year 114,204 Units sold 80,383 Units redeemed (47,857) Net increase in units 32,526 Units outstanding at end of year 146,730 The accompanying notes are an integral part of these financial statements. 5
Financial Highlights Class 1 Selected data per unit outstanding throughout the year Year Ended Net asset value, beginning of year $ 15.35 Income from investment operations: Net investment income (a) 0.21 Net realized and unrealized loss 2.14 Total from investment operations 2.35 Net asset value, end of year $ 17.70 Total Return (b) 15.31% Ratios and Supplemental Data: Net assets, end of year (in thousands) $ 1,404 Ratios to average net assets (c): Net expenses 0.80% Gross expenses 4.15% Net investment income 1.31% Portfolio turnover rate 132.46% (a) (b) (c) Net investment income has been computed based on average daily units outstanding. Certain expenses of the Portfolio have been waived or reimbursed by the Sub-Advisor; without such waiver/reimbursement of expenses, the Portfolio's return would have been lower. Total return calculation is based on the value of a single unit of participation outstanding throughout the year. It represents the percentage change in the net asset value per unit between the beginning of the year and end of the year and assumes reinvestments of all distributions, if any. The calculation includes only those expenses charged directly to the Portfolio. Individual participants may incur administration or other fees related to the management or maintenance of their individual participant accounts, which would have the effect of reducing a participant's net return on their investments in the Portfolio. The calculation includes only those expenses charged directly to the Portfolio, and does not include expenses charged to any funds in which the Portfolio invests. The accompanying notes are an integral part of these financial statements. 6
Financial Highlights Class 2 Selected data per unit outstanding throughout the year Year Ended Net asset value, beginning of year $ 15.34 Income from investment operations: Net investment income (a) 0.24 Net realized and unrealized gain 2.11 Total from investment operations 2.35 Net asset value, end of year $ 17.69 Total Return (b) 15.32% Ratios and Supplemental Data: Net assets, end of year (in thousands) $ 1,193 Ratios to average net assets (c): Net expenses 0.85% Gross expenses 4.45% Net investment income 1.46% Portfolio turnover rate 132.46% (a) (b) (c) Net investment income has been computed based on average daily units outstanding. Certain expenses of the Portfolio have been waived or reimbursed by the Sub-Advisor; without such waiver/reimbursement of expenses, the Portfolio's return would have been lower. Total return calculation is based on the value of a single unit of participation outstanding throughout the year. It represents the percentage change in the net asset value per unit between the beginning of the year and end of the year and assumes reinvestments of all distributions, if any. The calculation includes only those expenses charged directly to the Portfolio. Individual participants may incur administration or other fees related to the management or maintenance of their individual participant accounts, which would have the effect of reducing a participant's net return on their investments in the Portfolio. The calculation includes only those expenses charged directly to the Portfolio, and does not include expenses charged to any funds in which the Portfolio invests. The accompanying notes are an integral part of these financial statements. 7
Notes to Financial Statements (1) Organization Lazard/Wilmington Capital Allocator Series Collective Trust (the "Trust") is a trust organized under the laws of the Commonwealth of Massachusetts and formed pursuant to a Declaration of Trust dated February 13, 2007, as amended and restated on August 20, 2009 and April 1, 2012 and governed by the laws of the State of Delaware. The Trust is currently comprised of two portfolios: Lazard/Wilmington Capital Allocator Managed Global Equity Portfolio (the "Portfolio") and Lazard/Wilmington Capital Allocator Managed Global Diversified Portfolio. This report includes only the results of the Portfolio. The financial statements of Lazard/Wilmington Capital Allocator Managed Global Diversified Portfolio are presented separately. The Portfolio's investment objective is to achieve long-term capital appreciation by investing primarily in Underlying Funds (open-end and closed-end investment companies, exchange-traded funds and exchangedtraded notes) that invest primarily in domestic small-, mid- and large cap equity asset classes and international equity asset classes, including emerging markets. Please refer to the financial statements of each company and fund in which the Portfolio invests for disclosure of its investment objective, accounting policies and investment holdings. Wilmington Trust Retirement and Institutional Services Company (the "Trustee"), an indirect subsidiary of M&T Bank Corporation, is the Trustee of the Trust and is responsible for certain administrative functions. Lazard Asset Management LLC (the "Sub-Advisor"), a wholly-owned subsidiary of Lazard Frères & Co. LLC, provides sub-advisory services for the investment assets of the Portfolio. State Street Bank and Trust Company (the Custodian ) is the Custodian of the Portfolio and is responsible for custody of the Portfolio's assets and providing transfer agent, recordkeeping and accounting functions. According to the Offering Memorandum, the Portfolio initially will be divided into five classes, which shall be identical except as to expenses to be borne by a particular class. Additional classes may be added by the Trustee in its discretion. As of, the Portfolio had two classes, Class 1 and Class 2. (2) Significant Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ( GAAP ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets resulting from operations during the reporting period. Actual results could differ from those estimates. Refer to the financial statements of each fund in which the Portfolio invests for disclosure of its accounting policies and investment strategy. Events or transactions occurring after year end through April 4, 2014, which is the date the financial statements were available to be issued, have been evaluated by management in the preparation of the financial statements. There has been no significant event which requires disclosure in the financial statements. The following is a summary of the significant accounting policies consistently followed by the Portfolio in the preparation of the financial statements: (a) Valuation of Investments The investment valuation policy of the Portfolio is to value investments at fair value, which is generally determined as the amount that could reasonably be expected to be realized from an orderly disposition of securities and other financial instruments over a reasonable period of time. By its nature, a fair value price is a good faith estimate of the valuation in a current sale and may not reflect an actual market price. In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Portfolio discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure 8
Notes to Financial Statements (continued) the fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurement). The three-level hierarchy of inputs is summarized below. Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities that the Portfolio has the ability to access at the measurement date. Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active. Level 3 Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs were unavailable (for example, when there was little or no market activity for an investment at the end of the period), unobservable inputs may have been used. Unobservable inputs reflect the Sub-Advisor s own assumptions about the factors market participants would use in valuing a portfolio instrument, and would be based on the best information available. Equity investments for which market quotations are readily available (including registered investment companies that are exchange traded) are valued at the last reported sale price on their principal exchange on valuation date, or official close price for certain markets and are categorized as Level 1 in the hierarchy. If no sales are reported for that day, investments are valued at the last published sale price, the mean between the last reported bid and asked prices or at fair value as determined in good faith by the Trustee and are categorized as Level 2 in the hierarchy. Short-term investments (with 60 days or less to maturity), if any, are stated at amortized cost, which approximates fair value. Investments in registered investment companies (other than those that are exchange traded) or collective investment funds, if any, are valued at their respective net asset value. Investments in registered investment companies are categorized as Level 1 in the hierarchy, while investments in collective investment funds are typically categorized as Level 2 in the hierarchy. The Valuation Committee of the Sub-Advisor may evaluate a variety of factors to determine the fair value of securities for which market quotations are determined not to be readily available or reliable. These factors include, but are not limited to, the type of security, the value of comparable securities, observations from financial institutions and relevant news events. Input from the Sub-Advisor s portfolio managers/analysts also will be considered. Under these circumstances, when quoted prices for similar securities are used, securities are categorized as Level 2 in the hierarchy. When observable inputs are limited and assumptions are used in determining fair value, securities are categorized as Level 3 in the hierarchy. If a significant event materially affecting the value of securities occurs between the close of the exchange or market on which the security is principally traded and the time when the Portfolio s net asset value is calculated, or when current market quotations otherwise are determined not to be readily available or reliable (including restricted or other illiquid securities such as certain derivative instruments), such securities will be valued at their fair values as determined by, or in accordance with procedures approved by, the Trustee. Changes in valuation techniques may result in transfers into or out of the current assigned level within the hierarchy. As of, the short-term investments were transferred from Level 2 to Level 1 based on increased reliance on the net asset value of an open-end mutual fund as being representative of an active market price. During the year ended, there were no other transfers into or out of Level 1 or Level 2. Transfers between levels are recognized at the beginning of the reporting period. The following is a summary of the inputs used, as of, involving the Portfolio s assets carried at fair value. The inputs or methodologies used for valuing investments may not be an indication of the risks associated with investing in these securities. 9
Notes to Financial Statements (continued) Description Unadjusted Quoted Prices in Active Markets for Identical Investments (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance as of Exchange-Traded Funds* $ 2,511,470 $ $ $ 2,511,470 Closed-End Management Investment Companies* 24,010 24,010 Short-Term Investment* 197,808 197,808 Total $ 2,733,288 $ $ $ 2,733,288 * Please refer to the Portfolio of Investments, on page 2, for portfolio holdings as a percentage of net assets. (b) Foreign Currency Translation The accounting records of the Portfolio are maintained in US dollars. Portfolio securities and other assets and liabilities denominated in a foreign currency are translated daily into US dollars at the prevailing rates of exchange. Purchases and sales of securities, income receipts and expense payments are translated into US dollars at the prevailing exchange rates on the respective transaction dates. The Portfolio does not isolate the portion of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in their market prices. Such fluctuations are included in net realized and unrealized gain (loss) on investments. Net realized gain (loss) on foreign currency transactions and forward foreign currency contracts represents net foreign currency gain (loss) from forward foreign currency contracts, disposition of foreign currencies, currency gain (loss) realized between the trade and settlement dates on securities transactions, and the difference between the amount of dividends, interest and foreign withholding taxes recorded on the Portfolio s accounting records and the US dollar equivalent amounts actually received or paid. Net change in unrealized appreciation (depreciation) on foreign currency translations reflects the impact of changes in exchange rates on the value of assets and liabilities, other than investments in securities, during the period. (c) Portfolio Securities Transactions and Investment Income Portfolio securities transactions are accounted for on trade date. The cost of securities delivered and the net realized gain (loss) on securities sold are determined using the identified cost basis. Dividend income, if any, is recorded net of applicable withholding taxes on the ex-dividend date or as soon thereafter as the Portfolio is informed of the ex-dividend date. Interest income earned on securities, if any, is recorded net of applicable withholding taxes on the accrual basis; interest earned on foreign currency accounts is recorded when the Custodian is first notified of the amount credited by the depository bank. Interest income includes accretion of discounts and amortization of premiums, if any. Income received, if any, from funds in which the Portfolio invests retains its character. A portion of the income earned from Underlying Funds is reclassified to capital gains according to fund policy. (d) Income Taxes The Portfolio intends to continue to be exempt from taxation under section 501(a) of the Internal Revenue Code and qualify as a group trust under IRS Revenue Ruling 81-100 and any amendments thereto, and other applicable IRS rules and regulations. The participants are required to report their respective portion of the Portfolio s US taxable income or loss in their own income tax returns and are liable for any related taxes thereon. Accordingly, no provision for federal income taxes is made in the financial statements of the Portfolio. The Portfolio has adopted the authoritative guidance for uncertainty in income taxes and recognizes a tax benefit from an uncertain position only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority s widely understood administrative practices and precedents. If this threshold is met, the Portfolio measures the tax benefit as the largest amount of benefit that is greater than fifty percent likely of 10
Notes to Financial Statements (continued) being realized upon ultimate settlement. As of, management has reviewed the Portfolio s current tax position and has determined that no position for income tax is required in the Portfolio s financial statements. The Sub- Advisor has reviewed the Portfolio s tax positions for all open tax years (current and prior), and has determined that no provision for income tax is required in the Portfolio s financial statements. (e) Distributions to Participants Net investment income and net realized gains are retained by the Portfolio. (f) Accounting Pronouncements In June 2013, the Financial Accounting Standards Board (the FASB ) issued Accounting Standards Update ( ASU ) No. 2013-08 Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. This ASU clarifies the characteristics of an investment company, provides comprehensive guidance to determine whether an entity in an investment company and sets certain measurement and disclosure requirements. This ASU is effective for interim and annual periods in the fiscal years that begin after December 15, 2013. The Sub-Advisor does not expect that the adoption of this standard will have a material impact on the financial statements. In April 2013, the FASB issued an amendment to GAAP that requires financial statements to be prepared using the liquidation basis of accounting when liquidation is deemed imminent. The amendment is effective, for the Portfolio, on January 1, 2014. The Sub-Advisor does not anticipate that the adoption of the amendment will have a material impact on the Portfolio s financial statements. (3) Sub-Advisor Agreement Under the Sub-Advisor Agreement, the Sub-Advisor regularly provides the Portfolio with investment research, advice and supervision and furnishes continuously an investment program consistent with the Portfolio s investment objective and policies, including the purchase, retention and disposition of securities. The Portfolio pays the Sub-Advisor an investment advisory fee at an annual rate of 0.60% of the average daily net assets for Class 1 and Class 2. The investment advisory fees are accrued daily and paid quarterly. The Sub-Advisor has voluntarily agreed to reduce its fees and, if necessary, reimburse the Portfolio if annualized operating expenses exceed 0.80% and 0.85% of the average daily net assets for Class 1 and Class 2, respectively. For the year ended, the Sub-Advisor waived all of its fees and reimbursed the Portfolio $75,010 for such excess expenses. At December, 31, 2013, the Portfolio had a receivable of $48,393 for such reimbursement. The Trustee is responsible for certain administrative and financial reporting functions. For these services, from January 1, 2013 to June 30, 2013, the Portfolio paid the Trustee a per annum fee of 0.10% on the first $500 million of net assets, 0.08% on the next $500 million of net assets and 0.06% on net assets in excess of $1 billion. Effective July 1, 2013, the Portfolio pays the Trustee a per annum fee of 0.08% on the first $1 billion of net assets and 0.06% on net assets in excess of $1 billion, subject to a minimum quarterly fee of $75,000 for the aggregate of the Portfolio, Lazard/Wilmington Capital Allocator Managed Global Diversified Portfolio, Lazard/Wilmington Emerging Markets Portfolio and Lazard/Wilmington Emerging Markets Sudan Free Portfolio. The trustee fees are accrued daily and paid quarterly. At, fees payable to the Trustee were $397. 11
Notes to Financial Statements (continued) (4) Servicing Fees For certain classes of units, the following servicing fees are paid to third party administrators or other servicing agents as compensation for certain plan administration and other related expenses associated with an investment in units: Class Servicing Fee Class 1 0.00 % Class 2 0.25 At, servicing fees payable for Class 2 were $734. (5) Custody Agreement The Custodian is responsible for the custody of the Portfolio s assets and providing transfer agent, record keeping and accounting functions. For these services the Portfolio pays the Custodian a per annum fee of 0.03% on the first $50 million of net assets and 0.01% on net assets in excess of $50 million. The minimum annual fee for the Portfolio is $24,000. The Portfolio also pays the Custodian holding fees and transaction fees for its global custody services. In addition, the Custodian receives a monthly account services fee computed on the basis of the number of unitholder accounts it maintains for the Portfolio during the month, and is reimbursed for certain out-of-pocket expenses. At, fees payable to the Custodian were $18,037. (6) Financial Instruments The Portfolio transacts in derivative instruments including forward foreign currency contracts primarily for trading purposes with the primary risk exposure being foreign exchange. The Portfolio's use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing directly in securities and other more traditional investments. Derivatives are subject to a number of risks, such as potential changes in value in response to interest rate changes or other market developments or as a result of the counterparty's credit quality and the risk that a derivative transaction may not have the anticipated effect. Derivatives may also involve the risk of mispricing or improper valuation and the risk that changes in the value of a derivative may not correlate perfectly with the asset, rate, or index underlying the derivative. Derivative transactions can create investment leverage and may be highly volatile. Use of derivatives other than for hedging purposes may be considered speculative. When the Portfolio invests in a derivative instrument, it may lose more than the principal amount invested. Many derivative transactions are entered into "over the counter" (not on an exchange or contract market); as a result, the value of such a derivative transaction will depend on the ability and the willingness of the Portfolio's counterparty to perform its obligations under the transaction. A liquid secondary market may not always exist for the Portfolio's derivative positions at any time. Although the use of derivatives is intended to complement the Portfolio's performance, it may instead reduce returns and increase volatility. The measurement of the risks associated with derivative instruments is meaningful only when all related and offsetting transactions are considered. The Portfolio must set aside liquid assets or engage in other appropriate measures to cover its obligations under these derivative instruments. The Portfolio values derivatives at fair value as described below and recognizes changes in fair value currently in its results of operations. Accordingly, the Portfolio does not follow hedge accounting, even for derivatives employed as economic hedges. 12
Notes to Financial Statements (continued) (a) Forward Contracts The Portfolio may purchase or sell currencies and/or engage in forward foreign currency transactions in order to expedite settlement of Portfolio transactions and to manage currency risk. Forward foreign currency contracts are traded in the inter-bank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement and no commissions are charged at any stage for trades. The Portfolio will account for forward contracts by marking-to-market each day at current forward contract values. The change in market value is recorded by the Portfolio as an unrealized gain or loss. When the contract is closed, the Portfolio recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The Portfolio will only enter into forward contracts to sell, for a fixed amount of US dollars or other appropriate currency, an amount of foreign currency, to the extent that the value of the short forward contract is covered by the underlying value of securities denominated in the currency being sold. Alternatively, when the Portfolio enters into a forward contract to sell an amount of foreign currency, the Portfolio s Custodian will segregate assets in a segregated account of the Portfolio in an amount not less than the value of the Portfolio s total assets committed to the consummation of such forward contracts. If the additional segregated assets placed in the segregated account decline, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of the Portfolio s commitments with respect to such contracts. The Portfolio may use forward foreign currency contracts to facilitate transactions in foreign securities or as a hedge against either specific transactions or portfolio positions. Such contracts are valued based upon the applicable forward exchange rates and any resulting unrealized gains or losses are recorded in the Portfolio s financial statements. The Portfolio records realized gains or losses at the time the forward contract is extinguished by entry into a closing transaction or by delivery of the currency. Risks in forward foreign currency contracts arise from the possible inability of counterparties to meet the contracts terms and from movements in currency values. There were no open forward foreign currency contracts as of. (b) Fair Value of Derivative Instruments by Risk Category The following table sets forth by certain risk types the Portfolio gains (losses) related to derivative activities for the fiscal year ended. These gains (losses) should be considered in the context that derivative contracts may have been executed to economically hedge securities and accordingly, gains or losses on derivative contracts may offset losses or gains attributable to securities. These gains (losses) are included in "Net realized gain (loss) on foreign currency transactions and forward foreign currency contracts" or "Net change in unrealized appreciation (depreciation) on foreign currency translations" in the Statement of Operations: Effect of Derivative Instruments on the Statement of Operations - Net Realized Gain (Loss) on Foreign Currency Transactions and Forward Foreign Currency Contracts: Derivatives not accounted for as hedging instruments Net Realized Gain (Loss) on Foreign Currency Transactions and Forward Foreign Currency Contracts Forward foreign currency contracts $ 965 During the year ended, the Portfolio had an average notional amount of $3,316 for forward foreign currency contracts. 13
Notes to Financial Statements (continued) (7) Investment Transactions Purchases and sales of securities, excluding short-term investments and including in-kind contributions and redemptions, if any, for the year ended were $3,335,794 and $2,756,703, respectively. (8) Participants' Transactions The Portfolio offers units for sale and units may be redeemed at the class' net asset value as of the close of each business day. The issuance and redemption terms of the Portfolio are consistent with those of the Underlying Funds. For the year ended, the unit transactions were as follows: Units Dollar Amount Class 1 Units outstanding at beginning of year 75,568 $ 915,198 Units sold 23,465 390,627 Units redeemed (19,720) (334,320) Net increase in units 3,745 56,307 Units outstanding at end of year 79,313 $ 971,505 Class 2 Units outstanding at beginning of year 38,636 $ 554,708 Units sold 56,918 933,521 Units redeemed (28,137) (460,439) Net increase in units 28,781 473,082 Units outstanding at end of year 67,417 $ 1,027,790 Units in excess of 10% of Class 1 units at were held by one of the Class s unitholders and aggregated to 95.39% of the Class total units outstanding. Units in excess of 10% of Class 2 units at were held by two of the Class unitholders and aggregated to 68.66% of the Class total units outstanding. (9) Concentration of Investment Risks (a) Investing in Non-US Markets The Portfolio invests in securities of foreign entities and in instruments denominated in foreign currencies which involve risks not typically associated with investments in US securities. The Portfolio s performance will be influenced by political, social and economic factors affecting the non-us countries and companies in which the Portfolio invests. Non- US securities carry special risks, such as exposure to less developed or less efficient trading markets, political instability, a lack of company information, differing auditing and legal standards, and, potentially, less liquidity. In addition, investments denominated in currencies other than US dollars carry the risk that such currencies will decline in value relative to the US dollar and affect the value of these investments held in the Portfolio. Emerging market countries can generally have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed countries. The securities markets of emerging market countries have historically been extremely volatile. However, the capital markets in the US and internationally have experienced unprecedented volatility in recent years, causing significant declines in the value and liquidity of many securities. These market conditions may continue to worsen. Significant devaluation of emerging market currencies against the US dollar may occur subsequent to investments denominated in emerging markets currencies. The Sub-Advisor manages currency risk by entering into forward foreign currency contracts. 14
Notes to Financial Statements (continued) (b) Underlying Funds As this Portfolio may make investments in Underlying Funds, participants should consider the methods used to value the Underlying Funds' investments. The Underlying Fund's use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing directly in securities and other more traditional investments. Derivatives are instruments whose values are derived from underlying assets, indices, reference rates or a combination of these factors. Derivatives are subject to a number of risks, such as potential changes in value in response to interest rate changes or other market developments or as a result of the counterparty's credit quality and the risk that a derivative transaction may not have the anticipated effect. Derivatives may also involve the risk of mispricing or improper valuation and the risk that changes in the value of a derivative may not correlate perfectly with the asset, rate, or index underlying the derivative. Derivative transactions can create investment leverage and may be highly volatile. Use of derivatives other than for hedging purposes may be considered speculative. When the Underlying Fund invests in a derivative instrument, it may lose more than the principal amount invested. Many derivative transactions are entered into "over the counter" (not on an exchange or contract market); as a result, the value of such a derivative transaction will depend on the ability and the willingness of the Underlying Fund's counterparty to perform is obligations under the transaction. A liquid secondary market may not always exist for the Underlying Fund's derivative positions at any time. Although the use of derivatives is intended to complement the Underlying Fund's performance, it may instead reduce returns and increase volatility. The measurement of the risks associated with derivative instruments is meaningful only when all related and offsetting transactions are considered. The Underlying Funds must set aside liquid assets or engage in other appropriate measures to cover their obligations under these derivative instruments. The Underlying Funds value derivatives at fair value and recognize changes in fair value currently in their results of operations. Accordingly, the Underlying Funds do not follow hedge accounting, even for derivatives employed as economic hedges. Derivative instruments outstanding at year end, if any, are disclosed on the Portfolio of Investments. Futures Contracts The Underlying Funds may use futures contracts to manage exposure to the market. Futures contracts involve, to varying degrees, credit and market risks. The Underlying Funds enter into futures contracts only on exchanges or boards of trade where the exchange or board of trade acts as the counterparty to the transaction. Thus, credit risk on such transactions is limited to the failure of the exchange or board of trade. Losses in value may arise from changes in the value of the underlying instruments or if there is an illiquid secondary market for the contracts. In addition, there is the risk that there may not be an exact correlation between a futures contract and the underlying index or security. Forward Foreign Currency Contracts The Underlying Funds may use forward foreign currency contracts to facilitate transactions in foreign securities, to gain exposure to foreign currency or as a hedge against the foreign currency exposure of either specific transactions or portfolio positions. When entering into a forward foreign currency contract, the Underlying Funds agree to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed-upon future date. Such contracts are valued based upon the difference in the forward exchange rates at the dates of entry into the contracts and the forward rates at the reporting date. Most forward foreign currency contract transactions are entered into over the counter. The Underlying Funds assume the risk of unfavorable or unanticipated changes in the values of the currencies underlying the transactions. Overthe-counter currency transactions are typically uncollateralized, and the Underlying Funds may not be able to recover all or any of its loss on such transactions if the counterparty should default. Many types of currency transactions are expected to continue to be traded over the counter even after implementation of the clearing requirements under the Dodd- Frank Wall Street Reform and Consumer Protection Act. 15
Notes to Financial Statements (concluded) (10) Contingencies and Commitments In the normal course of business, the Portfolio enters into contracts that contain a variety of representations which provide general indemnifications. The Portfolio's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Portfolio that have not yet occurred. However, based on experience, management expects the risk of loss to be remote. 16