ARSN 094 159 501 Annual report - 30 June 2015
ARSN 094 159 501 Annual report - 30 June 2015 Contents Page Directors' Report 1 Auditor's Independence Declaration 4 Statement of Comprehensive Income 5 Statement of Financial Position 6 Statement of Changes in Equity 7 Statement of Cash Flows 8 9 Directors' Declaration 31 Independent Auditor's Report 32 This financial report covers Macquarie High Yield Bond Fund as an individual entity. The Responsible Entity of Macquarie High Yield Bond Fund is Macquarie Investment Management Limited (ABN 66 002 867 003). The Responsible Entity's registered office is No. 50 Martin Place, Sydney, NSW 2000.
Directors' Report 30 June 2015 The directors of Macquarie Investment Management Limited, a wholly owned subsidiary of Macquarie Group Limited, the Responsible Entity of Macquarie High Yield Bond Fund, present their report together with the financial report of Macquarie High Yield Bond Fund (the "Trust") for the year ended 30 June 2015. Principal activities The Trust invests in listed equities, debt securities and derivatives in accordance with the Trust Constitution. The Trust did not have any employees during the year. There were no significant changes in the nature of the Trust s activities during the year. Directors The following persons held office as directors of Macquarie Investment Management Limited during the year or since the end of the year and up to the date of this report: B Terry (resigned 30/06/2015) J Edstein I Miller H Brown (appointed 01/07/2014) Review and results of operations Results The performance of the Trust, as represented by the results of its operations, was as follows: 2015 2014 Operating profit before finance costs attributable to unitholders () 4,860 15,517 Distributions Distribution paid and payable () - 22,365 Distribution (cents per unit) - 19.60 Significant changes in state of affairs In the opinion of the directors, there were no significant changes in the state of affairs of the Trust that occurred during the financial year under review. 1
Directors' Report 30 June 2015 Matters subsequent to the end of the financial year On 1 July 2015, Macquarie Investment Management Limited executed business transfer deeds transferring the economic risks and rewards of its Macquarie Investment Management business to Macquarie Investment Management Australia Ltd (formerly known as MQ Portfolio Management Limited) and Macquarie Investment Management Global Ltd (formerly known as Macquarie Capital Investment Management (Australia) Limited). Subject to receiving relevant approvals, the transfer is expected to result in Macquarie Investment Management Limited retiring as Responsible Entity of the Trust and Macquarie Investment Management Australia Ltd being appointed as Responsible Entity of the Trust. No other matter or circumstance has arisen since 30 June 2015 that has significantly affected, or may significantly affect: (i) the operations of the Trust in future financial years, or (ii) the results of those operations in future financial years, or (iii) the state of affairs of the Trust in future financial years. Likely developments and expected results of operations The Trust will continue to be managed in accordance with the investment objective and strategy set out in the Trust s offer document and in accordance with the Trust Constitution. The results of the Trust's operations will be affected by a number of factors, including the performance of investment markets in which the Trust invests. Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. Further information on likely developments in the operations of the Trust and the expected results of those operations have not been included in this report because the Responsible Entity believes it would be likely to result in unreasonable prejudice to the Trust. Indemnification and insurance of officers and auditors No insurance premiums are paid for out of the assets of the Trust in regards to insurance cover provided to either the officers of Macquarie Investment Management Limited or the auditors of the Trust. Under the Trust Constitution, Macquarie Investment Management Limited as Responsible Entity of the Trust is entitled to be indemnified out of the assets of the Trust for any liability incurred by it in properly performing or exercising any of its powers or duties in relation to the Trust. Fees paid to and interests held in the Trust by the Responsible Entity or its associates Fees paid to the Responsible Entity and its associates out of Trust property during the year are disclosed in note 10 of the financial statements. No fees were paid out of Trust property to the directors of the Responsible Entity during the year (2014: Nil). The number of interests in the Trust held by the Responsible Entity, its directors or its associates as at the end of the financial year are disclosed in note 10 of the financial statements. 2
Directors' Report 30 June 2015 Interests in the Trust The movement in units on issue in the Trust during the year is disclosed in note 6 of the financial statements. The value of the Trust s assets and liabilities is disclosed on the statement of financial position and derived using the basis set out in note 2 of the financial statements. Environmental regulation The operations of the Trust are not subject to any particular or significant environmental regulations under a Commonwealth, State or Territory law. Rounding of amounts to the nearest thousand dollars Pursuant to Class Order 98/100 issued by the Australian Securities & Investments Commission, relating to the "rounding off" of amounts in the directors' report and financial report, amounts in the directors' report and financial report have been rounded off to the nearest thousand dollars in accordance with that Class Order, unless otherwise indicated. Auditor's independence declaration A copy of the Auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 4. This report is made in accordance with a resolution of the directors. Director:... I Miller Sydney 16 September 2015 3
Ernst & Young 680 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor s Independence Declaration to the Directors of Macquarie Investment Management Limited In relation to our audit of the financial report of Macquarie High Yield Bond Fund for the financial year ended 30 June 2015, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young Darren Handley-Greaves Partner 16 September 2015 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation
Statement of Comprehensive Income Notes 2015 2014 Investment income Dividend income - 19 Net gains on financial instruments held at fair value through profit or loss 5 5,943 16,245 Other operating income 221 - Total net investment income 6,164 16,264 Expenses Responsible Entity/Investment Manager fees 10 (1,213) (700) Other operating expenses (91) (47) Total operating expenses (1,304) (747) Operating profit 4,860 15,517 Finance costs attributable to unitholders Distributions to unitholders - (22,365) (Increase)/decrease in net assets attributable to unitholders 6 (4,860) 6,848 Profit/(loss) for the year - - Other comprehensive income for the year - - Total comprehensive income for the year - - The above statement of comprehensive income should be read in conjunction with the accompanying notes. 5
Statement of Financial Position As at 30 June 2015 Notes 2015 2014 Assets Cash and cash equivalents 7 2,095 5,359 Due from brokers - receivable for securities sold 329 480 Other receivables 25 12 Financial assets held at fair value through profit or loss 8 356,555 107,474 Total assets 359,004 113,325 Liabilities Due to brokers - payable for securities purchased 4,116 1,867 Responsible Entity/Investment Manager fees payable 10 546 168 Financial liabilities held at fair value through profit or loss 9 164 172 Total liabilities (excluding net assets attributable to unitholders) 4,826 2,207 Net assets attributable to unitholders - liability 6 354,178 111,118 The above statement of financial position should be read in conjunction with the accompanying notes. 6
Statement of Changes in Equity 2015 2014 Total equity at the beginning of the year - - Total comprehensive income for the year - - Transactions with owners in their capacity as owners - - Total equity at the end of the year - - Under Australian Accounting Standards, net assets attributable to unitholders are classified as a liability rather than equity. As a result there was no equity at the start or end of the year. The above statement of changes in equity should be read in conjunction with the accompanying notes. 7
Statement of Cash Flows Notes 2015 2014 Cash flows from operating activities: Proceeds from sale of financial instruments held at fair value through profit or loss 76,805 176,281 Purchase of financial instruments held at fair value through profit or loss (331,414) (100,154) Dividends received - 19 Interest received 11,681 6,786 Other income received 208 19 Responsible Entity/Investment Manager fees paid (835) (896) Payment of other expenses (91) (42) Net cash (outflow)/inflow from operating activities 11(a) (243,646) 82,013 Cash flows from financing activities: Proceeds from applications by unitholders 252,880 1,808 Payments for redemptions by unitholders (14,680) (77,856) Net cash inflow/(outflow) from financing activities 238,200 (76,048) Net (decrease)/increase in cash and cash equivalents (5,446) 5,965 Cash and cash equivalents at the beginning of the year 5,359 70 Effects of foreign currency exchange rate changes on cash and cash equivalents 2,182 (676) Cash and cash equivalents at the end of the year 7 2,095 5,359 Non-cash financing activities 11(b) - 22,365 The above statement of cash flows should be read in conjunction with the accompanying notes. 8
1 General Information This financial report covers Macquarie High Yield Bond Fund (the "Trust") as an individual entity. The Trust was constituted on 15 August 2000. The Trust is a registered managed investment scheme domiciled in Australia. The Responsible Entity of the Trust is Macquarie Investment Management Limited (the "Responsible Entity''). The Responsible Entity s registered office is No. 50 Martin Place, Sydney, NSW 2000. The financial report is presented in Australian dollars. For the period ended 31 December 2014, the Investment Manager of the Trust was Wellington Management Company, LLP (the Investment Manager ). On 1 January 2015, Wellington Management Company, LLP resigned as the Investment Manager of the Trust and Wellington Management Australia Pty Limited (the Investment Manager ) was appointed as Investment Manager of the Trust. The parent and ultimate parent of the Trust was Macquarie Diversified Fixed Interest Fund which ceased to control the Trust on 29 January 2015. On that date, Macquarie Income Opportunities Fund became the parent and ultimate parent of the Trust. The Trust will continue to be managed in accordance with the investment objective and strategy set out in the Trust s offer document and in accordance with the Trust Constitution. The financial statements were authorised for issue by the directors on 16 September 2015. The directors of the Responsible Entity have the power to amend and reissue the financial report. 2 Summary of Significant Accounting Policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated in the following text. (a) Basis of Preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001 in Australia. The financial report is prepared on the basis of fair value measurement of assets and liabilities except where otherwise stated. The statement of financial position is presented on a liquidity basis. Assets and liabilities are presented in decreasing order of liquidity and do not distinguish between current and non-current. All balances are expected to be recovered or settled within twelve months, except for investments in financial assets and net assets attributable to unitholders. The amount expected to be recovered or settled within twelve months after the end of each reporting period cannot be reliably determined. Where necessary, comparative information has been reclassified to be consistent with current period disclosures. Changes in Australian Accounting Standards The Trust has adopted all mandatory Australian Accounting Standards and Interpretations for the financial year beginning on or after 1 July 2014. The following key Accounting Standards and amendments to Accounting Standards became applicable in the current financial year: 9
2 Summary of Significant Accounting Policies (continued) (a) Basis of Preparation (continued) (i) AASB 2012-3 Amendments to Australian Accounting Standards - Offsetting Financial Assets and Financial Liabilities AASB 2012-3 amends AASB 132 Financial Instruments: Presentation to clarify that to set off an asset with a liability:! The right of set-off must be available and legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy;! Certain gross settlement mechanisms (such as through a clearing house) may be equivalent to net settlement;! Master netting arrangements where the legal right of offset is only enforceable on the occurrence of a future event (such as default of the counterparty) continue to not meet the requirements for netting. AASB 2012-3 is required to be retrospectively applied. Application in the current period has not had a material impact on the financial position nor performance of the Trust. (ii) AASB 2013-5 Amendments to Australian Accounting Standards Investment Entities AASB 2013-5 defines an investment entity and provides an exception to the consolidation requirements in AASB 10. Investment entities are required to measure particular subsidiaries at fair value through profit or loss, rather than consolidate them. However, where a non-investment entity parent ultimately controls an investment entity, the parent must still consolidate the investment entity and all the underlying subsidiaries, reversing fair value used by the investment entity. The amendments also set out new disclosure requirements for investment entities. AASB 2013-5 is required to be retrospectively applied, however, adjustments are not required for subsidiary investments that are disposed of or for which control is lost before the due date of initial application, 1 July 2014. As the Trust does not have any subsidiary investments, the application of this standard has no impact on the financial position nor performance of the Trust. Compliance with International Financial Reporting Standards The financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. 10
2 Summary of Significant Accounting Policies (continued) (b) Financial instruments (i) Classification The Trust's investments are categorised as at fair value through profit or loss. They comprise:! Financial instruments held for trading These include derivative financial instruments such as credit default swaps and foreign currency forward contracts. The Trust does not designate any derivatives as hedges in a hedging relationship.! Financial instruments designated at fair value through profit or loss upon initial recognition These include financial assets that are not held for trading purposes and which may be sold. These include investments in exchange traded equity securities and debt securities. Financial assets and financial liabilities designated at fair value through profit or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Trust s documented investment strategy. The Trust s policy is for the Responsible Entity to evaluate the information about these financial assets on a fair value basis together with other related financial information. Loans and receivables comprise amounts due to the Trust. (ii) Recognition/derecognition The Trust recognises financial assets and financial liabilities on the date it becomes party to the contractual agreement (trade date) and recognises changes in fair value of the financial assets or financial liabilities from this date. Investments are derecognised when the right to receive cashflows from the investments has expired or the Trust has transferred substantially all risks and rewards of ownership. (iii) Measurement (a) Financial assets and financial liabilities held at fair value through profit or loss Financial assets and financial liabilities held at fair value through profit or loss are measured initially at fair value excluding any transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed immediately. Subsequent to initial recognition, all instruments held at fair value through profit or loss are measured at fair value with changes in their fair value recognised in the statement of comprehensive income.! Fair value in an active market The fair value of financial assets and financial liabilities traded in active markets is based on their quoted market prices at the statement of financial position date without any deduction for estimated future selling costs. Financial assets are priced at current bid prices, while financial liabilities are priced at current asking prices. 11
2 Summary of Significant Accounting Policies (continued) (b) Financial instruments (continued) (iii) Measurement (continued) (a) Financial assets and financial liabilities held at fair value through profit or loss (continued)! Fair value in an inactive or unquoted market The fair value of financial assets and financial liabilities that are not traded in an active market is determined using valuation techniques. These include the use of recent arm s length market transactions, reference to the current fair value of a substantially similar other instrument, discounted cash flow techniques, option pricing models or any other valuation technique that provides a reliable estimate of prices obtained in actual market transactions. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate used in a market rate at the statement of financial position date applicable for an instrument with similar terms and conditions. For other pricing models, inputs are based on market data at the statement of financial position date. Fair values for unquoted equity investments are estimated, if possible, using applicable pricing/earnings ratios for similar listed companies adjusted to reflect the specific circumstances of the issuer. The fair value of derivatives that are not exchange traded is estimated at the amount that the Trust would receive or pay to terminate the contract at the statement of financial position date taking into account current market conditions (volatility and appropriate yield curve) and the current creditworthiness of the counterparties. Details on how the fair value of financial instruments is determined are disclosed in note 3(e). (b) Loans and receivables Loans and receivables are measured initially at fair value plus transaction costs and subsequently amortised using the effective interest method, less impairment losses if any. Such assets are reviewed at each statement of financial position date to determine whether there is objective evidence of impairment. If any such indication of impairment exists, an impairment calculation is undertaken and any impairment loss is recognised in the statement of comprehensive income as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. If in a subsequent period the amount of an impairment loss recognised on a financial asset carried at amortised cost decreases and the decrease can be linked objectively to an event occurring after the write-down, the write-down is reversed through the statement of comprehensive income. (iv) Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a legally enforceable right to offset the recognised amounts at all times and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 12
2 Summary of Significant Accounting Policies (continued) (c) Net assets attributable to unitholders Units are redeemable at the unitholders' option and are therefore classified as financial liabilities. The units can be put back to the Trust at any time for cash based on the redemption price. The fair value of redeemable units is measured at the redemption amount that is payable (based on the redemption unit price) at the statement of financial position date if unitholders exercised their right to put the units back to the Trust. (d) Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash includes cash on hand and deposits held at call with financial institutions. Cash equivalents include other short-term, highly liquid investments with original maturities of three months or less from the date of acquisition that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Bank overdrafts, if any, are shown separately on the statement of financial position. Payments and receipts relating to the purchase and sale of investment securities are classified as cash flows from operating activities, as movements in the fair value of these securities represent the Trust's main income generating activity. (e) Investment income Interest income is recognised in the statement of comprehensive income using the effective interest method for all financial instruments that are not held at fair value through profit or loss. Interest income on assets held at fair value through profit or loss is included in the net gains on financial instruments. Other changes in fair value for such instruments are recorded in accordance with the policies described in note 2(b). The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or a shorter period where applicable, to the net carrying amount of the financial asset or liability. When calculating the effective interest rate, the Trust estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, including transaction costs and all other premiums or discounts. Dividend income is recognised on the ex-dividend date. (f) Expenses All expenses, including Responsible Entity/Investment Manager fees, are recognised in the statement of comprehensive income on an accruals basis. (g) Income tax Under current legislation, the Trust is not subject to income tax as unitholders are presently entitled to the income of the Trust. Financial instruments held at fair value may include unrealised capital gains. Should such a gain be realised, that portion of the gain that is subject to capital gains tax will be distributed so that the Trust is not subject to capital gains tax. 13
2 Summary of Significant Accounting Policies (continued) (g) Income tax (continued) Realised capital losses are not distributed to unitholders but are retained in the Trust to be offset against any realised capital gains. If realised capital gains exceed realised capital losses, the excess is distributed to unitholders. The benefits of imputation credits and tax paid are passed on to unitholders. (h) Distributions In accordance with the Trust Constitution, the Trust distributes its distributable income, and any other amounts determined by the Responsible Entity, to unitholders by cash or reinvestment. The distributions are recognised in the statement of comprehensive income as finance costs attributable to unitholders. (i) Increase/decrease in net assets attributable to unitholders Income not distributed is included in net assets attributable to unitholders. Movements in net assets attributable to unitholders are recognised in the statement of comprehensive income as finance costs. (j) Foreign currency translation (i) Functional and presentation currency Items included in the Trust s financial statements are measured using the currency of the primary economic environment in which it operates (the functional currency ). This is the Australian dollar, which reflects the currency of the economy in which the Trust competes for funds and is regulated. The Australian dollar is also the Trust s presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translations at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. The Trust does not isolate that portion of gains or losses on securities and derivative financial instruments that are measured at fair value through profit or loss and which is due to changes in foreign exchange rates from that which is due to changes in the market price of securities. Such fluctuations are included with the net gains on financial instruments at fair value through profit or loss. (k) Due from/to brokers Amounts due from/to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet delivered by the end of the year. A provision for impairment of amounts due from brokers is established when there is objective evidence that the Trust will not be able to collect all amounts due from the relevant broker. Significant financial difficulties of the broker, probability that the broker will enter bankruptcy or financial reorganisation, and default in payments are considered indicators that the amount due from brokers is impaired. 14
2 Summary of Significant Accounting Policies (continued) (l) Receivables Receivables may include amounts for interest and dividends. Interest is accrued at the reporting date from the time of last payment in accordance with the policy set out in note 2(e) above. Dividends are accrued when the right to receive payment is established. Amounts are generally received within 30 days of being recorded as receivables. Receivables may include such items as Reduced Input Tax Credits ("RITC"). (m) Payables Payables include liabilities and accrued expenses owing by the Trust which are unpaid as at year end. (n) Applications and redemptions Applications received for units in the Trust are recorded net of any entry fees payable prior to the issue of units in the Trust. Redemptions from the Trust are recorded gross of any exit fees payable after the cancellation of units redeemed. (o) Goods and Services Tax (GST) The GST incurred on the costs of various services provided to the Trust by third parties such as Responsible Entity/Investment Manager fees have been passed onto the Trust. The Trust qualifies for RITC hence Responsible Entity/Investment Manager fees and other expenses have been recognised in the statement of comprehensive income net of the amount of GST recoverable from the Australian Taxation Office ("ATO"). Accounts payable are inclusive of GST. The net amount of GST recoverable from the ATO is included in receivables in the statement of financial position. Cash flows relating to GST are included as cash flows from operating activities in the statement of cash flows on a gross basis. (p) Use of estimates The Responsible Entity makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Certain financial instruments, for example, over-the-counter derivatives and unquoted securities are fair valued using valuation techniques. Where valuation techniques (for example, pricing models) are used to determine fair values, they are validated and periodically reviewed by experienced personnel of the Responsible Entity, independent of the area that created them. Models are calibrated by back-testing to actual transactions to ensure that outputs are reliable. Models use observable data to the extent practicable. However, inputs such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these inputs could affect the reported fair value of financial instruments. For certain other financial instruments, including amounts due from/to brokers and accounts payable, the carrying amounts approximate fair value due to the immediate or short-term nature of these financial instruments. 15
2 Summary of Significant Accounting Policies (continued) (q) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2015 reporting periods. The Responsible Entity s assessment of the impact of these new standards (to the extent relevant to the Trust) and interpretations is set out below: (i) AASB 9 Financial Instruments, AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9, AASB 2013-9 Amendments to Australian Accounting Standards - Conceptual Framework, Materiality and Financial Instruments - Part C and related amendment AASB 2010-7 and AASB 2014-1 Amendments to Accounting Standards AASB 9 Financial Instruments applies to annual reporting periods beginning on or after 1 January 2018 and will therefore apply to the Trust from 1 July 2018. AASB 9 Financial Instruments requires all financial instruments to be measured at fair value unless the criteria for amortised cost are met. The application of the standard is not expected to change the measurement basis of any of the Trust's current financial instruments, however, AASB 9 Financial Instruments allows the Trust to elect to present gains and losses on financial instruments held at fair value through other comprehensive income, which may impact the presentation of these gains and losses. The impact of the standard may also change if the nature of the Trust's activities or investments changes prior to initial application. The Trust is continuing to assess the full impact of adopting AASB 9 Financial Instruments. Standards and interpretations that are not expected to have material impact on the Trust have not been included. (r) Rounding of amounts Pursuant to Class Order 98/100 issued by the Australian Securities & Investments Commission, relating to the "rounding off" of amounts in the directors' report and financial report, amounts in the directors' report and financial report have been rounded off to the nearest thousand dollars in accordance with that Class Order, unless otherwise indicated. 3 Financial risk management (a) Strategy in using financial instruments The Trust s activities expose it to a variety of financial risks: market risk (which may include price risk, foreign exchange risk and interest rate and credit spread risk), credit risk and liquidity risk. The Responsible Entity s overall risk management programme focuses on ensuring compliance with the Trust s investment guidelines and seeks to maximise the returns derived for the level of risk to which the Trust is exposed. The Trust uses derivatives and other instruments for trading purposes and in connection with its risk management activities. 16
3 Financial risk management (continued) (a) Strategy in using financial instruments (continued) The Trust may use derivative financial instruments:! to gain or reduce market exposure in the portfolio! for currency hedging! to hedge the credit exposure within the portfolio. Derivatives are not used to gear (leverage) the portfolio. Gearing a portfolio would occur if the level of exposure to the markets exceed the underlying value of the Trust. Financial risk management is monitored by the Investment Manager's risk management department under policies approved by the Responsible Entity's senior managers or by the board of directors of the Responsible Entity (the "Board"). The Board Audit Risk and Compliance Committee of the Responsible Entity reviews any identified high and medium severity exceptions to internal risk policies and procedures on a quarterly basis. (b) Market risk (i) Price risk Price risk for the Trust's debt securities and derivatives is a function of foreign exchange risk, interest rate and credit spread risk, credit risk and liquidity risk. (ii) Foreign exchange risk The Trust holds both monetary and non-monetary assets and liabilities denominated in currencies other than the Australian dollar. The foreign exchange risk relating to non-monetary assets and liabilities is a component of price risk. Foreign exchange risk arises as the value of monetary assets and liabilities denominated in other currencies will fluctuate due to changes in exchange rates. As at 30 June 2015, the Trust is not exposed to significant foreign exchange risk as the amount of net monetary assets and liabilities is not significant to the Trust. Foreign exchange risk on monetary and non-monetary assets and liabilities is managed by hedging undesired currency exposure. 17
3 Financial risk management (continued) (b) Market risk (continued) (ii) Foreign exchange risk (continued) The table below summarises the Trust s monetary and non-monetary assets and liabilities denominated in Australian dollars and other currencies as at 30 June 2014. Australian Dollars US Dollars Other currencies Total 30 June 2014 A A A A Assets Cash and cash equivalents 238 5,115 6 5,359 Due from brokers - receivable for securities sold - (272) 752 480 Other receivables 12 - - 12 Financial assets held at fair value through profit or loss 176 85,439 21,859 107,474 Total assets 426 90,282 22,617 113,325 Liabilities Due to brokers - payable for securities purchased - 1,353 514 1,867 Responsible Entity/Investment Manager fees payable 168 - - 168 Financial liabilities held at fair value through profit or loss - 6 166 172 Total liabilities (excluding net assets attributable to unitholders) 168 1,359 680 2,207 Net assets attributable to unitholders - liability 258 88,923 21,937 111,118 The value of monetary assets and liabilities in all other currencies are individually not material to the Trust. Foreign exchange risk on monetary assets and monetary liabilities is measured using sensitivity analysis. The following table summarises the sensitivity of the Trust to foreign exchange risk as at 30 June 2014. The sensitivity of profit/(loss) for the year and the impact on net assets attributable to unitholders is the effect of a reasonably possible change in foreign exchange rates on monetary assets and liabilities held at year end. If exchange rate increased or decreased by 10%, with all other variables remaining constant, the approximate movement in net assets attributable to unitholders would amount to the following. In practice, the actual results may differ from the below sensitivity analysis and the difference could be significant. Foreign exchange risk Impact on operating profit/net assets attributable to unitholders +10% USD A -10% USD A 30 June 2014 349 (349) 18
3 Financial risk management (continued) (b) Market risk (continued) (iii) Interest rate and credit spread risk The Trust is subject to interest rate and credit spread risk due to fluctuations in the prevailing levels of market interest rates and credit spreads. Any excess cash and cash equivalents are invested at short-term market interest rates. Interest rate and credit spread risk is managed by:! only allowing investments into certain instrument types! limiting the term of interest rate securities! monitoring target interest rate durations. The Trust's financial assets and financial liabilities expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates and credit spreads on its financial position and cash flow. The table below demonstrates the sensitivity of the Trust's profit/(loss) for the year to a reasonably possible change in interest rates and credit spreads, with all other variables held constant. The sensitivity of the profit/(loss) for the year is the effect of the assumed changes in interest rates and credit spreads on income for the year based on the floating rate financial assets at year end and changes in fair value of investments for the year based on revaluing fixed rate financial assets at year end. In practice, the actual results may differ from the below sensitivity analysis and the difference could be significant. Change in basis points Sensitivity of changes in fair value of investments relating to a change in interest rates Sensitivity of changes in fair value of investments relating to a change in credit spreads Increase/ (decrease) Increase/ (decrease) Increase/ (decrease) 30 June 2015 25/(25) (3,902)/3,902 (3,962)/3,962 30 June 2014 25/(25) (1,028)/1,028 (1,053)/1,053 (c) Credit risk Credit risk arises from the Trust's investment in debt securities. Other credit risk arises from cash and cash equivalents, deposits with banks and other financial institutions, counterparties to derivatives and amounts due from brokers. None of these assets are impaired nor past due but not impaired. 19
3 Financial risk management (continued) (c) Credit risk (continued) Credit risk is managed by:! managing its exposures to issuers, deposit taking institutions, brokers and other counterparties! using credit default swaps to manage credit exposure! ensuring over-the-counter derivatives are traded with appropriately rated counterparties. Credit default swap exposures are managed through limiting the aggregate long, short and net exposures permitted to such instruments by the Trust. Credit default exposures are also incorporated in existing Trust exposure limits by "looking-through" the contract to the underlying issuer-level exposure being provided. The exposure to credit risk for cash and cash equivalents, deposits with banks and other financial institutions and counterparties to derivatives is low as all counterparties generally have a rating of at least A- (2014: A-) as determined by Standard and Poor's rating agency. In accordance with the Trust s policy, the Investment Manager's risk management department monitors the Trust s credit exposure on a daily basis. The maximum exposure to credit risk at the reporting date is the carrying amount of cash and cash equivalents and other financial assets. An analysis of debt securities by credit rating is set out in the table below: 2015 2014 S&P long term ratings Debt securities BBB 1,083 513 BBB- 8,176 1,717 BB+ 44,888 12,347 BB 46,020 17,301 BB- 43,136 14,445 B+ 65,187 11,957 B 47,519 16,775 B- 47,515 12,737 CCC+ 40,733 12,651 CCC 6,479 2,225 CCC- 880 277 D 2,666 1,088 Unrated 1,947 3,265 Total debt securities 356,229 107,298 20
3 Financial risk management (continued) (d) Liquidity risk The Trust is exposed to daily cash redemptions of redeemable units. It therefore invests the majority of its assets in investments that can be generally liquidated within a short period of time. The investments of the Trust may become illiquid. As a result, the Trust may not be able to liquidate quickly its investments in these instruments at an amount close to their fair value, or at all, to meet its liquidity requirements. No such investments were held at the statement of financial position date. Liquidity risk is managed by:! restricting the use of borrowing in order to ensure the fund has no debt obligations which may compromise solvency! managing the exposure to less liquid securities. Redeemable units are redeemed at the request of unitholders subject to the Trust's offer document and Trust Constitution (as applicable). All other liabilities are payable within 30 days. (e) Fair value estimation The carrying amounts of all the Trust's financial assets and financial liabilities at the end of each reporting period approximated their fair values as all financial assets and financial liabilities not fair valued are short-term in nature. The Responsible Entity classifies fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in making the measurements. The fair value hierarchy has the following levels:! Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).! Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).! Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes 'observable' requires significant judgement by the Responsible Entity. The Responsible Entity considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. 21
3 Financial risk management (continued) (e) Fair value estimation (continued) The following table analyses within the fair value hierarchy the Trust's financial assets and financial liabilities (by class) measured at fair value. 30 June 2015 Level 1 Level 2 Level 3 Total Financial assets Financial assets held for trading: - Derivatives - 326-326 Financial assets designated at fair value through profit or loss at inception: - Debt securities - 356,229-356,229 Total financial assets - 356,555-356,555 Financial liabilities Financial liabilities held for trading: - Derivatives - 164-164 Total financial liabilities - 164-164 30 June 2014 Level 1 Level 2 Level 3 Total Financial assets Financial assets held for trading: - Derivatives - 176-176 Financial assets designated at fair value through profit or loss at inception: - Debt securities - 107,298-107,298 Total financial assets - 107,474-107,474 Financial liabilities Financial liabilities held for trading: - Derivatives - 172-172 Total financial liabilities - 172-172 During the year, there were no transfers between level 1 and 2 or into/out of level 3 (2014: Nil). 22
3 Financial risk management (continued) (e) Fair value estimation (continued) For debt securities and over-the-counter derivatives, fair value is determined using valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. These financial instruments have therefore been classified as level 2 in the fair value hierarchy. (f) Offsetting financial instruments Financial assets and financial liabilities are presented net in the statement of financial position where the Trust currently has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Certain derivative assets and liabilities are subject to legally enforceable master netting arrangements, such as an International Swaps and Derivatives Association (ISDA) master netting agreement. The ISDA agreements in place meet the criteria for offsetting in the statement of financial position as the Trust has a current legally enforceable right to offset recognised amounts. In certain circumstances, for example, when a credit event such as a default occurs, all outstanding transactions under an ISDA agreement are terminated, the termination value is assessed, and only a net amount is payable in settlement of all transactions. As at 30 June 2015, if this netting agreement was applied to the derivative portfolio the derivative assets of $326,235 (2014: $176,053) would be reduced by $164,143 (2014: $165,810) to the net amount of $162,092 (2014: $10,243) and the derivative liabilities of $164,143 (2014: $171,620) would be reduced by $164,143 (2014: $165,810) to the net amount of Nil (2014: $5,810). 4 Auditor's remuneration During the year the following fees were paid or payable for services provided by the auditor of the Trust: 2015 $ 2014 $ Audit services Ernst & Young Australian firm Audit of financial reports 5,583 5,212 Other audit work under the Corporations Act 2001 363 346 Total remuneration for audit services 5,946 5,558 Audit fees are paid out of the Investment Manager's own resources. 23
5 Net gains on financial instruments held at fair value through profit or loss Net gains recognised in relation to financial instruments held at fair value through profit or loss: 2015 2014 Net (losses)/gains on financial instruments held for trading (20,468) 5,077 Net gains on financial instruments designated as at fair value through profit or loss 13,348 4,366 Interest income on financial instruments held at fair value through profit or loss 13,063 6,802 Net gains on financial instruments held at fair value through profit or loss 5,943 16,245 6 Net assets attributable to unitholders As stipulated within the Trust Constitution, each unit represents an undivided share in the beneficial interest in the Trust. There are no separate classes of units and each unit has the same rights attaching to it as all other units of the Trust. Movements in number of units and net assets attributable to unitholders during the year were as follows: 2015 No. '000 2014 No. '000 2015 2014 Opening balance 133,327 189,184 111,118 171,649 Applications 297,265 2,007 252,880 1,808 Redemptions (17,338) (84,410) (14,680) (77,856) Units issued upon reinvestment of distributions - 26,546-22,365 Increase/(decrease) in net assets attributable to unitholders - - 4,860 (6,848) Closing balance 413,254 133,327 354,178 111,118 Capital risk management The Trust manages its net assets attributable to unitholders as capital, notwithstanding net assets attributable to unitholders are classified as a liability. The amount of net assets attributable to unitholders can change significantly on a daily basis as the Trust is subject to daily applications and redemptions at the discretion of unitholders. The Investment Manager monitors the impact of applications and redemptions relative to the liquid assets in the Trust. 24
7 Cash and cash equivalents 2015 2014 Cash at bank 2,095 5,359 Total cash and cash equivalents 2,095 5,359 8 Financial assets held at fair value through profit or loss 2015 Fair value 2014 Fair value Held for trading Derivatives 326 176 Total held for trading 326 176 Designated at fair value through profit or loss Debt securities 356,229 107,298 Total designated at fair value through profit or loss 356,229 107,298 Total financial assets held at fair value through profit or loss 356,555 107,474 Comprising: Derivatives Foreign currency forward contracts 326 176 Total derivatives 326 176 Debt securities International corporate bonds 348,836 99,363 Asset backed securities - 488 Floating rate notes 5,967 5,687 Convertible hybrid securities 1,426 1,760 Total debt securities 356,229 107,298 Total financial assets held at fair value through profit or loss 356,555 107,474 An overview of the risk exposures relating to financial assets at fair value through profit or loss is included in note 3. 25
9 Financial liabilities held at fair value through profit or loss 2015 Fair value 2014 Fair value Held for trading Derivatives 164 172 Total held for trading 164 172 Total financial liabilities held at fair value through profit or loss 164 172 Comprising: Derivatives Credit default swaps - 6 Foreign currency forward contracts 164 166 Total derivatives 164 172 Total financial liabilities held at fair value through profit or loss 164 172 An overview of the risk exposures relating to financial liabilities at fair value through profit or loss is included in note 3. 10 Related party disclosures (a) Parent entities The parent and ultimate parent of Macquarie High Yield Bond Fund was Macquarie Diversified Fixed Interest Fund which ceased to control the Trust on 29 January 2015 (2014: 50.81%). On that date, Macquarie Income Opportunities Fund became parent and ultimate parent of the Trust, which at 30 June 2015 owns 70.11% (2014: 49.19%) of the units of Macquarie High Yield Bond Fund. (b) Responsible Entity The Responsible Entity of Macquarie High Yield Bond Fund is Macquarie Investment Management Limited ("MIML"), a wholly owned subsidiary of Macquarie Group Limited ("MGL"). (c) Key management personnel The following persons held office as directors of MIML during the year or since the end of the year and up to the date of this report: B Terry (resigned 30/06/2015) J Edstein I Miller H Brown (appointed 01/07/2014) 26