2015 ANNUAL REPORT - ALFM Mutual Funds - ALFM | Home · PDF file3 4 CORPORATE GOVERNANCE The Board of Directors of the ALFM Mutual Funds (the “Funds”), working closely with the

2015 ANNUALREPORT

TABLE OF CONTENTS

1Message to Shareholders

3Corporate Governance

4Board of Directors and Officers

72015: A Year in Review

10#MyALFMStory

16Fund Performance ReviewsALFM Money Market FundALFM Peso Bond FundALFM Dollar Bond FundALFM Euro Bond FundALFM Growth FundPhilippine Stock Index Fund

29Audited Financial StatementsALFM Money Market FundALFM Peso Bond FundALFM Dollar Bond FundALFM Euro Bond FundALFM Growth FundPhilippine Stock Index Fund

137Fund ManagerInvestment AdvisorDistributors

138ALFM OnlineFacebookWebsiteYouTubeTwitter

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MESSAGE TO SHAREHOLDERSYear 2015 was characterized by divergent monetary policies among major economies and higher volatility, especially during the second half of the year. On one hand, major strides in the U.S. labor market gave the Federal Reserve enough confidence to commence with its normalization of the Federal Funds rate, starting with a 25 basis points increase during its December 2015 meeting. Market response was muted as it was largely expected.

On the domestic front, the Philippines’ solid macroeconomic fundamentals continued to shine through as gross domestic product for 2015 registered a 5.81% growth. This was slightly lower than in 2014 but still respectable relative to peers. Inflation continued to remain benign at 1.4%, slightly below the Bangko Sentral ng Pilipinas’ (BSP) targeted range of 2-4% as oil prices persistently stayed at record-low levels. Because of these favorable economic conditions, the BSP was able to maintain the current policy rates even as monetary policy divergence was seen across central banks globally.

The local equities market was down by 3.85% to close at 6,952.08 for 2015. Share prices mirrored the declines in markets globally vis-à-vis the backdrop of a slowing global growth outlook, an oversupply of oil that led to a slump of

commodity prices to pre-crisis lows, and market-moving negative developments in certain economies. Nevertheless, due to strong fundamentals, the Philippine equities market continued to trade at 19.10x 2016 P/E, still one of the most expensive markets in the region.

As risk-off sentiment reigned among investors, capital flew out of emerging markets into safe-haven assets. This in turn caused the Philippine Peso to depreciate by 5.3% against the U.S. Dollar to close the year at Php47.06.

Meanwhile, the local currency fixed income market experienced a flattening of the yield curve as short-end yields rose while yields on the long end declined. The Philippine bond market saw the much awaited non-restricted trading environment implemented in May, allowing tax-exempt institutions to join the secondary market. Nonetheless, global events took center stage inflicting much volatility despite healthy fundamentals. Monetary policy remained on hold for the year, as the lower than expected inflation was expected to be largely transitory.

We continued to position the ALFM Mutual Funds to weather the volatility and maximize opportunities posed by the

global financial market conditions. Though equities posted a turbulent year, we managed to mitigate losses through active stock selection and favoring those which exhibited stronger earnings prospects and limited downside risk. On the fixed income side, the generally weak domestic bond market resulting from the rise in interest caused the ALFM Money Market Fund and the ALFM Peso Bond Fund to post subdued returns. Our foreign currency-denominated funds, the ALFM Dollar Bond Fund and the ALFM Euro Bond Fund, both outperformed their benchmarks and provided shareholders with respectable returns.

For 2016, we remain optimistic on the country’s strong fundamentals. GDP is seen to come in at 5.75% for the full-year, propelled by higher government spending and healthy public consumption, especially after the May elections. We expect inflation to be benign and to average at around 2.0%, owing to soft oil and commodity prices. Lastly, we expect the depreciation of the Philippine peso as a result of a stronger US dollar will be alleviated by strong remittances from Overseas Filipino Workers, revenues from the business process outsourcing industry, and capital flows into domestic financial markets.

Romeo L. BernardoDirector/Chairman

Simon R. PaternoDirector/Vice Chairman

Sherisa P. NuesaDirector/President

John Philip S. OrbetaDirector

Adelbert A. LegastoDirector

The Board of Directors of ALFM Mutual Funds

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CORPORATE GOVERNANCEThe Board of Directors of the ALFM Mutual Funds (the “Funds”), working closely with the Funds’ Investment Manager, commits to the principles and best practices on corporate governance, and acknowledges that the same guides the attainment of the Funds’ corporate goals.

The Board of Directors and stockholders believe that corporate governance is a necessary component of what constitutes sound strategic business management and will, therefore, undertake every effort necessary to create awareness within the organization as soon as possible. Compliance with the principles of good corporate governance starts with the Board of Directors.

The Board of Directors (the “Board”) is primarily responsible for the governance of the Funds. Corollary to setting the policies for the accomplishment of the corporate objectives, it provides an independent check on Management.

The Board conducts itself with utmost honesty and integrity in the discharge of its duties, functions and responsibilities. It ensures the Funds’ ability to satisfy the needs of its customers, sustains its leadership and competitiveness, and upholds its reputation in order to maintain the Funds’ long term success and viability. Its mandate consists of setting the strategic business directions of the Funds, appointing its senior executive officers, approving all major strategies and policies, overseeing all major risk-taking activities,

monitoring the financial results, and generating a reasonable investment return to shareholders.

It is likewise the Board’s responsibility to foster the long-term success of the Funds and secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it exercises in the best interests of the Funds, its shareholders and other stakeholders.

Moreover, the control environment of the ALFM Mutual Funds consists of (a) the Board which ensures that the Funds are properly and effectively managed and supervised; (b) a Management that actively manages and operates the Funds in a sound and prudent manner; (c) the organizational and procedural controls supported by effective management information and risk management reporting systems; and (d) an independent audit mechanism to monitor the adequacy and effectiveness of the Funds’ governance, operations, and information systems, including the reliability and integrity of financial and operational information, the effectiveness and efficiency of operations, the safeguarding of assets, and compliance with laws, rules, regulations and contracts.

The Funds establish and implement the corporate governance rules in accordance with the Revised Code of Corporate Governance, pursuant to SEC Memorandum Circular No. 6, Series of 2009 and SEC Memorandum Circular No. 9, Series of 2014.

ALFM BOARD OF DIRECTORSROMEO L. BERNARDO | DIRECTOR/CHAIRMANMr. Bernardo, born in 1954, is the current Chairman of the Funds. He is a director of organizations including but not limited to Lazaro Bernardo Tiu & Associates, Inc., GlobalSource Economist Philippines, Aboitiz Power, BPI, Globe Telecom Inc., and RFM Corporation. He was an alternate director of the Asian Development Bank from 1997-1998 and Undersecretary for International Finance, Privatization & Treasury Operations of the Department of Finance of the Philippines from 1990-1996. Mr. Bernardo took his Masters in Development Economics at Williams College in Williamstown, Massachusetts and received his B.S. Business Economics (Magna Cum Laude) degree from the University of the Philippines.

SIMON R. PATERNO | DIRECTOR/VICE CHAIRMANMr. Paterno, born in 1959, heads the Financial Products Group of the Bank of the Philippine Islands. He serves on the boards of the Foundation for Economic Freedom, Manila Polo Club and Ateneo Scholarship Foundation. He is a former President and CEO of the Development Bank of the Philippines. Prior to joining BPI, he served as a Managing Director for J.P. Morgan and Credit Suisse Philippines. In 2005, he was elected President of the Management Association of the Philippines and was named a TOYM awardee for Investment Banking in 1999. Mr. Paterno obtained his MBA from Stanford University and holds an A.B. Honors Program in Economics degree (Cum Laude) from Ateneo de Manila University.

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SHERISA P. NUESA | DIRECTOR/PRESIDENTMs. Nuesa, born in 1955, is a former Managing Director of Ayala Corporation until her retirement in 2011. She is likewise a director of companies and organizations including but not limited to: Manila Water Company, FEU Inc., East Asia Computer Center, and Institute of Corporate Directors (ICD). Ms. Nuesa attended the Advanced Management Program of the Harvard Business School in the US in June 1999 and completed her MBA degree from the Ateneo-Regis Graduate School of Business in 2011. She also attended the Financial Management Program of the Stanford University in 1991. A Certified Public Accountant, she holds a BS in Commerce degree (Summa Cum Laude) from the Far Eastern University.

JOHN PHILIP S. ORBETA | DIRECTORMr. Orbeta, born in 1961, is a Managing Director of Ayala Corporation and the Head of its Corporate Services Group. He is the founder and currently the President of HRMall, a subsidiary of Ayala Corporation. He received the Global HR Excellence Award for HR Leadership in the Philippines from the World HR Congress, and was awarded by People Management Association of the Philippines as People Manager of the Year in 2009. Mr. Orbeta graduated from the Ateneo de Manila University with an A.B. Economics degree. He accomplished the requirements of the American Compensation Association’s Certified Compensation Profession (CCP) Program in 1989 and completed the Watson Wyatt Leadership Development Program at Harvard Business School in 1995.

ADELBERT A. LEGASTO | DIRECTORMr. Legasto, born in 1947, has served as Governor of the Philippine Stock Exchange, incorporator of the Philippine Central Depository, and President of the Trust Officers Association of the Philippines (1998). He graduated from the Ateneo de Manila University with an A.B. Economics degree and completed his M.B.A. academics at the Ateneo Graduate School of Business. He completed the Pension Funds and Money Management course from the Wharton School of the University of Pennsylvania, and Investment Management course at the CFA Institute at the Harvard Business School in Cambridge, Massachusetts.

CORPORATE OFFICERSFERNANDO J. SISON III |TREASURERMr. Sison, born in 1952, is currently the Treasurer of the ALFM Mutual Funds. He was a former President of BPI Investment Management, Inc. and previously served as head of various divisions in BPI, including but not limited to Retail Trust Division, Private Banking Unit, and BPI Capital. He previously served as President of the Investment Company Association of the Philippines (ICAP) and was Chairman of the Board of the Philippine Investment Funds Association, from 2008 to 2013. Mr. Sison graduated from the Ateneo de Manila University with the degree A.B. General Studies (Honorable Mention) and completed his M.B.A. from the University of the Philippines (Diliman).

ATTY. SABINO B. PADILLA IV | CORPORATE SECRETARY & COMPLIANCE OFFICERAtty. Sabino B. Padilla IV, born in 1960, is the Corporate Secretary and Compliance Officer of the ALFM Mutual Funds. Atty. Padilla graduated with a degree in Bachelor of Laws from the University of the Philippines in 1985. He then received his Master of Laws from the Harvard University, USA in 1988. He is currently a partner of the Padilla Law Office which is legal counsel to BPI and its subsidiaries and to various religious orders, societies and congregations for men and women as well as educational institutions and hospitals. He is also the Corporate Secretary of other mutual funds such as the Bahay Pari Solidaritas Fund and Ekklesia Mutual Fund.

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2015: A YEAR IN REVIEWFIXED INCOME

2015 proved to be a volatile and challenging year for the fixed income market. Fears and volatility predominantly drove the market as various central banks began on divergent paths in boosting and supporting their own economies. On top of it, oil prices took a dive, falling below US$40 per barrel from above US$60 per barrel. This affected various countries depending whether they are net importers or exporters.

In the first half of 2015, the European Central Bank (ECB) launched their own quantitative easing worth €1.1 billion to combat deflationary pressure, high unemployment rate and slowing economic growth among its member countries. Greece further dampened the economic sentiment in the region as it refused further austerity packages and threatened exit from the European bloc.

In the second half of 2015, China took the world by surprise as it devalued its currency versus the US Dollar, sparking fears of currency war. The move was largely seen as a bid to boost its export competitiveness. In Europe, the Greek crisis deepened as it closed banks and imposed capital controls with cash withdrawal limits of €60 per day to avert collapse of the financial system. Credit rating agencies were on a roll as it issued rounds of downgrades led by Brazil, being stripped off its investment grade status amidst political and economic concerns. On the other hand, as concerns of weak global economic growth grew, US economic data was consistently improving. After months of uncertainty on the timing of the

possible first rate hike in nine years by the US Federal Reserve, the members finally decided to hike the US interest rate policy by 25 basis points in December. US Federal Chairwoman Janet Yellen indicated any future action on the policy rate will be modest and gradual as the members will closely monitor inflation, wages and unemployment rates.

On the local front, the Philippines’ annual 2015 GDP slowed down at 5.8% versus 2014’s 6.1% amidst dismal government spending and weaker trade performance. Inflation remained subdued, ranging from 0.4% to 2.5%, which largely benefitted from the lower oil prices.

All told, the 10-year US treasury yield rose by 10 basis points. In the Philippines, local government, yields in the short and long-term end of the curve increased by an average of 25 and 20 basis points, respectively, while the medium-term rates declined by an average of 15 basis points.

EQUITIES

The 2015 equities market at a glance:

• Full year 2014 GDP was recorded at 6.1%• Low oil prices taken positively by the local market as

the Philippines remains to be a net importer of oil and a largely consumption-driven economy

• Strong growth outlook differentiated the Philippines among emerging markets and allowed for the local bourse to trade at a premium relative to peers

• Net foreign inflow for the quarter reached US$1.067 billion, compared to full year 2014 net foreign inflow of US$1.26 billion

• The Philippine Stock Exchange Index hit an all-time high at 8,127.48 on April 10, 2015

• Funds started to flow from ASEAN to North Asia due to monetary easing in China

• 1Q2015 GDP disappointed at 5.2% compared to 6.6% market estimate. Weak government spending and dismal trade performance were the key factors for the underperformance

• Financial woes in Greece further dampened sentiment

• China’s weakening economy triggered a shift from emerging markets to developed markets

• 2Q2015 GDP was recorded at 5.6%, slightly below market estimate of 5.7%

• The perceived slowdown in global growth ushered in several downgrades from major economic and credit rating agencies

• More capital outflows from emerging markets took place over concerns of weaker than expected economic growth

• Strong US economic data allowed for a December Fed rate increase, making investors stay on the sidelines waiting for further decision

• 3Q2015 GDP disappointed at 6.0% versus 6.3% market estimate

• Oil prices continued to drop, with WTI falling below US$40/barrel during the quarter

1Q2015 7,940.49THE INDEX CLOSED AT




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#MYALFMSTORYInspiring Filipino Investors, one story at a time

In Summary:

After a 6-year positive-run, the Philippine market succumbed to foreign selling and ended the year down 3.9% compared to its 2014 close. Foreigners had a net sell position of US$1.2 billion, a new record high. Foreigners were net buyers to the tune of US$1.067 billion after the first three months before selling in volumes for the next nine months. Average daily trading volume for the year was down to US$165 million from US$175.8 million in 2014, and dominated by local participants which accounted for 60% of average trading volume.

The PSEi soared to an all-time high of 8127.48 in April but fears of policy tightening in the US started to brew quickly after 1Q2015, setting off the departure of flows from the country and the rest of the emerging markets. Concerns of an economic slowdown in China and the Greece crisis added to the risk-off sentiment.

Only two sectors were gainers in 2015, which were media (+20.9%) and conglomerates (+1.6%). Worst performing sectors were gaming (-60.7%), transportation (-21.5%), banks (-15%) and consumer (-12%).

Domestically, lack of positive catalysts contributed to the lack of conviction. Lackluster GDP and corporate results quarter after quarter clouded market sentiment. GDP was weighed down by trade data and sluggish government spending. Meanwhile, aggregate net profit growth rates which started at 14% in 1Q, dropped to 9% in 2Q and even lower to 1% by

the time 3Q rolled around, as strong revenue growth failed to trickle to the bottom-line.

In US Dollar terms, however, the Philippines outperformed the rest of the region in 2015. The main index lost 8.3% (US$ terms) while Indonesia fell 21.05. Thailand slipped 21.45%. Malaysia was down 21.7%, and Singapore declined 19.95%.

EQUITIES

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“The seminar opened my eyes to the endless possibilities of investing and how it can make or break my future.”

I am in my thirties, I started investing just recently, and it makes me feel proud of myself. Though, I always wish that I started investing 10 years ago when I was still young, when I just had my first job, the time when I was still single and had no family obligations. I even wish that financial awareness was taught in high school or in college. That way, we have time in our favor and we could have been millionaires by the time we are 30, had we started our investment journey early on.

Financial awareness came late for me. Too late that I almost gave up because of the lost time and opportunity to grow and maximize the growth potential of whatever money I may have or I can save. But as we always know, it is better late than never. I decided to learn about investing and attended a financial literacy seminar. The seminar opened my eyes to the endless possibilities of investing and how it can make or break my future. But most of all, the seminar emphasized the potential growth of my money and how it could make my dreams come true. With a vision, a goal in mind – which is the amount I should have in x number of years – and

determination to catch up with the lost and wasted time by not investing earlier, I eventually decided to start investing.

I enrolled online through the BPI platform, printed the required documents and coursed my application through the nearest BPI branch. I allotted a portion of my 13th month as my initial investment in my chosen ALFM fund (Phil Stock Index Fund). I also enrolled in BPI’s Regular Subscription Plan program wherein a specific amount was automatically deducted from my source account and automatically invested in my investment account. This way, I could ensure that funds were added to my account every month and invested consistently.

I chose BPI Investment Management Inc.’s ALFM Fund because of convenience. The online platform is really making my life better. I can invest, check my investment account, monitor my gains or loss, and see my transaction history at the comfort of my home or even just by using my cellphone. I may have started late, I may have allotted only a small portion of my salary for my investment fund, but I would like to believe that these simple important steps in my financial journey will lead me to something rewarding in the future. A meaningful retirement perhaps? Whatever it is, I am glad I chose to start it with ALFM – my partner in my journey towards a better life.

“ I may have started late, I may have allotted only a small portion of my salary for my investment fund, but I would like to believe that these simple important steps in my financial journey will lead me to something rewarding in the future.”

- Ramin “Min” Viloria

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At the start of this century, I got the itch to retire from fulltime work. I was still too young to retire by all measures, but that made it clear that I didn’t want to work till I drop, tied for the longest time to an 8:30 to 5:30 job that in reality, demanded at least a half day (12 hours is a half-day, right?) on most days. True, it was professionally fulfilling and financially rewarding, but I wanted more out of this one life I was given than just a great job.

So back then, I took stock of where I was -- life stage, skills, opportunities, finances. Sadly, I clearly wasn’t ready to get off full time employment anytime in the near future. Sabi nga -- work pa more! But on the bright side, I realized the goal would not be out of reach, if I made the right investments -- in myself as a person, and in my finances. One thing I realized too was that my financal management style leaned on setting investment directions and portfolios but leaving the day-to-day transactions to dedicated managers.

ALFM funds proved to be one of my wise choices. They had the brand name that meant integrity, a solid track record of earnings, fund choices that fit my appetite, as well as ease of subscription and redemption through online access.

Fast-forward to today, one year after my early retirement and into starting my own professional practice. Thanks, ALFM!

ALFM funds proved to be one of my wise choices. They had the brand name that meant integrity, a solid track record of earnings, fund choices that fit my appetite, as well as ease of subscription and redemption through online access.

- Maria Victoria “Avic” Lim

I was previously an OFW in Saudi Arabia. There, I experienced that no matter how hard I work, I could not save, since all of my money had to be sent to my family for their needs and necessities. So, I learned from experience, attended a lot of seminars discussing how to achieve financial independence, and discovered that there are a lot of ways to make my money grow.

It was in the year 2013 when I was hired in UAE as a Registered Nurse, when I decided to visit a BPI branch in Novaliches area to open an investment account. I approached a staff and asked about how to open one and they suggested that I invest in an ALFM product which was managed by their subsidiary, BPI Investment Management Inc. I invested in an ALFM product, and availed of a program wherein they will auto-deduct a certain amount from my savings account every month for 2 years, since I will be working in the UAE for 2 years.

Now, I have already completed my two years here in the UAE and I’m hoping that when I come back to the Philippines this year, I’ll be able to visit the branch where I first discovered ALFM and discuss with them further about their other mutual funds.

Investing in ALFM is one of the greatest turning points on my goal to achieve financial independence. It’s not the amount itself but the habit of doing. It is the attitude that we need to mold in each of us. No matter how big or small your salary is, as long as you adopt the habit of setting aside a certain amount of money to make it grow, it will not be in vain.

Investing in ALFM is one of the greatest turning points on my goal to achieve financial independence. It’s not the amount itself but the habit of doing. It is the attitude that we need to mold in each of us.

- Maria Teresa Cunanan

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FUND PERFORMANCE REVIEWS

“I aim to continue learning about different investment vehicles and hope that other Filipinos, especially women, go on a similar journey because each bit of additional knowledge is a step towards financial freedom, which ALFM Mutual Funds has helped me achieve.”

- Denise Matias

The road to my first investment was paved with fear of the unknown but finding out that two of my male friends already have investments pushed me to learn more about it. I invested some of my extra Euros in the ALFM Euro Bond Fund. I chose to invest in ALFM Euro Bond Fund because it is one-of-a-kind. I do not know of any other reliable or legitimate Euro investment fund in the Philippines.

I aim to continue learning about different investment vehicles and hope that other Filipinos go on a similar journey because each bit of additional knowledge is a step towards financial freedom, which ALFM Mutual Funds has helped me achieve.

“For OFW’s like me who wish to invest their hard-earned money in the Philippines, I encourage them to go for ALFM Mutual Funds via the BPI’s Online Investment facility.”

- Mar Peralta

When ALFM started an online investment facility through the BPI website, I inquired and got replied to immediately. The procedure was tough but fair and with their way of assisting online clients, I was able to start my online investment easier. I have been an ALFM investor for almost a year now and I have seen my money grow much better than my ordinary savings.

For OFW’s like me who wish to invest their hard-earned money in the Philippines, I encourage them to go for ALFM Mutual Funds via the BPI’s Online Investment facility. It’s simple, safe, and you’ll get real time status of your investments.

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ALFM MONEY MARKET FUNDA Mutual Fund Designed for Stability

The ALFM Money Market Fund is a mutual fund denominated in Philippine pesos. The Fund aims to achieve preservation of capital and stable income by investing in a diversified portfolio of Philippine Peso denominated short term fixed income and money market instruments. The Fund’s objective is to outperform its benchmark, the HSBC Philippines Money Market Index.

FUND PERFORMANCE

The ALFM Money Market Fund is one of the bigger mutual funds in the money market fund segment representing 23.8% of the category. It gave a full year return of 1.20%, net of taxes and fees, higher than previous year’s return of 1.04%, net of taxes and fees.

The Fund ended the year with a Net Asset Value (NAV) of PHP 2.05 billion; up from 2014’s PHP1.48 billion due to risk-off sentiment from investors resulting from a volatile fixed income and equities market in 2015.

In terms of Net Asset Value per Share (NAVpS), it rose by PHP1.35 to end the year at PHP114.30, from PHP112.95 per share at the end of 2014.

PORTFOLIO COMPOSITION

The Fund’s portfolio was mostly invested in time deposit instruments and government securities which lent to stability of return. The fund was opportunistic when it increased its exposure in government securities. Average credit rating is Baa3/BBB (Moody’s/S&P).

MARKET OUTLOOK

The Philippines will likely continue to see prudent fiscal and monetary policy with inflation likely to remain subdued between 2 to 4% this year. The strong economic fundamentals of the Philippines may warrant respectable returns in the local fixed income market, but global developments will contribute significant volatility through the year. The Fund will continue to prefer short dated time deposits as the market will likely continue to adjust to the normalization of global interest rates. Government securities may remain to be volatile this year and thus the fund will be opportunistic in adding exposure to it.

CALENDAR YEAR PERFORMANCE (%)AS OF DECEMBER 29, 2015

* HSBC Philippines Money Market Index

FUND

1.20

1.04

1.98

3.01

3.31

2015

2014

2013

2012

2011

BENCHMARK*

1.60

0.85

0.62

2.11

1.39

ALFM MONEY MARKET FUNDNET ASSET VALUE PER SHARE

120

115

110

105

100

952010 2012 20142011 2013 2015

PHP 114.30

PORTFOLIO COMPOSITIONAS OF DECEMBER 29, 2015

44.15%GOVERNMENT

7.17%CORPORATES

46.68%CASH & OTHERRECEIVABLES

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ALFM PESO BOND FUNDThe Largest Mutual Fund in the Philippines

The ALFM Peso Bond Fund is a mutual fund denominated in Philippine pesos. It is the only mutual fund in the country that provides free life insurance coverage to its eligible investors. The coverage is a fixed amount of PHP 200,000 for each eligible primary investor maintaining at least a PHP100,000 investment in the Fund. The Fund aims to achieve a steady stream of income by investing in a diversified portfolio of Philippine Peso denominated high-grade fixed income instruments, such as, but not limited to, government securities, corporate notes and bonds, and fixed income funds. The Fund aims to outperform its composite benchmark, 91-day Philippine Treasury Bill- net of tax, plus 1.00%.

FUND PERFORMANCE

The Fund’s Net Asset Value (NAV) increased from PHP55.27 billion in 2014 to PHP 64.27 billion in 2015, and remained to be the largest bond fund in the Philippines despite the weakness in the Philippine bond market. The Fund still constitutes 78.27% of the whole peso-denominated bond

mutual fund space. The local mutual fund industry grew by PHP2.61 billion or 3.33% as the investors sought refuge from the equities market. The Fund though was not spared by the effects of market fluctuations and in effect, returned 1.12%, net of fees and taxes, as of year-end 2015.

As for the Fund’s Net Asset Value per Share (NAVpS), it rose PHP3.57 to PHP322.78 by year-end 2015, from PHP319.21 per share at the end of 2014. The Fund’s NAVpS experienced volatility of only 1.2% in the year, providing its customers with stable and positive returns.


ALFM Peso Bond Fund increased its exposure to corporate securities which provided yield enhancement and stable income to the Fund. The increase was done in anticipation of the rise in interest rates given the normalization of U.S. rates. Other top holdings of the Fund were government securities and cash and other Receivables.

* 1-day Philippine Treasury Bill (net of tax) plus 1.00%

FUND

1.12

1.74

4.65

5.86

6.80

2015

2014

2013

2012

2011

BENCHMARK*

3.39

3.76

2.89

4.66

1.56


MARKET OUTLOOK

Year 2016 will expect further diversion in the actions of various central banks which would cause volatility in the bond market. The European and Asian region will look to bolster economic output through accommodative monetary policy while the U.S. may continue its path towards rate normalization at a gradual pace. The Philippines will likely continue its prudent fiscal and monetary policy with inflation to remain subdued between 2 to 4%. All held true, coupled with strong economic fundamentals of the Philippines, the local bond market may warrant respectable returns. However, volatility and fear will contribute significantly throughout the year coming from developments worldwide and the results of the Philippine national elections.

Given this, the Fund will retain an underweight to neutral position in terms of duration, and will continue to favor the higher yielding and more stable corporate securities. The Fund will remain to be nimbly positioned to take advantage of the volatility that may arise in 2016. Pockets of opportunity are foreseen to arise given the dynamic nature of the bond market.

ALFM PESO BOND FUNDNET ASSET VALUE PER SHARE

350

330

310

290

270

2502010 2012 20142011 2013 2015

PHP 322.78


40.74%CORPORATES

32.79%GOVERNMENT


0.53%BOND FUND

6.09%PREFERRED

SHARES

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ALFM DOLLAR BOND FUNDThe Leader in US Dollar-Denominated Bond Mutual Funds

The ALFM Dollar Bond Fund is a mutual fund denominated in US Dollars. The Fund aims to achieve capital preservation through a steady stream of income by investing in a diversified portfolio of fixed income instruments issued by foreign and local entities, such as but not limited to, US dollar-denominated government securities, corporate notes and bonds, and fixed income funds. The Fund aims to outperform its benchmark, a composite of the 3-month US Treasury bill plus 1.00%.

FUND PERFORMANCE

ALFM Dollar Bond Fund is the largest in the US dollar-denominated bond fund segment. The Fund’s market share grew slightly to 68.1% as of December 2015. The Fund provided its investors with a full-year return of 2.41%, net of taxes and fees.

The Fund’s net asset value (NAV) increased by 0.91% from the previous year’s figure of USD216.79 million to USD218.77

million as of end 2015, countering net redemptions for the year.

As for the Fund’s Net Asset Value per Share (NAVpS), it rose USD10.32 to USD418.46 by year-end 2015, from USD408.14 per share at the end of 2014. The Fund’s NAVpS experienced volatility of only 1.27% in the year, staying true to its objective of providing stable and positive returns.


Subscriptions to ALFM Dollar Bond Fund, along with the Fund’s maturities and interest income, were invested primarily in U.S. dollar-denominated securities issued by the Philippine government, Philippine corporations and in short-term money market placements. Investments in other countries such as those in the Asia-Pacific region allowed some diversification for the Fund. By the end of 2015, the Fund increased its exposure to corporate securities which provided yield enhancement and stable income.

* 3-month US Treasury Bill plus 1.00%

FUND

2.53

5.94

-3.23

9.83

3.98

2015

2014

2013

2012

2011

BENCHMARK*

2.11

5.60

-2.51

6.92

0.04


MARKET OUTLOOK

Moving forward, we expect further diversion in the actions of various central banks which would cause volatility in the bond market. The European and Asian region will look to bolster economic output through accommodative monetary policy while the U.S. may continue its path towards rate normalization at a gradual pace. The dollar-denominated Philippine bond market will remain an investor’s favorite due to strong economic fundamentals of the country but will not be isolated to global economic developments.

Given this, the Fund will retain an underweight to neutral position in terms of duration and will continue to favor the higher yielding and more stable corporate securities. The Fund will remain to be nimbly positioned to take advantage of the volatility that may arise in 2016. Pockets of opportunity are foreseen to arise given the dynamic nature of the bond market. Investors of the Fund should be ready to withstand some fluctuations and pursue a medium-to-long-term investment horizon.

ALFM DOLLAR BOND FUNDNET ASSET VALUE PER SHARE

440

420

400

380

360

3402010 2012 20142011 2013 2015

USD 418.46


38.57%GOVERNMENT

50.81%CORPORATES

2.63%BOND FUND


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23

ALFM EURO BOND FUNDThe Dominant Euro-Denominated Bond Fund

The ALFM Euro Bond Fund is a mutual fund denominated in the Euro currency. The Fund aims to achieve capital preservation through a steady stream of income by investing in a diversified portfolio of fixed income instruments issued by foreign and local entities, such as but not limited to, Euro-denominated government securities, corporate notes and bonds, and fixed income funds. The Fund aims to outperform its benchmark, the 3-month German Treasury Bill.

FUND PERFORMANCE

ALFM Euro Bond Fund continued to be the prevailing fund in the Euro-denominated bond fund segment with a market share of 99.3%, slightly up from 98.3% of the previous year. The Fund posted a full year return of 0.06%, net of taxes and fees in 2015. This was due to the persistent negative rate in the European bond market.

As of end 2015, the Fund’s Net Asset Value (NAV) stood at EUR9.60 million, a EUR1.34 million increase from 2014’s

year-end figure of EUR 8.26 million. In terms of the Fund’s Net Asset Value per Share (NAVpS), it rose to EUR206.12 by year-end 2015, from EUR206.00 per share at the end of 2014. The Fund’s NAVpS experienced volatility of only 0.91% in the year, providing its customers with stable and positive returns.


Subscriptions to ALFM Euro Bond Fund, along with the Fund’s interest income and trading gains, were invested primarily in Euro-denominated securities issued by the Republic of the Philippines (ROP) and other Asian sovereign bonds. By the end of 2015, Euro-denominated sovereign bonds accounted for 51.68% of the Fund, corporate bonds for 33.23% and other cash and receivables for 15.09%. The Fund increased its exposure to corporate securities which provided yield enhancement and stable income to the Fund.

MARKET OUTLOOK

Moving towards 2016, the European Central Bank (ECB) is expected to bolster their accommodative monetary stance in combatting deflationary pressure. Further rate cuts and longer quantitative easing are expected to be delivered within the year. Negative bond rates are expected to persist and Euro deposit rates will remain negative to zero. Euro-zone economies will remain volatile as the U.S. is on its path of gradual rate normalization. Political risk is also an increasing concern in the European region with its rising refugee crisis and the different ways each country deals with it. Coupled with high unemployment rate and low economic growth, it causes division among the ECB members which might possibly cause a break-up of the European Union. If that happens, the Euro currency will be at risk. Expect volatility and fear to manifest throughout the year.

Given this, the Fund will retain an underweight to neutral position in terms of duration, and will continue to favor the higher yielding and more stable corporate securities. The Fund will remain to be nimbly positioned to take advantage of the volatility that may arise in 2016. Pockets of opportunity are foreseen to arise given the dynamic nature of the bond market. Investors of the Fund should be ready to withstand fluctuations and pursue a medium-to-long-term or 3-to-5 years investment horizon.

* 3-month German Treasury Bill

FUND

0.06

4.81

0.73

9.02

0.07

2015

2014

2013

2012

2011

BENCHMARK*

-0.33

0.00

0.00

-0.07

0.54



51.68%GOVERNMENT

33.23%CORPORATES


ALFM EURO BOND FUNDNET ASSET VALUE PER SHARE

220

210

200

190

180

1702010 2012 20142011 2013 2015

EUR 206.12

24

25

ALFM GROWTH FUNDA Mutual Fund Primed for Growth

The ALFM Growth Fund is a mutual fund denominated in Philippine pesos. The Fund’s aims to achieve long-term capital appreciation by investing in a diversified portfolio of equities and fixed income instruments. The Fund shall invest at least 75% of its net assets in equity securities under normal market conditions. The Fund’s objective is to outperform its composite benchmark, 90% Philippine Stock Exchange index (PSEi) and 10% return of the 91-day Philippine Treasury Bill.

FUND PERFORMANCE

ALFM Growth Fund ended the year 2015 with a market share of 9.56% in the peso equity mutual fund category. The Net Asset Value (NAV) of the ALFM Growth Fund increased to PHP8.93 billion in 2015 from PHP8.60 billion from the year prior. The Fund gave a full-year return of -5.81% which is slightly lower than its benchmark due to investments in companies with exposure in the volatile commodities and foreign exchange markets that unfortunately yielded sub-par returns.


ALFM Growth Fund invested mainly in Holding Firms (23.34%), Property Firms (14.62%), and Industrials (13.57%) to maximize income potential.

MARKET OUTLOOK

In the local space, the biggest story in 2016 is the national and local elections held in May. GDP is expected to grow rapidly this year especially with increased consumption and spending heading into the elections. The Philippines is expected to continue to outgrow its peers. Corporate earnings outlook, however, remains bleak in comparison due to stiff competition and lack of pricing power. The market in general has downgraded earnings expectations heading into 2016, and is expected to further revise expectations downward should the first half disappoint.

In the global space, given the improvement of the economic condition of the U.S., we expect continuation of the U.S. Federal Reserve interest rate increase as a possible risk factor for emerging equities markets such as the Philippines. Expectations of weak global economic growth especially in China and Brazil are perceived risks to the global markets.

With the anticipation of volatile global financial markets, we will employ a bottom-up stock selection approach for the Fund. We prefer names that have clear earnings visibility, acceptable dividend yield, and defensive in nature. Favored sectors include consumer to take advantage of increased consumption both from election spending and improving economy, conglomerates as a beneficiary of GDP growth, and utilities due to competitive prices, defensive nature, and high dividend yield.

* 90% Philippine Stock Exchange Index (PSEi) and 10% return of the 91-day Philppine Treasury Bill

FUND

-5.81

20.07

-1.71

19.18

-0.86

2015

2014

2013

2012

2011

BENCHMARK*

-3.22

20.46

1.14

25.04

3.44



83.88%EQUITIES


ALFM GROWTH FUNDNET ASSET VALUE PER SHARE

310

290

270

250

230

210

190

170

1502010 2012 20142011 2013 2015

PHP 246.09

26

27

PHILIPPINE STOCK INDEX FUNDA Mirror of the Philippine Stock Exchange Index

The Philippine Stock Index Fund (PSIF) is a mutual fund denominated in Philippine pesos which invests in exactly the same securities comprising the Philippine Stock Exchange Composite Index (PSEi) and in the same weights as in the index.

FUND PERFORMANCE

PSIF market share, with respect to the mutual fund equity funds category as of December 2015, is 12.59% which is lower than the previous year’s 17.09%. The Net Asset Value of PSIF declined to PHP11.76 billion in 2015 from PHP14.82 billion the previous year and gave out a negative 3.85% return for the year which mimicked the PSEi. This can be attributed to the perceived weakness in the economic growth of emerging markets; and encouraging economic data in the U.S. signaling the possibility of the U.S. Federal Reserve tapering its quantitative easing policy. These economic developments led to a shift in fund flows from emerging markets to developed markets.


The Fund aims to track the performance of the PSEi; hence the PSIF invests in the same securities and in the same weights as its benchmark.

As of December 31, 2015, the top 5 holdings of the fund are SM Investments Corp. (10.18%), Ayala Land, Inc. (8.40%), PLDT (7.10%), SM Prime Holdings, Inc. (6.21%), and JG Summit Holdings, Inc. (6.01%).

* Philippine Stock Exchange Index (PSEi)

FUND

-3.85

23.10

2.05

34.74

3.89

2015

2014

2013

2012

2011

BENCHMARK*

-3.85

22.76

1.33

32.95

4.07


PHILIPPINE STOCK INDEX FUNDNET ASSET VALUE PER SHARE

850

750

650

550

450

3502010 2012 20142011 2013 2015

MARKET OUTLOOK

Global growth remains to be weak heading towards 2016. In the last quarter of 2015, global GDP grew only 1.7% mainly dragged by poor economic data in China and weak trade volumes in emerging markets. Meanwhile, weakness in Japan as evidenced by poor manufacturing data in the last quarter entertains the possibility of another round of quantitative easing policies being implemented early next year.

In the local space, the biggest story is the national and local elections held in May 2016. GDP growth for the first quarter was measured at 6.90%, relatively strong compared to the Philippines’ peers. However, first quarter earnings have mostly been in-line with market expectations at 7% which is relatively weak. This may lead to an increased sense of caution as analysts hint on the possibility of another round of downgrades in earnings expectations.

Given the improvement of the economic condition of the U.S., we expect continuation of the US Federal Reserve interest rate increase as a possible risk factor for emerging equities markets such as the Philippines. Continued weakness in global economic growth especially in China and other emerging markets may make investors nervous and prefer developed markets.

The 2016 national elections proceeded quite peacefully compared to previous years’ which pushed investors to re-invest in the market and provided a relief rally in the near term. However, corporate earnings growth are still perceived as a possible risk factor as weak first quarter 2016 earnings open the possibility of additional downgrades and de-rating of the market. We perceive external factors such as weak global growth and the possible U.S. Federal Reserve rate increases to continue to provide downside risk. Overall, we expect the PSEi to continue to outperform its peers with positive sentiment stemming from strong economic growth.

PHP 775.38


99.60%EQUITIES


28

29 30

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 accompanying financial statements present fairly, in all material respects, the financial position of ALFM Money Market Fund, Inc. as at December 31, 2015 and 2014, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2015 in accordance with Philippine Financial Reporting Standards.

Report on Bureau of Internal Revenue Requirements

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information in Note 15 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in our audits of the basic financial statements. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Isla Lipana & Co.

John-John Patrick V. LimPartnerCPA Cert. No. 83389P.T.R. No. 0007706, issued on January 6, 2016, Makati CitySEC A.N. (individual) as general auditors 0050-AR-4, Category A; effective until January 6, 2019SEC A.N. (firm) as general auditors 0009-FR-3; effective until January 15, 2018TIN 112-071-386BIR A.N. 08-000745-17-2016, issued on February 9, 2016; effective until February 8, 2019BOA/PRC Reg. No. 0142, effective until December 31, 2016

Makati CityApril 15, 2016

INDEPENDENT AUDITOR’S REPORTTo the Board of Directors and Shareholders ofALFM Money Market Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City

Report on the Financial Statements

We have audited the accompanying financial statements of ALFM Money Market Fund, Inc., which comprise the statements of financial position as at December 31, 2015 and 2014, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation 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 these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and 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 the auditor’s 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, the auditor considers internal control relevant to the entity’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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Statements Required by Rule 68, Securities Regulation Code (SRC), As Amended on October 20, 2011

To the Board of Directors and Shareholders ofALFM Money Market Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City

We have audited the financial statements of ALFM Money Market Fund, Inc. as at and for the year ended December 31, 2015, on which we have rendered the attached report dated April 15, 2016. The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, 2015, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code, and Schedules A,B,C,D,E,F,G and H, as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code.

Isla Lipana & Co.



31 32

ALFM MONEY MARKET FUND, INC.Statements of Financial Position

December 31, 2015 and 2014 (All amounts in Philippine Peso)

Notes

ASSETS

LIABILITIES AND EQUITY

ASSETS Cash and cash equivalents Short-term investments Financial assets at fair value through profit or loss Held-to-maturity securities Loans and receivables Other receivables

Total assets

EQUITY Redeemable shares Share premium Deposits for future subscriptions Retained earnings

Total equity

Total liabilities and equity

LIABILITIES Accrued expenses Deposits for future subscriptions

Total liabilities

23456

9

9

79

517,320,307390,000,016383,635,711740,717,330

-23,277,867

2,054,951,231

137,149,3801,366,091,123479,325,87371,080,282

2,053,646,658

2,054,951,231

1,304,573-

1,304,573

1,115,076,623140,000,000

9,249,03057,719,080

641,129,7226,483,685

1,969,658,140

131,701,9901,309,139,629

-48,201,654

1,489,043,273

1,969,658,140

1,288,994479,325,873

480,614,867

2015 2014

(The notes to the financial statements of the above Fund, found at the succeeding pages, are integral part of these financial statements)

ALFM MONEY MARKET FUND, INC.Statements of Total Comprehensive Income

For each of the three years in the period ended December 31, 2015(All amounts in Philippine Peso except per share amounts)

Notes

INCOME Interest income Net gains on financial assets at fair value through profit or loss Other income

INCOME BEFORE INCOME TAXPROVISION FOR INCOME TAX

NET INCOME FOR THE YEAROTHER COMPREHENSIVE INCOME

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

BASIC AND DILUTED EARNINGS PER SHARE

EXPENSES Management fees Professional fees Taxes and licenses Others

2,3,4,5,6

4

8

9

11

9

46,170,549

2,455,54152,067

48,678,157

31,534,6248,655,996

22,878,628-

22,878,628

1.32

41,406,32318,269,443

23,136,880-

23,136,880

1.36

27,223,8776,099,697

21,124,180-

21,124,180

1.70

14,784,055159,728404,187

1,795,563

17,143,533

29,594,331

10,558,98967,611

40,220,931

61,274,657

1,371,4972,093

62,648,247

10,339,511808,345

1,682,553166,645

12,997,054

17,127,164928,470594,607

2,591,683

21,241,924

2015 20132014


33 34

ALFM MONEY MARKET FUND, INC.Statements of Changes in Equity

For each of the three years in the period ended December 31, 2015 (All amounts in Philippine Peso)

Balance at January 1, 2013

Comprehensive income Net income for the year Other comprehensive income

Total comprehensive income for the year

Transactions with owners Issuance of shares Redemption of shares

Total transactions with owners

Balance at December 31, 2013








Transactions with owners Issuance of shares Redemption of shares Deposit for future subscriptions



Redeemable shares(Note 9)

95,799,480

---

307,803,380(205,227,640)

102,575,740

198,375,220

--

-

92,295,420(158,968,650)

(66,673,230)

131,701,990

--

-

54,092,340(48,644,950)

-

5,447,390

137,149,380

923,662,741

---

3,117,518,092(2,073,776,110)

1,043,741,982

1,967,404,723

--

-

941,930,099(1,600,195,193)

(658,265,094)

1,309,139,629

--

-

560,859,221(503,907,727)

-

56,951,494

1,366,091,123

Sharepremium

-

--

-

--

-

--

-

--

-

-

--

-

--

479,325,873

479,325,873

479,325,873

Deposit for future subscriptions

(Note 9)

32,070,840

21,124,180-

21,124,180

--

-

53,195,020

23,136,880-

23,136,880

-(28,130,246)

(28,130,246)

48,201,654

22,878,628-

22,878,628

---

-

71,080,282

Retainedearnings

1,051,533,061

21,124,180-

21,124,180

3,425,321,472(2,279,003,750)

1,146,317,722

2,218,974,963

23,136,880-

23,136,880

1,034,225,519(1,787,294,089)

(753,068,570)

1,489,043,273

22,878,628-

22,878,628

614,951,561(552,552,677)479,325,873

541,724,757

2,053,646,658

Totalequity


ALFM MONEY MARKET FUND, INC.Statements of Cash Flows

For each of the three years in the period ended December 31, 2015 (All amounts in Philippine Peso)

Notes

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Unrealized fair value (gains) losses, net Interest income

Operating loss before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Short-term investments Financial assets at fair value through profit or loss Loans and receivables Held-to-maturity Other receivables Increase (decrease) in accrued expenses

Cash absorbed by operations Interest received Income taxes paid

Net cash used in operating activities

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from deposits for future subscriptions Proceeds from issuance of shares Redemptions of shares

Net cash from (used in) financing activities

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1

December 31

42,3,4,5,6

999

2

31,534,624

(1,110,941)(46,170,549)

(15,746,866)

(250,000,016)

(373,275,740)641,129,722

(682,998,250)-

15,579

(680,875,571)29,376,367(8,655,996)

(660,155,200)

-614,951,561

(552,552,677)

62,398,884

(597,756,316)

1,115,076,623

517,320,307

27,223,877

1,664,043(29,594,331)

(706,411)

-

(473,510,012)50,602,999

-(148,209)1,153,353

(422,608,280)21,680,113(6,099,697)

(407,027,864)

349,999,8133,425,321,472

(2,279,003,750)

1,496,317,535

1,089,289,671

849,730,887

1,939,020,558

41,406,323

(48,693)(61,274,657)

(19,917,027)

(140,000,000)

551,437,850(582,052,231)(57,719,080)

222,886(510,027)

(248,537,629)66,605,647

(18,269,443)

(200,201,425)

479,325,873684,225,705

(1,787,294,088)

(623,742,510)

(823,943,935)

1,939,020,558

1,115,076,623

2015 20132014


35 36

NOTES TO FINANCIAL STATEMENTSAs at December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 (All amounts are shown in Philippine Peso, unless otherwise stated)

Note 1 - General informationALFM Money Market Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to establish and carry on the business of an open-end investment company. It was registered on October 19, 2009 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799).

The Fund seeks capital preservation and stable income. It aims to achieve this objective by investing in a diversified portfolio of short-term bonds and money market instruments. As an open-end investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund’s prospectus (Note 10).

The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on June 23, 2015 (Note 9).

The Fund’s registered office address, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City, Philippines.

The Fund has no employees. The principal management and administration functions of the Fund are outsourced from BPI Investment Management, Inc. (the “Fund Manager”) (Note 11).

These financial statements have been approved and authorized for issuance by the Fund’s Board of Directors (BOD) on April 15, 2016.

Note 2 - Cash and cash equivalentsThe account at December 31 consists of:

Short-term time deposits bear interest rates ranging from 2.5% to 2.75% in 2015 (2014 - 2.30% to 3.00%).

Interest income earned from cash and cash equivalents for the year ended December 31, 2015 amounts to P20,317,281 (2014 - P17,599,850; 2013 - P11,529,321).

Note 3 - Short-term investmentsShort-term investments as at December 31, 2015 amount to P390,000,016 (2014 - P140,000,000). The account consists of placements in time deposits with maturity period of more than three (3) months but not more than one (1) year.

Interest income earned from short-term investments for the year ended December 31, 2015 amounts to P4,524,287 (2014 - P822,889; 2013 - nil).

Note 4 - Financial assets at fair value through profit or lossThe account at December 31 consists of held for trading investments in:

Financial assets at fair value through profit or loss are all due within 12 months from reporting date.

Details of net unrealized and realized gains (losses) on financial assets at fair value through profit or loss for the years ended December 31 follow:

Interest income earned from financial assets at fair value through profit or loss amounts to P2,802,926 (2014 - P26,741,592; 2013 - P10,837,909).

Note 5 - Held to maturity securitiesThe account at December 31 consists of:

Short-term time depositsRegular savings deposits

2015515,000,813

2,319,494517,320,307

20141,110,000,000

5,076,6231,115,076,623

Unit investment trust fundGovernment securities

201570,623,797

313,011,914383,635,711

20149,249,030

-9,249,030

Net realized gainsNet unrealized gains (losses)

20151,344,6001,110,9412,455,541

201312,223,032(1,664,043)10,558,989

20141,322,804

48,6931,371,497

Government securitiesCorporate debts

2015593,514,740147,202,590740,717,330

201457,719,080

-57,719,080

The maturity pattern of held-to-maturity securities follows:

The movements in held-to-maturity securities follow:

Interest income earned from held-to-maturity securities for the year ended December 31, 2015 amounts to P8,344,502 (2014 - P2,767,459; 2013 - nil).

The interest rate of held-to-maturity securities in 2015 is 1.30% to 7.47% (2014 - 5.10%).

Note 6 - Loans and receivablesThe account as at December 31, 2014 consists of unsecured term loans and promissory notes with an aggregate amount of P641,129,722. These term loans issued by certain Philippine counterparties with interest rates ranging from 1.90% to 11.76% were fully paid in 2015.

Interest income earned from loans and receivables for the year ended December 31, 2015 amounts to P10,181,553 (2014 - P13,342,867; 2013 - P7,227,101).

Note 7 - Accrued expensesThe account at December 31 consists of the following:

Management fee payable and withholding taxes payable are settled on a monthly basis.

Note 8 - Income taxesProvision for income tax substantially represents tax withheld for income subject to final tax. Provision for income tax for the year ended December 31, 2015 amounts toP8,655,996 (2014 - P18,269,443; 2013 - P6,099,697).

The Fund did not recognize deferred income tax assets on NOLCO in view of its limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund’s income is subject to final tax. The details of the Fund’s unused NOLCO at December 31 are as follows:

Note 9 - Redeemable sharesThe details of the Fund’s authorized shares at December 31 follow:

The Fund’s Board of Directors approved on July 18, 2013 an increase in the Fund’s authorized share capital from 20 million to 40 million shares with par value of P10 per share. The increase in authorized share capital was subsequently approved by the SEC on June 24, 2014. The corresponding shares for the cash received by the Fund from various investors as deposits for future subscriptions amounting to P349,999,813 were issued in 2014.

On November 21, 2014, the Board of Directors approved an increase in the Fund’s authorized share capital from 40 million to 57 million shares with par value of P10 per share. The Fund received cash from investors as deposits for future subscriptions amounting to P479,325,873. On June 23, 2015, the SEC approved the application for the increase in authorized share capital. As at December 31, 2015, the Fund has yet to file an application with the SEC for the authority to sell the increase in share capital.

During the year ended December 31, 2015, the Fund incurred SEC filing fee related to the application for the increase in authorized share capital. The filing fee amounts to P968,798 (2014 - P2,264,653; 2013 - nil) which is presented as Other expense in the statement of total comprehensive income.

Management fee payableWithholding tax on management fees

Note11

20151,091,699197,295

1,288,994

20151,109,191195,382

1,304,573

Due in one year or lessDue after one year through five years

2015697,028,44343,688,887

740,717,330

201457,719,080

-57,719,080

At January 1AdditionsMaturitiesAmortization of premiumAt December 31

201557,719,080

1,256,425,388(563,109,526)(10,317,612)740,717,330

2014-

58,892,369-

(1,173,289)57,719,080

Number of sharesPar value per shareAmount

201557 million

P10P570 million

201440 million

P10P400 million

Year of Incurrence2015201420132012

20159,808,123

13,114,16712,929,4431,305,666

37,157,399(1,305,666)35,851,733

30%10,755,520

2014-

13,114,167 12,929,443 1,305,66627,349,276

-27,349,276

30%8,204,783

Year of Expiration2018201720162015

Expired NOLCO Income tax rate Unrecognized deferred income tax assets

37 38

The movement in the number of redeemable shares for the years ended December 31 follow:

Details of issuances and redemptions of the Fund’s redeemable shares for the years ended December 31 follow:

As at December 31, 2015, the Fund has 3,177 shareholders (2014 - 1,966).

Earnings per shareEarnings per share is calculated by dividing net income by the weighted average number of outstanding redeemable shares during the year.

The information used in the computation of basic and diluted earnings per share for the years ended December 31 follow:

Note 10 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for redeemable shares issued or repurchased, respectively is based on the value of the Fund’s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund’s NAV based on PFRS (“PFRS NAV”).

In accordance with the provisions of the Fund’s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the PFRS NAV to arrive at the Fund’s NAV for purposes of share subscriptions and redemptions (“Trading NAV”). The policy which has been adopted for the best interest of the Fund’s investors is designed to protect the Fund against sharp fluctuations, thereby allowing the Fund to meet its investment objective, which is to generate a steady stream of income through investments in a diversified portfolio of high-grade fixed-income

instruments. The allowance for market risk is subject to the BOD’s periodic review.

The movement in allowance for market risk follows:

Reconciliation of the Fund’s PFRS NAV to its trading NAV at December 31 is provided below:

The Fund computes its NAV per share by dividing the trading NAV as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows:

As disclosed in Note 1, the Fund is an open-end investment company which stands ready at any time to redeem its outstanding shares at a value defined under its prospectus (trading NAV). Any changes in the value of the shareholders’ investment are reflected in the increase or decrease in the Fund’s NAV.

The Fund’s retained earnings may exceed 100% of its paid-up capital from time to time. This, however, is not construed as a compelling factor for the Fund to declare dividends considering the nature of the Fund’s business. Such retained earnings may be used for reinvestment and will be converted into realized profits by the shareholders upon redemption of their shareholdings in the Fund.

Issued and outstanding, January 1Issuance of sharesRedemptions of sharesIssued and outstanding, December 31

201513,170,1995,409,234

(4,864,495)13,714,938

20139,579,948

27,645,301(17,387,727)19,837,522

201419,837,5229,229,542

(15,896,865)13,170,199

Issuances of sharesRedemptions of shares

2015614,951,561552,552,677

20141,034,225,5191,787,294,089

20133,425,321,4722,279,003,750

Net income for the yearWeighted average number of shares outstanding during the yearBasic and diluted earnings per share

201522,878,628

17,373,4991.32

201423,136,880

17,067,0771.36

201321,124,180

12,416,0251.70

At January 1Reversal of provisions for market riskAt December 31

2015577,644

(575,692)1,952

2014590,686(13,042)577,644

PFRS NAVAllowance for market riskDeposits for future stock subscriptionsTrading NAV

20152,053,646,658

(1,952)-

2,053,644,706

20141,489,043,273

(577,644)479,325,873

1,967,791,502

Trading NAVTotal number of shares issued and outstandingTotal number of shares covered by deposits for future subscriptionsTotal number of sharesTrading NAV per share

Note

9

9

20151,967,791,502

13,170,199

4,250,00017,420,199

112.96

20152,053,644,706

13,714,938

4,250,00017,964,938

114.31

Note 11 - Related party transactionsBPI Investment Management, Inc. (BIMI) and BPI - Asset Management Trust Group (BPI - AMTG) were designated as fund manager and investment advisor of the Fund, respectively.

As fund manager, BIMI shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BIMI to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BIMI a fee of not more than 0.375% p.a. of the Fund’s average trading NAV. The Fund’s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPI-AMTG a fee of not more than 0.375% p.a. of the Fund’s average trading NAV.

The Fund has distribution agreements with subsidiaries of BPI, namely, BIMI, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BIMI, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund for a fee of 0.375% p.a. of the Fund’s average trading NAV. Such agreements are effective year after year unless terminated by each parties. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders.

The table below summarizes the Fund’s transactions and balances with its related parties:

The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of P10,000 for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor.

For the year ended December 31, 2015, total remunerations paid to directors and officers charged in profit or loss amounts to P102,500 (2014 - P90,000 ; 2013 - P120,000). As at reporting date, there were no outstanding balances related to these fees.

Note 12 - Critical accounting judgmentsEstimates, assumptions and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas of judgment that have significant risks of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Outstanding balances

553,450553,450

2,291

1,109,191

Terms and conditions

The outstanding balance is unsecured, unguaranteed, non-interest bearing and

payable in cash a month after the management

fee is incurred.

Transactions

7,378,2347,378,234

27,587

14,784,055

December 31, 2015

Management feesBIMI

BPI - AMTGBPI Capital


544,702544,702

2,295

1,091,699




fee is incurred.

Transactions

8,551,0378,551,036

25,091

17,127,164

December 31, 2014

Management feesBIMI

BPI - AMTGBPI Capital


670,007670,007

1,340,014




fee is incurred.

Transactions

5,169,7565,169,755

10,339,511

December 31, 2013

Management feesBIMI

BPI - AMTG

39 40

Held-to-maturity classification (Note 5)Notwithstanding the open-ended nature of the Fund, a portion of the Fund’s investments are classified as held-to-maturity. The Fund follows the guidance of PAS 39 in classifying these investments as held-to-maturity. This classification requires significant judgment. In making this judgment, the Fund evaluates its intention and ability to hold such investments to maturity and such evaluation takes into consideration the Fund’s historical experience on the characteristics and profile of its shareholders, the level of contributions and redemptions at any given period and average holding period of its shareholders.

If the Fund fails to keep these investments to maturity other than for the specific circumstances (e.g. selling an insignificant amount close to maturity), it will be required to measure the investments at fair value and not at amortized cost.

As at December 31, 2015, the Fund’s held-to-maturity securities amount to P740,717,330 (2014- P57,719,080).

Impairment of loans and receivables (Note 6)The Fund reviews its loans and receivables at each reporting date to assess whether an allowance for impairment should be recorded in the statement of total comprehensive income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. The level of allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to age of balances, financial status of counterparties, payment behaviour and known market factors. The Fund reviews the age and status of receivables, and identifies accounts that are to be provided with allowance on a regular basis.

Loans and receivables as at December 31, 2015 have been collected in full in 2015 (2014 - outstanding balance of P641,129,722). No impairment loss was necessary to be recognized for the year ended December 31, 2014.

Note 13 - Financial risk and capital management

13.1 Strategy in using financial instrumentsThe Fund’s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund’s assets and liabilities are denominated in Philippine Peso and is not therefore exposed to foreign exchange risk. The Fund’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund’s financial performance.

The management of financial risks is carried out by the Fund Manager under policies

approved by the BOD of the Fund. The BOD approves written principles for overall risk management as well as written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks.

The Fund has established risk management functions with clear terms of reference and with the responsibility for developing policies on financial risks. It also supports the effective implementation of policies. The policies define the Fund’s identification of risk and its interpretation, limit structure to ensure the appropriate quality and diversification of assets to the corporate goals and specify reporting requirements.

The Fund’s objective is to exceed the performance of the HSBC Philippines Money Market Index by investing in a diversified portfolio of the Peso denominated short-term fixed income and money market instruments.

13.2 Interest rate riskThe Fund trades in financial instruments, taking positions in traded and over-the-counter instruments, to take advantage of short-term market movements primarily in the bond markets. Trading positions are reported at estimated market value with changes reflected in the statement of total comprehensive income. Trading positions are subject to various risk factors, which include exposures to interest rates.

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Fund takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates primarily on its fair value risk.

The Fund’s financial assets at fair value through profit or loss are mostly non-repricing and hence exposed to fair value interest rate risk. The Fund’s fair value interest rate risk exposure principally relates to debt securities classified as financial assets at fair value through profit or loss whose market values fluctuate as a result of changes in interest rates or factors specific to their issuers. The Fund’s interest-bearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund’s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a monthly basis by the BOD.

The Fund’s fair value interest rate risk is managed through diversification of the investment portfolio ratios by exposures. The Fund is also actively managed via portfolio duration management, yield curve positioning, credit diversification, portfolio quality and liquidity management.

To estimate its exposure to market risk, the Fund Manager computes the statistical “value at risk” (VAR) of its investments. The VAR measurement estimates the maximum loss due to adverse market movements that could be incurred by a portfolio during a given holding period with a given level of confidence. The Fund Manager uses a one month holding period, estimated as the number of days required to liquidate the investment portfolio, and a 99% degree of confidence in the computation of VAR. As such, there remains 1% statistical probability that the portfolios’ actual loss could be greater than the VAR estimate.

As at December 31, 2015, the Fund’s VAR with respect to market interest rate volatilities amounts to P4,796,793 (2014 - P798,413).

13.3 Credit riskThe Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation.

The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund’s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceed ten percent (10%) of the outstanding securities of any one investee company. Credit risk is also minimized through diversification or by investing in a variety of investments belonging to different sectors or industries.

The maximum exposure to credit risk before any credit enhancements at December 31 is the carrying amount of the financial assets as set out below:

As at December 31, 2015 and 2014, the Fund’s financial assets as shown above are neither past due nor impaired. There were no renegotiated financial assets as at December 31, 2015 and 2014.

The Fund’s cash in bank and short-term investments (Note 3) were placed with a local universal bank while its cash equivalents are composed of short-term time deposits with the same universal bank (Note 2). The Fund invests primarily in high-grade investment instruments and securities. Details of ratings of the Fund’s investments at December 31 based on external credit rating agencies follow:

Unrated investments and loans and receivables are from counterparties with no history of default with the Fund.

In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s credit position on a daily basis and the BOD reviews it on a monthly basis. Further, the Fund’s investment advisor regularly reviews the credit quality of the Fund’s investments and receivables by assessing the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty.

The Fund’s other receivables are primarily composed of accrued interest receivable which has the same credit quality as the related debt securities.

Cash and cash equivalentsShort term investmentsFinancial assets at fair value through profit or lossHeld to maturity securitiesLoans and receivablesOther receivables

20151,115,076,623140,000,000

-57,719,080

641,129,7226,483,685

1,960,409,110

2015517,320,307390,000,016

313,011,914740,717,330

-23,277,867

1,984,327,434

Held-to-maturity

593,514,740

105,181,13242,021,458

740,717,330

Loans and receivables

-

---

Fair value through profit or loss

313,011,914

--

313,011,914

2015

Moody’s Baa2

Philippine Rating Services Corp.

Aaa Unrated

Held-to-maturity

-

57,719,080-

57,719,080


282,654,989

-358,474,733641,129,722


-

--

2014

Moody’s Aaa

Standard and Poor’s BBB

Unrated

41 42

13.4 Liquidity riskLiquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous.

The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s liquidity position on a daily basis to ensure that excess cash positions are invested in fixed-income securities and redemptions are funded within the prescribed period indicated in the Fund’s prospectus.

The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market and can be readily disposed of. The Fund’s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date.

Furthermore, the Fund has the ability to borrow in the short term to settle its obligations when necessary. No such borrowings have arisen in 2015 and 2014.

The Fund’s financial liabilities pertain to management fee payable which is contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their maturity dates.

13.5 Capital managementThe capital of the Fund is represented by total equity as shown in the statement of financial position. The BOD and the Fund Manager monitor capital on the basis of the value of total equity. The Fund’s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund’s objectives when managing capital are as follows:

i) Safeguard the Fund’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders;

ii) Maintain a strong capital base to support the development of the investment activities of the Fund; and

iii) Comply with the minimum subscribed and paid-in capital of P50 million required for investment companies under Investment Company Act of 1960.

As at December 31, 2015 and 2014, the Fund is in compliance with the minimum required capital for investment companies.

In order to maintain or adjust the capital structure, the Fund’s policies consist of the following:

i) Monitor the level of daily subscriptions and redemptions relative to the assets it expects to be able to liquidate within 7 days; and

ii) Redeem and issue new shares in accordance with the Fund’s prospectus, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions.

13.6 Fair value estimationThe following table presents the fair value hierarchy of the Fund’s assets and liabilities measured at fair value at December 31:

The fair value of held-to-maturity securities as at December 31, 2015 amounts to P741,042,526 (2014 – P57,832,000). The fair value of held-to-maturity securities is based on market prices or broker/dealer price quotations and classified under Level 1 of the fair value hierarchy.

The Fund’s other financial assets and liabilities at reporting period approximate their fair values considering that they have short-term maturities or the impact of discounting is not significant.

There were no transfers between the fair value hierarchy during the years ended December 31, 2015 and 2014.

Note 14 - Summary of significant accounting policiesThe principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2015Financial assets at fair value through profit or lossUnit investment trust fund Government securities

Level 1

70,623,797313,011,914383,635,711

Level 2

---

Level 3

---

Fair value

2014Financial assets at fair value through profit or loss Unit investment trust fund

Level 1

9,249,0309,249,030

Level 2

--

Level 3

--

Fair value

14.1 Basis of preparation The financial statements of the Fund have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS), and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC.

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss.

The preparation of these financial statements in conformity with PFRS requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Fund’s accounting policies. There are no areas where assumptions and estimates are significant to the financial statements. The areas involving a higher degree of judgment or complexity are disclosed in Note 12.

Amended standards adopted by the FundThe following relevant amendments to existing standards have been adopted by the Fund effective January 1, 2015:

• Amendments to PAS 24, ‘Related party disclosures’ on key management personnel. This amendment clarifies that where an entity receives management personnel services from a third party (a management entity), the fees paid for those services must be disclosed by the reporting entity, but not the compensation paid by the management entity to its employees or directors. The amendment did not have a significant effect on the Fund’s financial statements.

• Amendment to PFRS 13, ‘Fair value measurement’ on short-term receivables and payables and portfolio exception. This amendment confirms that short-term receivables and payables can continue to be measured at invoice amounts if the impact of discounting is immaterial. The amendment also clarifies that the portfolio exception in PFRS 13 (measuring the fair value of a group of financial assets and financial liabilities on a net basis) applies to all contracts within the scope of PAS 39 ‘Financial instruments: Recognition and measurement’. The amendment did not have a significant effect on the Fund’s financial statements.

Other standards, amendments and interpretations which are effective for the financial year beginning on January 1, 2015 are considered not relevant to the Fund.

New standards, amendments and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2015, and have not been applied in

preparing these financial statements. None of these standards are expected to have a significant effect on the financial statements of the Fund, except the following as set out below:

• PFRS 9, ‘Financial instruments’ will replace the multiple classification and measurement models in PAS 39 ‘Financial instruments: Recognition and measurement’ with a single model that has initially only two classification categories: amortized cost and fair value. Classification of debt assets will be driven by the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. A debt instrument is measured at amortized cost if: a) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and b) the contractual cash flows under the instrument solely represent payments of principal and interest. All other debt and equity instruments, including investments in complex debt instruments and equity investments, must be recognized at fair value. All fair value movements on financial assets are taken through the statement of profit or loss, except for equity investments that are not held for trading, which may be recorded in the statement of profit or loss or in reserves (without subsequent recycling to profit or loss). For financial liabilities that are measured under the fair value option, entities will need to recognize the part of the fair value change that is due to changes in their own credit risk in other comprehensive income rather than in profit or loss. The new hedge accounting rules (released in December 2013) align hedge accounting more closely with common risk management practices. As a general rule, it will be easier to apply hedge accounting going forward. The new standard also introduces expanded disclosure requirements and changes in presentation. In December 2014, the International Accounting Standards Board (IASB) made further changes to the classification and measurement rules and also introduced a new impairment model. With these amendments, PFRS 9 is now complete. The changes introduce: (1) a third measurement category (FVOCI) for certain financial assets that are debt instruments, and (2) a new expected credit loss (ECL) model which involves a three-stage approach whereby financial assets move through the three stages as their credit quality changes. The stage dictates how an entity measures impairment losses and applies the effective interest rate method. A simplified approach is permitted for financial assets that do not have a significant financing component (e.g. trade receivables). On initial recognition, entities will record a day-1 loss equal to the 12-month ECL (or lifetime ECL for trade receivables), unless the assets are considered credit impaired.

For financial years commencing before February 1, 2015, entities can elect to apply PFRS 9 early for any of the following: (1) the own credit risk requirements for financial liabilities, (2) classification and measurement (C&M) requirements for financial assets, (3) C&M requirements for financial assets and financial liabilities,

43 44

or (4) C&M requirements for financial assets and liabilities and hedge accounting. After February 1, 2015, the new rules must be adopted in their entirety. The standard is effective for accounting periods beginning on or after January 1, 2018. Early adoption is permitted. The amendment did not have a significant effect on the Fund’s financial statements.

There are no other standards, amendments or interpretations that are not yet effective that have a material impact on the Fund.

14.2 Cash and cash equivalentsCash includes deposit held at call with a bank and short-term highly liquid investments with original maturities of three months or less from the date of acquisition.

14.3 Financial assets

ClassificationThe Fund classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, held-to-maturity securities and available-for-sale securities. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its investments at initial recognition.

Financial assets at fair value through profit or loss are classified as held for trading if they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of being traded. The Fund’s loans and receivables include cash and cash equivalents, short-term investments, term loans and other receivables.

Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Fund’s management has the positive intention and ability to hold to maturity. If the Fund were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified to available-for-sale.

As at December 31, 2015 and 2014, the Fund has no financial asset under the available-for-sale category.

Recognition and derecognitionRegular-way purchases and sales of financial assets are recognized on trade date, the

date on which the Fund commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition.

Financial assets are derecognized when the rights to receive the cash flows from the financial assets have expired or where the Fund has transferred substantially all the risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income.

Subsequent measurementFinancial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are included within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income in the year in which they arise. Loans and receivables and held-to-maturity securities are subsequently carried at amortized cost using the effective interest method.

ImpairmentThe Fund assesses at each reporting date whether there is an objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is an objective evidence of impairment as a result of one or more events that occurred after the initial recognition of an asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Fund first assesses whether an objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Fund determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are

considered indicators that a financial asset is impaired. The amount of provision for impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of loss has been determined. If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of reversal is recognized in profit or loss as a reduction of impairment loss for the year.

14.4 Financial liabilities

Classification and measurementThe Fund classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss and financial liabilities at amortized cost.

Financial liabilities at fair value through profit or loss comprise two sub-categories: financial liabilities classified as held for trading and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Financial liabilities designated at fair value through profit or loss are those that are not classified as held-for-trading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss as at December 31, 2015 and 2014.

Financial liabilities that are not classified as at fair value through profit or loss fall into the category of other liabilities measured at amortized cost. Financial liabilities measured at amortized cost pertain to management fee payable (Note 7).

Derecognition of financial liabilitiesFinancial liabilities are derecognized when they have been redeemed or otherwise extinguished. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition

of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss.

14.5 Offsetting of financial instrumentsFinancial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Fund or the counterparty.

As at December 31, 2015 and 2014, there are no financial assets and liabilities that have been offset.

14.6 Fair value measurementFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date. The fair values of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

The quoted market price used for financial assets held by the Fund is the last traded market price for financial assets where the last traded price falls within the bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, management determines the point within the bid-ask spread that is most representative of fair value.

The Fund classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

• Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.).

• Level 2 - 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). The primary source of input parameters like LIBOR yield curve or counterparty credit risk is Bloomberg.

• Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments

45 46

with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible.

14.7 Redeemable sharesThe shares issued by the Fund are redeemable at the holder’s option and are classified as equity and are recognized at par value.

Share premium includes any premium or consideration received in excess of par value on the issuance of redeemable shares.

The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: (i) the puttable instruments must entitle the holder to a pro-rata share of net assets; (ii) the puttable instruments must be the most subordinated class and the features of that class must be identical; (iii) there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and (iv) the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares’ terms or conditions change such that they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument’s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity.

Redeemable shares can be put back to the Fund at any time for cash equal to a proportionate share of the Fund’s trading net asset value (Note 10) calculated in accordance with the Fund’s prospectus. Any excess of subscriptions over the par value of shares issued is shown as share premium. The excess of redemption amount over the par value of shares redeemed are first applied against the related share premium and then to the related retained earnings.

14.8 Deposits for future subscriptionsDeposits for future subscriptions represent funds received by the Fund with a view of applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares or from a proposed increase in authorized share capital, or as share premium.

Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the

approval by its BOD, stockholders and the SEC.

The Fund classifies a deposit for future subscription as an equity instrument, if all of the following conditions are met:

• The unissued authorized share capital of the Fund is insufficient to cover the amount of shares indicated in the contract;

• There is BOD’s approval on the proposed increase in authorized share capital (for which a deposit was received by the Fund);

• There is shareholders’ approval of said proposed increase; and• The application for the approval of the proposed increase has been filed with the SEC.

If any or all of the foregoing conditions are not present, the Fund recognizes the deposit as a liability.

Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund’s trading net asset value. Upon approval, the amount will be credited to share capital for the par value of the shares and to share premium for the amount in excess of the par value.

14.9 Revenue and expense recognitionInterest income is recognized on a time-proportion basis using the effective interest method.

When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Expenses are recognized when incurred.

14.10 Functional and presentation currencySubscriptions and redemptions of the Fund’s redeemable shares are denominated in Philippine Peso (“Peso”). The primary activity of the Fund is to invest in diversified portfolio of Peso denominated short-term fixed income and money market instruments. The BOD considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions of the Fund. The financial statements are presented in Peso, which is the Fund’s functional and presentation currency.

14.11 Earnings per shareBasic earnings per share is calculated by dividing the net income attributable to shareholders over the weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares.

There are no dilutive potential redeemable shares as at December 31, 2015 and 2014.

14.12 Income tax

Current income taxThe current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

The Fund primarily earns interest income from its investments in debt securities which are subject to final withholding tax. Such income is presented gross of taxes paid or withheld and the related tax is presented in the statement of total comprehensive income as Provision for income tax. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax.

Deferred income taxDeferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized for all deductible temporary differences and carry-forward of unused tax losses (net operating loss carryover or NOLCO) to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

The Fund reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset.

Deferred income tax liabilities are provided on taxable temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except where the timing of the reversal of the temporary differences is controlled by the Fund and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority and where there is an intention to settle the balances on a net basis.

14.13 Related party relationships and transactionsRelated party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprise and its key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.

14.14 Subsequent events (or Events after reporting date)Post year-end events that provide additional information about the Fund’s financial position at reporting date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes to financial statements when material.

There are no subsequent events that have occurred that would require recognition or disclosure 1n the financial statements.

Note 15 - Supplementary information required by the Bureau of Internal RevenueBelow is the additional information required by Revenue Regulations No. 15-2010 that is relevant to the Fund. This information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements.Documentary stamp taxes

Total documentary stamp taxes paid on share subscriptions for the year ended December 31, 2015 amount to P286,538. There are no documentary stamp taxes accrued as at December 31, 2015.

47 48

Withholding taxesWithholding taxes for the year ended December 31, 2015 amount to P2,241,624, of which P195,382 is outstanding as at December 31, 2015.

All other local and national taxesAll other local and national taxes paid for the year ended December 31, 2015 consist of:

The above local and national taxes are lodged under taxes and licenses in expenses in the statement of total comprehensive income.

There are no other local and national taxes accrued as at December 31, 2015.

Tax assessments and cases As at December 31, 2015, open taxable years are 2014, 2013 and 2012. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR.

INDEPENDENT AUDITOR’S REPORTTo the Board of Directors and Shareholders ofALFM Peso Bond Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City


We have audited the accompanying financial statements of ALFM Peso Bond Fund, Inc., which comprise the statements of financial position as at December 31, 2015 and 2014, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information.






Municipal and other related taxesCommunity taxTotal

Amount107,14910,500

117,649


Opinion

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Peso Bond Fund, Inc. as at December 31, 2015 and 2014, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2015 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.




To the Board of Directors and Shareholders ofALFM Peso Bond Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City

We have audited the financial statements of ALFM Peso Bond Fund, Inc. as at and for the year ended December 31, 2015, on which we have rendered the attached report dated April 15, 2016. The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, 2015, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code, and Schedules A,B,C, D,E,F,G and H, as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code.

Isla Lipana & Co.



49 50

ALFM PESO BOND FUND, INC.Statements of Financial Position

December 31, 2015 and 2014 (All amounts in thousands of Philippine Peso)

Notes

ASSETS


ASSETS Cash and cash equivalents Short-term investments Financial assets at fair value through profit or loss Loans and receivables Held-to-maturity securities

Total assets

EQUITY Redeemable shares Share premium Deposits for future subscriptions Retained earnings

Total equity


LIABILITIES Management fee payable Other liabilities Deposits for future subscriptions

Total liabilities

23456

9

9

10

1279

2,072,35310,350,00321,814,36621,436,2988,687,011

64,360,031

18,119,38320,943,9614,770,185

20,445,168

64,278,697

64,360,031

69,78711,547

-

81,334

8,428,383 1,300,000

22,182,508 22,194,901 6,018,248

60,124,040

17,079,936 18,651,236

-19,545,542

55,276,714

60,124,040

66,072 11,069

4,770,185

4,847,326

2015 2014


ALFM PESO BOND FUND, INC.Statements of Total Comprehensive Income

For each of the three years in the period ended December 31, 2015(All amounts in thousands of Philippine Peso except per share amounts)

Notes

INCOME Interest income Net (losses) gains on financial assets at fair value through profit or loss Other income





EXPENSES Management and other professional fees Taxes and licenses Custodian fee Others

2,3,4,5,6

411

8

9

12

13

2,442,029

(250,355)218,263

2,409,937

1,361,143461,517

899,626-

899,626

4.43

1,053,149548,433

504,716-

504,716

2.65

2,993,096489,556

2,503,540-

2,503,540

11.75

982,26946,7403,479

16,306

1,048,794

2,452,854

1,517,856149,766

4,120,476

2,439,694

(465,830)110,026

2,083,890

1,012,267106,102

4938,518

1,127,380

967,58934,338

50128,313

1,030,741

2015 20132014


51 52

ALFM PESO BOND FUND, INC.Statements of Changes in Equity

For each of the three years in the period ended December 31, 2015 (All amounts in thousands of Philippine Peso)


















15,257,695

---

19,766,943(14,160,098)

5,606,845

20,864,540

--

-

5,252,461(9,037,065)

(3,784,604)

17,079,936

--

-

8,556,012(7,516,565)

-

1,039,447

18,119,383

11,643,428

---

42,567,385(27,514,612)

15,052,773

26,696,201

--

-

11,269,271(19,314,236)

(8,044,965)

18,651,236

--

-

19,002,440(16,709,715)

-

2,292,725

20,943,961

Sharepremium

--

-

--

-

--

-

--

-

-

--

-

--

4,770,185

4,770,185

4,770,185

Deposit for future subscriptions

(Note 9)

19,567,194

2,503,540-

2,503,540

-(2,964,328)

(2,964,328)

19,106,406

504,716-

504,716

-(65,580)

(65,580)

19,545,542

899,626-

899,626

---

-

20,445,168

Retainedearnings

46,468,317

2,503,540-

2,503,540

62,334,328(44,639,038)

17,695,290

66,667,147

504,716-

504,716

16,521,732(28,416,881)

(11,895,149)

55,276,714

899,626-

899,626

27,558,452(24,226,280)

4,770,185

8,102,357

64,278,697

Totalequity


ALFM PESO BOND FUND, INC.Statements of Cash Flows


Notes

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Unrealized fair value losses, net Interest income

Operating (loss) before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Short-term investments Financial assets at fair value through profit or loss Loans and receivables Held-to-maturity (Increase) decrease in: Management fee payable Other liabilities

Cash (absorbed by) generated from operations Interest received Income taxes paid

Net cash used in operating activities

CASH FLOWS FROM FINANCING ACTIVITIES Deposits for future subscriptions Proceeds from issuance of shares Redemption of shares


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1

December 31

42,3,4,5,6

999

2

1,361,143

260,028(2,442,029)

(820,858)

(9,050,003)108,114789,780

(2,668,763)

3,715478

(11,637,537)2,410,853(461,517)

(9,688,201)

-27,558,452

(24,226,280)

3,332,172

(6,356,029)

8,428,382

2,072,353

2,993,096

509,825(2,452,854)

1,050,067

-(21,878,350)(2,171,869)

-

176,57028,559

(22,795,023)1,943,029(489,556)

(21,341,550)

4,770,18562,334,328

(44,639,038)

22,465,475

1,123,925

3,755,317

4,879,242

1,053,149

457,797(2,439,694)

(928,748)

(1,300,000)28,883,353(6,889,747)(6,018,248)

(181,704)(11,877)

13,553,0292,439,694(548,433)

15,444,290

-16,521,732

(28,416,881)

(11,895,149)

3,549,141

4,879,242

8,428,383

2015 20132014


53 54

NOTES TO FINANCIAL STATEMENTSAs at December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015(All amounts are in thousands of Philippine Peso, except for number of shares and per share amounts)

Note 1 - General informationALFM Peso Bond Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to establish and carry on the business of an open-end investment company. It was registered on July 18, 1997 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799).

The Fund aims to generate a steady stream of income through investments in a diversified portfolio of high-grade fixed income instruments. As an open-end investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund’s prospectus (Note 10).

The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on August 15, 2014.





Short-term time deposits bear interest rates in 2015 ranging from 2% - 2.75% (2014 - 0.63% to 2.88%).

Interest income earned from cash and cash equivalents as at December 31, 2015 amounts to P198,706 (2014 - P138,320; 2013 - P58,850)

Note 3 - Short-term investmentsShort-term investments as at December 31, 2015 amount to P10,350,003 (2014 - P1,300,000). The account consists of placements in time deposits with maturity period of more than three (3) months but not more than one (1) year.

Interest income earned from short-term investments for the year ended December 31, 2015 amounts to P95,862 (2014 - P7,608; 2013 - nil).


Government securities bear interest rates ranging from 1.70% - 14.60% in 2015 and 2014.

The maturity pattern of government securities follows:

Details of net unrealized and realized (losses) gains on financial assets at fair value through profit or loss for the years ended December 31 follow:

Interest income earned from financial assets at fair value through profit or loss for the year ended December 31, 2015 amounts to P622,350 (2014 - P980,950; 2013 - P1,668,310).


20151,980,000

92,3532,072,353

20148,320,000108,383

8,428,383

Government securitiesUnit investment trust funds Mutual fundsPreferred shares

201516,961,706

807,338191,203

3,854,11921,814,366

201417,359,760

932,766191,458

3,698,52422,182,508

Net unrealized lossesNet realized gains (losses)

2015(260,028)

9,673(250,355)

2013(509,825)2,027,6811,517,856

2014(457,797)

(8,033)(465,830)

Due in one year or lessDue after one year

2015801,097

16,160,60916,961,706

2014177,159

17,182,60117,359,760

Note 5 - Loans and receivablesThe account at December 31 consists of:

The maturity pattern of loans and receivables follows:

Term loans represent debts issued by certain Philippine corporations. The term loans carry interest rates ranging from 4.16% to 9.33% in 2015 (2014 - 4.38% to 9.33%).

Other receivables mainly pertain to accrued interest income.

The classification of Loans and receivables as to security follows:

Secured term loans are primarily collateralized by real estate and chattel mortgage.

Interest income earned on loans and receivables for the year ended December 31, 2015 amounts to P1,176,286 (2014 - P1,074,842; 2013 - P725,694).

Note 6 - Held-to-maturity securities The account at December 31 consists of:


The movement in held-to-maturity securities is summarized as follows:

Interest earned from held-to-maturity securities for the year ended December 31, 2015 amounts to P348,825 (2014 - P237,974 and 2013 - nil).

The range of average interest rates of held-to-maturity securities in 2015 is 1.92% to 9%.

Note 7 - Other liabilitiesThe account at December 31, 2015 mainly consists of withholding taxes payable amounting to P11,547 (2014 – P11,069). This is settled on a monthly basis.

Note 8 - Income taxesProvision for income tax substantially represents tax withheld on income subject to final tax. Provision for income tax for the year ended December 31, 2015 amounts to P461,517 (2014 - P548,433; 2013 - P489,556).

The Fund did not recognize deferred income tax assets on NOLCO in view of its limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund’s income is subject to final tax. The details of the Fund’s unused NOLCO at December 31 are as follows:

Note 9 - Redeemable sharesThe details of the Fund’s authorized shares as at December 31, 2015 and 2014 follow:

Term loansOther receivables

201520,913,791

522,50721,436,298

201421,703,570

491,33122,194,901


20151,932,734

19,503,56421,436,298

201420,050,3602,144,541

22,194,901

UnsecuredSecured

201521,436,298

-21,436,298

201420,736,5261,458,375

22,194,901

Government securitiesCorporate debts

20153,800,1864,886,8258,687,011

20143,719,7782,298,4706,018,248


2015671,756

8,015,2558,687,011

2014793,839

5,224,4096,018,248

At January 1AdditionsDisposalsAmortization of discount (premium) At December 31

20156,018,2483,440,516(797,240)

25,4878,687,011

2014-

6,053,872-

(35,624)6,018,248


2015683,020 752,702

1,098,242223,544

2,757,508(223,544)2,533,964

30%760,189

2014-

752,702 1,098,242 223,544

2,074,488-

2,074,48830%

622,346



55 56

The movements in the Fund’s redeemable shares (in thousands) for the years ended December 31 follow:



Deposits for future subscriptionsOn March 21, 2013, the BOD approved an increase in the Fund’s authorized share capital from 340 million shares to 400 million shares with par value of P100 per share. The Fund received cash from certain investors as deposits for future subscriptions amounting to P4,770,185. On December 4, 2015, the Fund filed an application with the SEC for the authority to sell the increase in share capital after the SEC approved the Fund’s application for an increase in authorized capital stock.

Earnings per shareEarnings per share is calculated by dividing the net income by the weighted average number of outstanding redeemable shares during the year.

The information used in the computation of basic and diluted earnings for the years ended December 31 follow:

Note 10 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for redeemable shares issued or re-purchased, respectively is based on the value of the Fund’s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund’s NAV based on PFRS (“PFRS NAV”).

In accordance with the provisions of the Fund’s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the PFRS NAV to arrive at the Fund’s NAV for purposes of share subscriptions and redemptions (“trading NAV”). The policy which has been adopted for the best interest of the Fund’s investors is designed to protect the Fund against sharp fluctuations, thereby allowing the Fund to meet its investment objective, which is to generate a steady stream of income through investments in a diversified portfolio of high-grade fixed-income instruments. The allowance for market risk shall be subject to the BOD’s periodic review.



The Fund computes its NAV per share by dividing the trading NAV as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows:


400 MillionP100

P40 billion


2015170,79985,560

(75,166)181,193

2013152,577182,668

(126,600)208,645

2014208,64552,525

(90,371)170,799


201527,558,45224,226,280

201416,521,73228,416,881

201362,334,32844,639,038


2015899,626

203,0234.43

2014504,716

190,7652.65

20132,503,540

213,13611.75

Trading NAVTotal number of shares issued and outstanding (in thousands)Total number of shares covered by deposits for future subscriptions (in thousands)

Note

9

9

201559,316,355

170,799

15,000

201563,339,837

181,193

15,000

At January 1Provisions for (reversal of) market risk during the year

2015730,544

208,289938,833

20141,244,754

(514,210)730,544

PFRS NAVAllowance for market riskOthersDeposits for future stock subscriptionsTrading NAV

201564,278,697(938,833)

(27)-

63,339,837

201455,276,714(730,544)

-4,770,185

59,316,355



Note 11 - Other incomeAs at December 31, 2015, other income consists of dividend income of P214,376 (2014 - P104,530; 2013 - P126,379) and exit fees of P3,887 (2014 - P5,496; 2013 – 23,387). Exit fees pertain to fees earned from the redemption of securities held for not more than 180 days.


As fund manager, BIMI shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BIMI to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BIMI a fee of not more than 0.75% p.a. of the Fund’s average trading NAV. The Fund’s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPI-AMTG a fee of not more than 0.75% p.a. of the Fund’s average trading NAV.

The Fund has distribution agreements with subsidiaries of BPI, namely, BIMI, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BIMI, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connection with

the marketing and the growth of the level of assets of the Fund for a fee of 0.75% p.a. of the Fund’s average trading NAV. Such agreements are effective year after year unless terminated by each parties. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders.


Total number of sharesTrading NAV per share

Note 2015185,799319.25

2015196,193322.84


32,39432,394

134

64,922




fee is incurred.

Transactions

461,549461,549

1,732

924,830

December 31, 2015

Management fees BIMI BPI - AMTG BPI Capital


30,96030,960

209

62,129




fee is incurred.

Transactions

462,820462,820

4,823

930,463

December 31, 2015



38,97538,974

77,949




fee is incurred.

Transactions

503,897503,896

1,007,793

December 31, 2013

Management fees BIMI BPI - AMTG

57 58

The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of P30,000 (in absolute amount) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31, 2015, total remunerations paid to directors and officers charged in profit or loss amount to P1,186 (2014 - P1,280; 2013 - P1,650). As at reporting date, there were no outstanding balances related to these fees.

Note 13 - Custodian agreementThe Fund has an existing custodian agreement with Hongkong & Shanghai Banking Corporation Ltd. (“HSBC”) for custodial services of the Fund’s proprietary assets and/or assets owned in the Philippines. Relative to this, the Fund pays monthly custodian fees of not more than 0.015% of the average daily market value of the assets. As at December 31, 2015, the market value of securities in custody of HSBC amounts to P4,854,119 (2014 - P4,206,205).

Custodian fee for the year ended December 31, 2015 amounts to P3,479 (2014 - P501; 2013 – P493)

Note 14 - Critical accounting judgmentsEstimates, assumptions and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The accounting judgments that have significant risks of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Impairment of loans and receivables (Note 5)The Fund reviews its loans and receivables at each reporting date to assess whether an allowance for impairment should be recorded in the statement of total comprehensive income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to age of balances, financial status of counterparties, payment behavior and known market factors. The Fund reviews the age and status of receivables, and identifies accounts that are to be provided with allowance on a regular basis.

Term loans, which are classified under Loans and receivables, amount to P20,913,791 as at December 31, 2015 (2014 - P21,703,570). No impairment loss is necessary to be recognized for the years ended December 31, 2015, 2014 and 2013.Held-to-maturity classification (Note 6)

Notwithstanding the open-ended nature of the Fund, a portion of the Fund’s investments are classified as held-to-maturity. The Fund follows the guidance of PAS 39 in classifying these investments as held-to-maturity. This classification requires significant judgment. In making this judgment, the Fund evaluates its intention and ability to hold such investments to maturity and such evaluation takes into consideration the Fund’s historical experience on the characteristics and profile of its shareholders, the level of contributions and redemptions at any given period and average holding period of its shareholders.


As at December 31, 2015, the Fund’s held-to-maturity securities amount to P8,687,011(2014 - P6,018,248).


15.1 Strategy in using financial instrumentsThe Fund’s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund’s assets and liabilities are denominated in Philippine Peso; hence, the Fund is not exposed to foreign exchange risk. The Fund’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund’s financial performance.

The management of financial risks is carried out by the Fund Manager under policies approved by the BOD of the Fund. The BOD approves written principles for overall risk management as well as written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting risk exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks.


The Fund’s objective is to outperform its composite benchmark, 50% of 91-day Philippine Treasury Bills and 50% of HSBC Philippine local currency bond index, by investing in a diversified portfolio of Philippine Peso denominated high-grade fixed income investments.

15.2 Interest rate riskThe Fund trades in financial instruments, taking positions in traded and over-the-counter instruments, to take advantage of short-term market movements primarily in the bond markets. Trading positions are reported at estimated market value with changes reflected in profit or loss. Trading positions are subject to various risk factors, which include primarily exposures to changes in interest rates.

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Fund takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates primarily on its fair value interest rate risk.

The Fund’s financial assets at fair value through profit or loss are mostly non-repricing and hence exposed to fair value interest rate risk. The Fund’s fair value interest rate risk exposure principally relates to debt securities classified as financial assets at fair value through profit or loss whose market values fluctuate as a result of changes in interest rates or factors specific to the issuer. The Fund’s interest-bearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund’s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a monthly basis by the BOD.

The Fund’s fair value interest rate risk is managed through diversification of the investment portfolio by exposures. The Fund is also actively managed via portfolio duration management, yield curve positioning, credit diversification, portfolio quality and liquidity management.

The Fund also sets up a provision for market risk on its investment portfolio which is deducted from the Fund’s net asset value to protect the Fund from market price fluctuations (see Note 10). To estimate its exposure to market risk, the Fund Manager computes the statistical “value at risk” (VAR) of its investments. The VAR measurement estimates the maximum loss due to adverse market movements that could be incurred by a portfolio during a given holding period with a given level of confidence. The Fund Manager uses a one month holding period, estimated as the number of days required to liquidate the investment portfolio, and a 99% degree of confidence in the computation of VAR. As such, there remains 1% statistical probability that the portfolios’ actual loss could be greater than the VAR estimate.

As at December 31, 2015, the Fund’s VAR with respect to market interest rate volatilities

amounts to P958,553,146 (2014 - P594,997,952).




As at December 31, 2015 and 2014, the Fund’s financial assets as shown above are neither past due nor impaired.

There were no renegotiated financial assets as at December 31, 2015 and 2014.

The Fund invests primarily in high-grade investment instruments and securities. Details of ratings of the Fund’s investments at December 31 based on external credit rating agencies are as follows:

Cash and cash equivalentsShort term investmentsFinancial assets at fair value through profit or lossLoans and receivablesHeld to maturity securities

Note23

456

20148,428,3831,300,000

17,359,76022,194,9016,018,248

55,301,292

20152,072,353

10,350,003

16,961,70621,436,2988,687,011

59,507,371

Held-to-maturity

2,502,567

4,251,9871,932,4578,687,011


17,720,075

2,034,3701,681,853

21,436,298


-

16,961,706-

16,961,706

2015

PhilRatings Aaa

Moody’s Baa2

Unrated

59 60


The Fund’s cash in bank and short-term investments were placed with a local universal bank while its cash equivalents are composed of short-term time deposits with the same universal bank (Note 2).

Collaterals held as security for loans and receivables consist of mortgage trust indentures, chattel and real estate mortgages. Aggregate fair value of these collaterals as at December 31, 2015, pertaining to the full amount of the debt issuance in which the Fund is participating, is nil (2014 - P1,458,375). The balance of loans and receivables includes accrued interest income (Note 5).

In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s credit position on a daily basis, and the BOD reviews it on a monthly basis. Further, the Fund’s investment advisor regularly reviews the credit quality of the Fund’s investments and loans and receivables by assessing the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty.

15.4 Liquidity riskLiquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s liquidity position on a daily basis to ensure that excess cash positions are invested in fixed-income securities and redemptions are funded within the prescribed period indicated in the Fund’s prospectus.



The Fund’s financial liability pertains to management fee payable which is contractually due in less than one (1) month. The Fund expects to settle its obligations in accordance with their maturity dates.




iii) Comply with the minimum subscribed and paid-in capital of P50 million required for investment companies under the Investment Company Act of 1960.






Recurring fair value measurements

Held-to-maturity

-

3,719,7782,298,4706,018,248


16,702,999

1,891,1163,600,786

22,194,901


-

17,359,760-

17,359,760

2014

PhilRatings Aaa

Moody’s Baa2

Unrated

The carrying amounts of the Fund’s other financial assets and liabilities at reporting period approximates their fair values considering that they have short-term maturities. For loans and receivables, the carrying amount also approximates fair value as the impact of discounting is not significant.

The fair value of held-to-maturity securities as at December 31, 2015 amounts to P8,731,641 (2014 - 6,209,751). The fair value of held-to-maturity securities is based on market prices or broker/dealer price quotations and classified under Level 1 of the fair value hierarchy.



16.1 Basis of preparationThe financial statements of the Fund have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS) and interpretations of the Philippine

Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC.


The preparation of these financial statements in conformity with PFRS requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Fund’s accounting policies. There are no areas where assumptions and estimates are significant to the financial statements of the Fund as at reporting date. The areas involving a higher degree of judgment or complexity are disclosed in Note 14. Amended standards adopted by the FundThe following relevant amendments to existing standards have been adopted by the Fund effective January 1, 2015:



Other standards, amendments and interpretations which are effective for the financial year beginning January 1, 2015 are considered not relevant to the Fund.

New standards, amendments and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2015, and have not been applied in preparing these financial statements. None of these standards are expected to have a significant effect on the financial statements of the Fund, except the following as set out below:

2015Financial assets at fair value through profit or loss Government securities Unit investment trust fund Mutual funds Preferred shares

Level 1

16,961,706807,338191,203

3,854,11921,814,366

Level 2

-----

Level 3

-----

Fair value

2014Financial assets at fair value through profit or loss Government securities Unit investment trust fund Mutual funds Preferred shares

Level 1

17,359,760932,766191,458

3,698,52422,182,508

Level 2

-----

Level 3

-----

Fair value

61 62


For financial years commencing before February 1, 2015, entities can elect to apply PFRS 9 early for any of the following: (1) the own credit risk requirements for financial liabilities, (2) classification and measurement (C&M) requirements for financial assets, (3) C&M requirements for financial assets and financial liabilities, or (4) C&M requirements for financial assets and liabilities and hedge accounting. After February 1, 2015, the new rules must be adopted in their entirety. The standard is effective for accounting periods beginning on or after January 1, 2018.

Early adoption is permitted. The amendment did not have a significant effect on the Fund’s financial statements.


16.2 Cash and cash equivalentsCash and cash equivalents include deposits held at call with a bank and short-term highly liquid investments with original maturities of three months or less from the date of acquisition.



Financial assets at fair value through profit or loss are classified as held for trading as they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.

Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Fund’s management has the positive intention and ability to hold to maturity. If the Fund were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified to available-for-sale.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of being traded. The Fund’s loans and receivables include cash and cash equivalents, short-term investments, term loans and other receivables.

As at December 31, 2015 and 2014, the Fund has no financial asset under the available-for-sale category.

Recognition and derecognitionRegular-way purchases and sales of financial assets are recognized on trade date, the date on which the Fund commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried

at fair value through profit or loss. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition.

Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all the risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income.

Subsequent measurementFinancial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are included within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income in the year in which they arise. Loans and receivables and held-to-maturity securities are subsequently carried at amortized cost using the effective interest method.

ImpairmentThe Fund assesses at each reporting date whether there is an objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is an objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.


A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are considered indicators that a financial asset is impaired. The amount of provision for impairment is the difference between the asset’s carrying amount and the present value

of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of loss has been determined. If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of reversal is recognized in profit or loss as a reduction of impairment loss for the year.



Financial liabilities at fair value through profit or loss comprise two sub-categories: financial liabilities classified as held for trading and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Financial liabilities designated at fair value through profit or loss are those that are not classified as held-for-trading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss as at December 31, 2015 and 2014.

Financial liabilities that are not classified as at fair value through profit or loss fall into the category of other liabilities measured at amortized cost. Financial liabilities measured at amortized cost mainly include management fee payable.

Derecognition of financial liabilitiesFinancial liabilities are derecognized when they have been redeemed or otherwise extinguished. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss.

63 64



16.6 Fair value measurementFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.





• Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible.


Share premium includes any premiums or consideration received in excess of par value on the issuance of redeemable shares.



16.8 Deposits for future subscriptionsDeposits for future subscriptions represent funds received by the Fund with a view to applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium.

Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the approval by its BOD, stockholders and the SEC.

The Fund classifies a deposit for future subscription as an equity instrument, if all of the

following conditions are met:








Dividend income is recognized when the Fund’s right to receive payment is established.


16.10 Functional and presentation currencySubscriptions and redemptions of the Fund’s redeemable shares are denominated in Philippine Peso (“Peso”). The primary activity of the Fund is to invest in Peso-denominated high-grade fixed income instruments. The BOD considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions of the Fund. The financial statements are presented in Peso, which is the Fund’s functional and presentation currency.

16.11 Earnings per shareBasic earnings per share is calculated by dividing net income attributable to shareholders

over weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares.


16.12 Income tax


The Fund primarily earns interest income from its investment in debt securities which are subject to final withholding tax. Such income is presented gross of taxes paid or withheld and the related tax is presented in the statement of total comprehensive income as Provision for income tax. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax.




65 66





There are no subsequent events that have occurred that would require recognition or disclosure in the financial statements.

Note 17 - Supplementary information required by the Bureau of Internal RevenueBelow is the additional information required by Revenue Regulations No. 15-2010 that is relevant to the Fund. This information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements.

Documentary stamp taxThe documentary stamp taxes paid on share subscriptions for the year ended December 31, 2015 amount to P42,589. There are no documentary stamp taxes accrued as at December 31, 2015.

Withholding taxesWithholding taxes for the year ended December 31, 2015 amount to P139,900, of which P11,547 is outstanding at December 31, 2015.




Tax cases and assessments As at December 31, 2015, open taxable years are 2014, 2013, 2012 and 2011. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR.

Business permits and other related taxesCommunity taxOthers

Amount4,115

1125

4,151

INDEPENDENT AUDITOR’S REPORTTo the Board of Directors and Shareholders ofALFM Dollar Bond Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City


We have audited the accompanying financial statements of ALFM Dollar Bond Fund, Inc., which comprise the statements of financial position as at December 31, 2015 and 2014, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information.







Opinion

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Dollar Bond Fund, Inc. as at December 31, 2015 and 2014, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2015 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.



67 68


To the Board of Directors and Shareholders ofALFM Dollar Bond Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City

We have audited the financial statements of ALFM Dollar Bond Fund, Inc. as at and for the year ended December 31, 2015, on which we have rendered the attached report dated April 15, 2016. The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, 2015, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code, and Schedules A,B,C, D,E,F,G and H, as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code.

Isla Lipana & Co.



ALFM DOLLAR BOND FUND, INC.Statements of Financial Position

December 31, 2015 and 2014 (All amounts in US Dollar)

Notes

ASSETS


ASSETS Cash and cash equivalents Short-term investments Financial assets at fair value through profit or loss Held-to-maturity securities Loans and receivables Other receivables

Total assets

EQUITY Redeemable shares Share premium Retained earnings

Total equity


LIABILITIES Management fee payable Withholding taxes payable

Total liabilities

234567

9

10

11

8,590,370 7,500,000

129,100,469 64,551,245 5,533,5813,728,494

219,004,159

100,855,17053,139,21064,779,589

218,773,969

219,004,159

195,546 34,644

230,190

11,869,1564,000,000

148,929,22542,901,3475,876,1763,447,953

217,023,857

102,537,62655,070,61959,187,472

216,795,717

217,023,857

193,86234,278

228,140

2015 2014


69 70

ALFM DOLLAR BOND FUND, INC.Statements of Total Comprehensive Income

For each of the three years in the period ended December 31, 2015(All amounts in US Dollar)

Notes

INCOME Interest income Net (losses) gains on financial assets at fair value through profit or loss Foreign exchange losses, net Other income

2,3,4,5,6

4

10,609,721

(500,449)(763,540)

8,912

9,354,644

10,095,717

(15,446,845)-

51,295

(5,299,833)

10,180,354

5,278,734(346,368)

8,290

15,121,010

2015 20132014

INCOME (LOSS) BEFORE INCOME TAXPROVISION FOR INCOME TAX

NET INCOME (LOSS) FOR THE YEAROTHER COMPREHENSIVE INCOME

TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

EXPENSES Management and other professional fees Taxes and licenses Custodian fee Others

8

9

11

12

6,421,548829,431

5,592,117-

5,592,117

10.56

12,296,908810,611

11,486,297-

11,486,297

21.36

(8,479,898)364,197

(8,844,095)-

(8,844,095)

(15.18)

2,758,948102,21825,04746,883

2,933,096

2,874,532235,918 39,65229,963

3,180,065

2,701,98284,71811,78125,622

2,824,102


ALFM DOLLAR BOND FUND, INC.Statements of Changes in Equity

For each of the three years in the period ended December 31, 2015(All amounts in US Dollar)


Comprehensive income Net loss for the year Other comprehensive income

Total comprehensive loss for the year















109,139,447

--

-

24,701,179(24,687,304)

13,875

109,153,322

--

-

11,846,771(18,462,467)

(6,615,696)

102,537,626

--

-

15,017,428(16,699,884)

(1,682,456)

100,855,170

58,517,006

--

-

25,196,760(22,420,792)

2,775,968

61,292,974

--

-

12,402,923(18,625,278)

(6,222,355)

55,070,619

--

-

16,881,411(18,812,820)

(1,931,409)

53,139,210

Sharepremium

58,956,826

(8,844,095)-

(8,844,095)

-(1,883,937)

(1,883,937)

48,228,794

11,486,297-

11,486,297

-(527,619)

(527,619)

59,187,472

5,592,117-

5,592,117

--

-

64,779,589

Retainedearnings

226,613,279

(8,844,095)-

(8,844,095)

49,897,939(48,992,033)

905,906

218,675,090

11,486,297-

11,486,297

24,249,694(37,615,364)

(13,365,670)

216,795,717

5,592,117-

5,592,117

31,898,839(35,512,704)

(3,613,865)

218,773,969

Totalequity


71 72

ALFM DOLLAR BOND FUND, INC.Statements of Cash Flows

For each of the three years in the period ended December 31, 2015 (All amounts in US dollar)

Notes

CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income Unrealized foreign exchange losses

Operating loss before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Short-term investments Financial assets at fair value through profit or loss Held-to-maturity securities Loans and receivables Increase (decrease) in: Management fee payable Withholding taxes payable


Net cash from (used in) operating activities

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemptions of shares

Net cash (used in) from financing activities

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1 Effects of exchange rate changes on cash and cash equivalents

December 31

4

9

2

6,421,548

1,847,127(10,609,721)

19,566

(2,321,480)

(3,500,000)17,981,629

(21,649,898)342,595

1,684366

(9,145,104)10,329,180(829,431)

354,645

31,898,839(35,512,704)

(3,613,865)

(3,259,220)

11,869,156

(19,566)

8,590,370

(8,479,898)

12,269,313(10,095,717)

1,563,984

(4,742,318)

-9,093,603

7,127,907 (4,877,767)

(2,511)369

6,599,28312,380,324(364,197)

18,615,410

49,897,939(48,992,033)

905,906

19,521,316

9,355,463

(1,563,984)

27,312,795

12,296,908

(5,350,093)(10,180,354)

263,056

(2,970,483)

(4,000,000)1,511,441

(5,698,483)(121,430)

(1,188)(33,724)

(11,313,867)10,309,565(810,611)

(1,814,913)

24,249,694(37,615,364)

(13,365,670)

(15,180,583)

27,312,795

(263,056)

11,869,156

2015 20132014

NOTES TO FINANCIAL STATEMENTSNotes to Financial StatementsAs at December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015(All amounts are in US Dollar, unless otherwise stated)

Note 1 - General informationALFM Dollar Bond Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to establish and carry on the business of an open-end investment fund. It was registered on October 23, 1993 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799).

The Fund aims to achieve capital preservation by investing in a diversified portfolio of foreign currency-denominated fixed-income instruments. As an open-end investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund’s prospectus (Note 10).

The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on June 5, 2013 (Note 9).

The Fund’s registered office, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City.



Note 2 - Cash and cash equivalentsCash and cash equivalents at December 31 consist of:

Short-term time deposits bear interest rates ranging from 0.175% to 1.625% (2014 - 1.88% to 2.00%) and have average maturities of 65 days in 2015 (2014 - 73 days).

Interest income earned from cash and cash equivalents for the year ended December 31, 2015 amounts to $111,305 (2014 - $108,070; 2013 - $66,827).

Note 3 – Short-term investmentsShort-term investments as at December 31, 2015 amount to $7,500,000 (2014 - $4,000,000). The account consists of placements in time deposits with maturity period of more than three (3) months but not more than one (1) year.

Interest income earned from short-term investments for the year ended December 31, 2015 amounts to $214,285 (2014 - $202,866 and 2013 - nil).



20158,500,000

90,3708,590,370

201411,800,000

69,15611,869,156

Debt securities Philippine corporate bonds Philippine government bonds Asia Pacific corporate and government bonds US corporate bonds Supranational debts European corporate bonds OthersInvestment funds Unit investment trust funds Mutual funds

Interest rates(%)

4.25 - 7.38

2.75 - 10.63

2.50 - 7.882.60 - 4.38

-

--

--

Interest rates(%)

4.25 - 9.88

2.75 - 10.63

2.88 - 11.632.60 - 4.381.38 - 5.50

2.88

4.88 - 8.88

--

Amount

34,612,432

44,063,757

36,529,9987,715,398

-

--

3,235,2662,943,618

129,100,469

Amount

49,715,987

41,247,160

36,038,4357,944,4732,880,500

160,0454,542,850

3,412,8682,986,907

148,929,225

2015 2014


73 74

The maturity pattern of debt securities follows:

Investments in unit investment trust funds and mutual funds are classified as current.

Details of net unrealized and realized (losses) gains on financial assets at fair value through profit or loss follow:

Interest income earned from financial assets at fair value through profit or loss for the year ended December 31, 2015 amounts to $6,528,816 (2014 - $5,487,539; 2013 - $6,430,404).

Note 5 - Held-to-maturity securitiesThe account at December 31 consists of investments in:



Interest income earned from held-to-maturity securities for the year ended December 31, 2015 amounts to $3,383,932 (2014 $3,979,703; 2013 - $3,145,757).

Note 6 - Loans and receivables The account as at December 31, 2015 consist of an unsecured term loan amounting to $5,533,581 (2014 - $5,876,176), which carry an interest rate of 7% and will mature in November 2017.

Interest income earned from loans and receivables for the year ended December 31, 2015 amounts to $371,383 (2014 - $402,176; 2013- $452,729).

Note 7 - Other receivablesOther receivables as at December 31, 2015 amount to $3,728,494 (2014 - $3,447,953) and consist of accrued interest mainly from financial assets at fair value through profit or loss, held-to-maturity securities and loans and receivables.

Other receivables are considered current as at December 31, 2015 and 2014.

Note 8 - Income taxesProvision for income tax substantially represents tax withheld for income subject to final tax. Provision for income tax for the year ended December 31, 2015 amounts to $829,431 (2014 - $810,611; 2013 - $364,197).

The Fund did not recognize deferred income tax asset on net operating loss carryover (NOLCO) in view of its limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund’s income is subject to final tax. The details of the Fund’s unused NOLCO at December 31 are as follows:


2015554,658

122,366,927122,921,585

20143,441,041

139,088,409142,529,450

Net unrealized fair value (losses) gainsNet realized fair value gains (losses)

2015(1,847,127)1,346,678(500,449)

2013(12,269,313)(3,177,532)

(15,446,845)

20145,350,093(71,359)

5,278,734

Short-term (less than 1 year)Medium-term (more than 1 year but less than 5 years)Long-term (more than 5 years)

2013-

27,789,30315,112,04442,901,347

201411,898,90928,887,05123,765,28564,551,245

Philippine government bondsPhilippine corporate bondsLong-term negotiable certificate of depositsAsia Pacific corporate bonds

Interest rates(%)

7.50 - 10.63

3.88 - 9.00

3.70

4.5 - 7.38

Interest rates(%)

7.50 - 10.63

4.88 - 8.38

3.70

-

Amount

29,005,768

25,028,967

2,000,000

8,516,51064,551,245

Amount

29,135,306

11,766,041

2,000,000

-42,901,347

2015 2014

At January 1AdditionsMaturitiesAmortization of premiumAt December 31

201542,901,34725,654,397(3,485,000)(519,499)

64,551,245

201437,202,86414,373,250(8,520,619)(154,148)

42,901,347

Year of Incurrence

201520142013

Year ofExpiration

201820172016

USD1,559,628269,387607,667

USD-

269,387607,667

PHP54,974,03311,992,90926,988,982

PHP-

11,992,90926,988,982

2015 2014

Note 9 - Redeemable sharesThe details of the Fund’s authorized shares at December 31, 2015 and 2014 follow:

The movements in the number of redeemable shares for the years ended December 31 follow:



On October 12, 2012, the Fund’s BOD approved an increase in Fund’s authorized shares from 600,000 to 679,000 shares with par value of P10,000 per share. The SEC approved the application for increase in authorized share capital on June 5, 2013.


The information used in the computation of basic and diluted earnings per share for the

years ended December 31 follow:

Note 10 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for redeemable shares issued or re-purchased respectively is based on the value of the Fund’s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund’s NAV based on PFRS (“PFRS NAV”). In accordance with the provisions of the Fund’s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the PFRS NAV to arrive at the Fund’s NAV for purposes of share subscriptions and redemptions (“trading NAV”). The policy which has been adopted for the best interest of the Fund’s investors is designed to protect the Fund against sharp fluctuations, thereby allowing the Fund to meet its investment objective, which is to generate a steady stream of income through investments in a diversified portfolio of high-grade foreign currency-denominated fixed-income instruments. The allowance for market risk shall be subject to the BOD’s periodic review.


Reconciliations of the Fund’s PFRS NAV to its trading NAV at December 31 are provided below:

The Fund computes its NAV per share by dividing the trading NAV as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions, if any. The trading NAV per share at December 31 is calculated as follows:

Year of Incurrence

20122011

Year ofExpiration

20152014

USD1,570,292

-4,006,974

(1,570,292)2,436,682

30%

731,005

USD1,570,2922,333,4724,780,818

(2,333,472)2,447,346

30%

734,204

PHP66,311,557

-160,267,481(66,311,557)93,955,924

30%

28,186,777

PHP66,311,55798,539,738

203,833,186(98,539,738)105,293,448

30%

31,588,034


2015 2014


679,000P10,000 ($195.43)

$132.7 million


2015524,67776,843

(85,452)516,068

2013558,458126,394

(126,323)558,529

2014558,52960,619

(94,471)524,677


201531,898,83935,512,704

201424,249,69437,615,364

201349,897,93948,992,033

Net income (loss) for the yearWeighted average number of shares outstanding during the yearBasic and diluted earnings (loss) per share

20155,592,117

529,33410.56

201411,486,297

537,67221.36

2013(8,844,095)

582,757(15.18)

At January 1Adjustment for market risk during the yearAt December 31

20152,601,596170,546

2,772,142

20143,405,124(803,528)2,601,596

PFRS NAVAllowance for market riskOthersTrading NAV

2015218,773,969(2,772,142)

87216,001,914

2014216,795,717(2,601,596)

-214,194,121

75 76




As fund manager, BIMI shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BIMI to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BIMI a fee of not more than 0.625% p.a. of the Fund’s average trading NAV. The Fund’s investment advisor is tasked to render services which include investment research and advice; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPI-AMTG a fee of not more than 0.625% p.a. of the Fund’s average trading NAV.

The Fund has distribution agreements with subsidiaries of BPI, namely, BIMI, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BIMI, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders.


The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of $237 (P10,000) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31, 2015, total remunerations paid to directors and officers charged in profit or loss amount to $8,656; (2014 - $10,372; 2013 - $11,891). As at reporting date, there were no outstanding balances related to these fees.

Trading NAVTotal issued and outstanding sharesTrading NAV per share

2015216,001,914

516,068418.55

2014214,194,121

524,677408.24


97,69997,699

148

195,546




fee is incurred.

Transactions

1,370,5471,370,547

5,440

2,746,534

December 31, 2015



96,58096,580

702

193,862




fee is incurred.

Transactions

1,332,7051,332,705

7,587

2,672,997

December 31, 2014



97,52597,525

195,050




fee is incurred.

Transactions

1,419,7851,419,785

2,839,570

December 31, 2013


Note 12 - Custodianship agreementThe Fund has custodian agreements with Hongkong & Shanghai Banking Corporation Ltd. (HSBC) and Bank of New York (BONY) for custodial services of the Fund’s proprietary assets and/or the assets owned in the Philippines. The Fund pays HSBC and BONY a fixed monthly custodian fee. As at December 31, 2015, the aggregate market value of securities held by the custodian amounts to $185,472,829 (2014 - $185,430,797).

Custodian fee as of December 31, 2015 amounts to $25,047 (2014 - $11,781; 2013 – P39,652)

Note 13 - Critical accounting judgmentsEstimates, assumptions and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The accounting judgments that have significant risks of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Held-to-maturity classification (Note 5)Notwithstanding the open-ended nature of the Fund, a portion of the Fund’s investments are classified as held-to-maturity. The Fund follows the guidance of PAS 39 in classifying these investments as held-to-maturity. This classification requires significant judgment. In making this judgment, the Fund evaluates its intention and ability to hold such investments to maturity and such evaluation takes into consideration the Fund’s historical experience on the characteristics and profile of its shareholders, the level of contributions and redemptions at any given period and average holding period of its shareholders.


Held-to-maturity securities as at December 31, 2015 is valued at $64,551,245 (2014- $42,901,347).

Impairment of loans and receivables (Note 6)The Fund reviews its loans and receivables at each reporting date to assess whether an allowance for impairment should be recorded in the statement of total comprehensive income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited

to age of balances, financial status of counterparties, payment behaviour and known market factors. The Fund reviews the age and status of receivables, and identifies accounts that are to be provided with allowance on a regular basis. Term loans, which are classified under Loans and receivables, amount to $ 5,533,581 as at December 31, 2015 (2014 - $5,876,176). No impairment loss is necessary to be recognized for the years ended December 31, 2015, 2014 and 2013.


14.1 Strategy in using financial instrumentsThe Fund’s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund’s exposure to foreign exchange risk is considered limited. The Fund’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund’s financial performance.

The management of financial risks is carried out by the Fund Manager under the policies approved by the BOD of the Fund. The BOD approves written principles for overall risk management as well as written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks.


The Fund’s objective is to outperform its composite benchmark, 50% of 3-month US Treasury Bills and 50% of JP Morgan Asia Credit Philippines Total Return Index, by investing in diversified portfolio of US dollar-denominated fixed income instruments issued by foreign and local entities.

14.2 Interest rate riskThe Fund trades in financial instruments, taking positions in traded and over-the-counter instruments, to take advantage of short-term market movements primarily in the bond markets. Trading positions are reported at estimated market value with changes reflected in profit or loss. Trading positions are subject to various risk factors, which include primarily exposures to changes in interest rates.

77 78

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Fund takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates primarily on its fair value risk.

The Fund’s financial assets at fair value through profit or loss are mostly non-repricing and hence exposed to fair value interest rate risk.

The Fund’s fair value interest rate risk exposure principally relates to debt securities classified as financial assets at fair value through profit or loss whose values fluctuate as a result of changes in interest rates or factors specific to the issuer. The Fund’s interest-bearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund’s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a monthly basis by the BOD.

The Fund’s fair value interest rate risk is managed through diversification of the investment portfolio ratios by exposures. The Fund is also actively managed via portfolio duration management, yield curve positioning, credit diversification, portfolio quality and liquidity management.

The Fund also sets up a provision for market risk on its investment portfolio which is deducted from the Fund’s net asset value to protect the Fund from market price fluctuations (Note 9). To estimate its exposure to market risk, the Fund Manager computes the statistical “value at risk” (VAR) of its investments. The VAR measurement estimates the maximum loss due to adverse market movements that could be incurred by a portfolio during a given holding period with a given level of confidence. The Fund Manager uses a one month holding period, estimated as the number of days required to liquidate the investment portfolio, and a 99% degree of confidence in the computation of VAR. As such, there remains 1% statistical probability that the portfolio’s actual loss could be greater than the VAR estimate.

As at December 31, 2015, the Fund’s VAR with respect to market interest rate volatilities amounts to $3,415,215 (2014 - $3,318,873).


The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund’s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. Credit risk is also minimized through diversification or by investing in a variety of investments belonging to different sectors or industries.


As at December 31, 2015 and 2014, the Fund’s financial assets as shown in the table above are neither past due nor impaired. There were no renegotiated financial assets as at December 31, 2015 and 2014.

The Fund’s cash in bank and short-term investments were placed with a local universal bank while its cash equivalents are composed of short-term time deposits with the same universal bank (Note 2).

Pursuant to the guidelines issued by the SEC, the Fund is allowed to invest in debt instruments registered and traded in an organized market in another country which are rated at least “BBB” by a reputable credit rating agency. For unrated securities, a rating is assigned using an approach that is consistent with that used by rating agencies.


Details of ratings of the Fund’s investments based on various external credit rating agencies are as follows:

Cash and cash equivalentsShort term investmentsFinancial assets at fair value through profit or lossHeld to maturity securities Loans and receivablesOther receivables

201411,869,1564,000,000

142,529,45042,901,3475,876,1763,447,953

210,624,082

20158,590,3707,500,000

122,921,58564,551,2455,533,581 3,728,494

212,825,275


In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s credit position on a daily basis and the BOD reviews it on a monthly basis. Further, the Fund’s investment advisor regularly reviews the credit quality of the Fund’s investments and receivables by assessing the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty.



The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market and can be readily disposed of. The Fund’s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date. Furthermore, the Fund has the ability to borrow in the short term to settle its obligations when necessary. No such borrowings have arisen in 2015 and 2014.

The Fund’s financial liability pertains to management fee payable which is contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with the maturity date.








Held-to-maturity

--

31,384,40028,166,845

5,000,000-

64,551,245


---

5,533,581

--

5,533,581


7,178,4957,103,550

66,382,36138,920,609

-3,336,570

122,921,585

At December 31, 2015Moody’s/Philippine Ratings Aa3 to Aa1 A3 to A1 Baa3 to Baa1 UnratedStandard and Poor’s BB+ BBB

Held-to-maturity

-----

38,497,282

2,000,0002,404,065

42,901,347


-----

5,876,176

--

5,876,176


2,880,5004,894,4699,314,080

37,514,2584,356,438

79,221,985

-4,347,720

142,529,450

At December 31, 2014Moody’s/Philippine Ratings Aaa Aa3 to Aa1 A3 to A1 Baa3 to Baa1 Ba3 to Ba1 UnratedStandard and Poor’s BB+ BBB

79 80




Below is a comparison of the carrying amounts and fair values for financial assets carried at amortized cost in the statement of financial position as at December 31:

The fair value of held-to-maturity securities is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. The estimated fair value of loans and receivables represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. The carrying amounts of the Fund’s other financial assets and liabilities at reporting period not presented in the table above approximate their fair values considering that they have short-term maturities.



2015Financial assets at fair value through profit or loss Debt securities Philippine corporate bonds Philippine government bonds Asia Pacific corporate and government bonds US corporate bonds Investment funds Unit investment trust funds Mutual funds

Level 1

34,612,43244,063,757

36,529,9987,715,398

3,235,2662,943,618

129,100,469

Level 2

--

--

---

Level 3

--

--

---

Fair value

2015Held-to-maturity securities Philippine government bonds Philippine corporate bonds Long-term negotiable certificate of deposits Asia Pacific Corporate bondsLoans and receivables

29,005,768

25,028,976

2,000,000

8,516,5105,533,581

Level 1

29,952,398

25,215,550

8,699,213

Carryingamount Level 2

2,000,000

5,658,197

Level 3Fair value

2014Held-to-maturity securities Philippine government bonds Philippine corporate bonds Long-term negotiable certificate of depositsLoans and receivables

29,135,306

11,766,041

2,000,0005,876,176

Level 1

29,107,595

11,762,842

--

Carryingamount Level 2

-

-

2,157,2405,871,120

Level 3

-

-

--

Fair value

2014Financial assets at fair value through profit or loss Debt securities Philippine corporate bonds Philippine government bonds Asia Pacific corporate and government bonds US corporate bonds Supranational debts European corporate bonds Others Investment funds Unit investment trust funds Mutual funds

Level 1

49,715,98741,247,160

36,038,4357,944,4732,880,500160,045

4,542,850

3,412,8682,986,907

148,929,225

Level 2

--

-----

--

Level 3

--

-----

--

Fair value

15.1 Basis of preparationThe financial statements of the Fund have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS), and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC.The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss.

The preparation of these financial statements in conformity with PFRS requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Fund’s accounting policies. There are no areas where assumptions and estimates are significant to the financial statements of the Fund as at reporting date. The areas involving a higher degree of judgment or complexity are disclosed in Note 13.




Other standards, amendments and interpretations which are effective for the financial year beginning on January 1, 2015 are considered not relevant to the Fund.

New standards, amendments and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2015, and have not been applied in

preparing these financial statements. None of these standards are expected to have a significant effect on the financial statements of the Fund, except the following as set out below:


For financial years commencing before February 1, 2015, entities can elect to apply PFRS 9 early for any of the following: (1) the own credit risk requirements for financial liabilities, (2) classification and measurement (C&M) requirements for financial assets, (3) C&M requirements for financial assets and financial liabilities,

81 82

or (4) C&M requirements for financial assets and liabilities and hedge accounting. After February 1, 2015, the new rules must be adopted in their entirety. The standard is effective for accounting periods beginning on or after January 1, 2018. Early adoption is permitted. The amendment did not have a significant effect on the Fund’s financial statements.


15.2 Cash and cash equivalentsCash and cash equivalents include deposits held at call with banks and short-term highly liquid investments with maturities of three months or less from the date of acquisition.




Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Fund’s management has the positive intention and ability to hold to maturity. If the Fund were to sell other than an insignificant amount of held-to-maturity the entire category would be tainted and reclassified as available for sale.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of being traded. The Fund’s loans and receivables include cash and cash equivalents, short-term investments, term loan and other receivables.

As at December 31, 2015 and 2014, the Fund has no financial assets under the available-for-sale category.

Recognition and derecognitionRegular-way purchases and sales of financial assets are recognized on trade date, the

date on which the Fund commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition.

Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all the risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within Net gains (losses) on financial assets in profit or loss in the statement of total comprehensive income.

Subsequent measurementFinancial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income in the year in which they arise. Loans and receivables and held-to-maturity securities are subsequently carried at amortized cost using the effective interest method.

ImpairmentThe Fund assesses at each reporting date whether there is an objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are recognized only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.


A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are

considered indicators that a financial asset is impaired. The amount of provision for impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of loss has been determined. If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of reversal is recognized in profit or loss as a reduction of impairment loss for the year.



Financial liabilities at fair value through profit or loss comprise two sub-categories: financial liabilities classified as held for trading and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition.

A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Financial liabilities designated at fair value through profit or loss are those that are not classified as held-for-trading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss as at December 31, 2015 and 2014.

Financial liabilities that are not classified as at fair value through profit or loss fall into the category of other liabilities measured at amortized cost. Financial liabilities measured at amortized cost include management fee payable (Note 11).

Derecognition of financial liabilitiesFinancial liabilities are derecognized when they have been redeemed or otherwise extinguished. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition

of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss.








• Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments

83 84

with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible.





15.8 Deposits for future subscriptionsDeposits for future subscriptions represent funds received by the Fund with a view of applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium.

Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof

for the purpose of issuing additional stocks may be made by the entity subject to the approval by its BOD, stockholders and the SEC.










15.10 Foreign currency transactions and translation

Functional and presentation currencySubscriptions and redemptions of the Fund’s redeemable shares are denominated in US Dollar. The primary activity of the Fund is to invest in local and foreign US dollar-denominated government securities, corporate notes and bonds and fixed-income funds. The performance of the Funds is measured and reported to the investors in US Dollar. The BOD considers the US Dollar as the currency that most faithfully represents

the economic effects of the underlying transactions, events and conditions of the Fund. The financial statements are presented in US Dollar, which is the functional and presentation currency of the Fund.

Transactions and balancesForeign 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 translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.

Foreign exchange gains and losses relating to financial assets and liabilities are presented in the statement of total comprehensive income within ‘Foreign exchange gains (losses), net’.

15.11 Earnings per shareBasic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares.


15.12 Income tax



Deferred income taxDeferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying

amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.







85 86

There are no subsequent events that have occurred that would require recognition or disclosure on the financial statements.


Documentary stamp tax Total documentary stamp taxes paid on share subscriptions for the year ended December 31, 2015 amount to $83,036 (P3,748,131). There are no documentary stamp taxes accrued as at December 31, 2015.

Withholding taxesWithholding taxes for the year ended December 31, 2015 amount to $412,851 (P18,846,623), of which $34,644 (P1,563,830) is outstanding as at December 31, 2015.




Tax cases and assessmentsAs at December 31, 2015, open taxable years are 2014, 2013 and 2012. The Fund has not received any Final Assessment Notice (FAN) from the BIR. The Fund is also not a party to any outstanding tax case with the BIR.

In US Dollar Municipal and other related taxes Community tax

Amount

18,948234

19,182

In Philippine Peso Municipal and other related taxes Community tax

Amount

848,14910,500

858,649

INDEPENDENT AUDITOR’S REPORTTo the Board of Directors and Shareholders ofALFM Euro Bond Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City


We have audited the accompanying financial statements of ALFM Euro Bond Fund, Inc., which comprise the statements of financial position as at December 31, 2015 and 2014, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information.







Opinion

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Euro Bond Fund, Inc. as at December 31, 2015 and 2014, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2015 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.




To the Board of Directors and Shareholders ofALFM Euro Bond Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City

We have audited the financial statements of ALFM Euro Bond Fund, Inc. as at and for the year ended December 31, 2015, on which we have rendered the attached report dated April 15, 2016. The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, 2015, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code, and Schedules A,B,C, D,E,F,G and H, as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code.

Isla Lipana & Co.



87 88

ALFM EURO BOND FUND, INC.Statements of Financial Position

December 31, 2015 and 2014 (All amounts in US Dollar)

Notes

ASSETS


ASSETS Cash and cash equivalents Short-term investments Financial assets at fair value through profit or loss Held-to-maturity securities Other receivables

Total assets


Total equity


LIABILITIES Management fee payable Withholding taxes payable Income tax payable

Total liabilities

2345

7

8

9

576,342651,141

4,152,5793,975,164280,878

9,636,104

6,704,512945,269

1,980,215

9,629,996

9,636,104

5,193915

-

6,108

413,048-

6,894,741751,852210,750

8,270,391

5,754,334530,515

1,977,074

8,261,923

8,270,391

4,586815

3,067

8,468

2015 2014


ALFM EURO BOND FUND, INC.Statements of Total Comprehensive Income

For each of the three years in the period ended December 31, 2015(All amounts in Euro)

Notes

INCOME Interest income Net (losses) gains on financial assets at fair value through profit or loss Other income





EXPENSES Management and other professional fees Taxes and licenses Professional fees Directors’ fees Custodian fee Others

2,3,4,5,6

4

6

7

9

910

196,928

(96,489)1,212

101,651

5,6832,542

3,141-

3,141

0.07

376,6213,176

373,445-

373,445

8.71

41,27920,311

20,968-

20,968

0.46

69,93412,2639,1811,7341,1961,660

95,968

306,131

(171,120)782

135,793

258,558

203,249114

461,921

67,33511,28610,5441,842847

2,660

94,514

64,5088,3939,1481,6291,024598

85,300

2015 20132014


89 90

ALFM EURO BOND FUND, INC.Statements of Changes in Equity

For each of the three years in the period ended December 31, 2015 (All amounts in Euro)


















6,296,117

--

-

1,589,837(1,264,594)

325,243

6,621,360

--

-

1,267,625(2,134,651)

(867,026)

5,754,334

--

-

1,534,258(584,080)

950,178

6,704,512

643,393

--

-

568,738 (384,119)

184,619

828,012

--

-

515,040(812,537)

(297,497)

530,515

--

-

664,272(249,518)

414,754

945,269

Sharepremium

1,698,444

20,968-

20,968

-(69,538)

(69,538)

1,649,874

373,445-

373,445

-(46,245)

(46,245)

1,977,074

3,141-

3,141

--

-

1,980,215

Retainedearnings

8,637,954

20,968-

20,968

2,158,575(1,718,251)

440,324

9,099,246

373,445-

373,445

1,782,665(2,993,433)

(1,210,768)

8,261,923

3,141-

3,141

2,198,530(833,598)

1,364,932

9,629,996

Totalequity


ALFM EURO BOND FUND, INC.Statements of Cash Flows

For each of the three years in the period ended December 31, 2015(All amounts in Euro)

Notes

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Unrealized fair value (gains) losses, net Interest income

Operating income before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Short-term investments Other receivables Held-to-maturity securities (Increase) decrease in: Management fee payable Accrued expenses


Net cash (used in) operating activities

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemption of shares


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1

December 31

42,3,4,5

77

2

5,683

382,647(196,928)

191,402

2,359,515(651,141)(36,024)

(3,223,312)

607100

(1,358,853)162,824(5,609)

(1,201,638)

2,198,530(833,598)

1,364,932

163,294

413,048

576,342

41,279

171,120(306,131)

(93,732)

(729,005)-

(76)1,529

336 134

(820,814)281,617 (20,311)

(559,508)

2,158,575 (1,718,251)

440,324

(119,184)

585,522

466,338

376,621

(83,776)(258,558)

34,287

817,418-

8341,620

(303)(880)

852,976304,611

(109)

1,157,478

1,782,665(2,993,433)

(1,210,768)

(53,290)

466,338

413,048

2015 20132014


91 92

Notes to Financial StatementsAs at December 31, 2015 and 2014 andfor each of the three years in the period ended December 31, 2015(All amounts are in Euro, unless otherwise stated)

Note 1.1 - General informationALFM Euro Bond Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to establish and carry on the business of an open-end investment company. It was registered on August 5, 2005 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act 8799).

The Fund aims to provide its shareholders a steady stream of income by investing in foreign currency-denominated fixed income instruments. As an open-end investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund’s prospectus (Note 8).

The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on May 30, 2007.

The Fund’s registered office, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City.


The financial statements have been approved and authorized for issue by the Fund’s Board of Directors (BOD) on April 15, 2016.


Short-term time deposits bear interest rates ranging from 0.05% to 1.97% (2014 - 0.10% to 2.0%) and have average maturities in 2015 of 60 days (2014 - 60 days).

Interest income earned from cash and cash equivalents for the year ended December 31, 2015 amounts to €2,806 (2014 - €1,368; 2013 - €108).

Note 3 - Short-term investmentsShort-term investments as at December 31, 2015 amount to €651,141 (2014 - nil). The account consists of placements in time deposits with maturity period of more than three (3) months but not more than one (1) year.

Interest income earned from short-term investments for the year ended December 31, 2015 amounts to €4,115 (2014 and 2013 - nil).


The maturity patterns of the debt securities follow:

Details of net unrealized and realized (losses) gains on financial assets at fair value through profit or loss for the years ended December 31 follow:

Cash in banksTime deposits

201510,410

565,932576,342

201423,858

389,190413,048


2015279,047

3,873,5324,152,579

20141,026,8245,867,9176,894,741

US corporate bondsEuropean corporate bondsAsia Pacific corporate bondsAsia Pacific government bondsLatin America sovereign bondsPhilippine government bondsSupranational debtEuropean government bonds

Interest rates(%)

0.75 – 5.380.75 – 5.88

1.38 – 5.50

2.13 – 3.38

1.63 – 5.50

2.75 – 6.25-

-

Interest rates(%)

2.00 - 4.003.50 - 4.88

2.38 - 4.75

2.13 - 3.63

-

3.30 - 6.253.75 - 3.88

1.75 - 5.00

Amount

1,047,0901,035,624

885,818

596,824

308,176

279,047-

-4,152,579

Amount

473,261659,838

915,818

359,363

-

2,610,2031,092,172

784,0866,894,741

2015 2014

Interest income earned from financial assets at fair value through profit or loss for the year ended December 31, 2015 amounts to €125,919 (2014 - €211,935; 2013 - €264,312).

Note 5 - Held-to-maturity securitiesThe account consists of investments in Philippine government bonds which carry interest rate of 6.25% as at December 31, 2015 and 2014.

The held-to-maturities securities are classified as long-term in which maturity is more than one year but less than five years from reporting date.


Interest income earned from held-to-maturity securities for the year ended December 31, 2015 amounts to €64,088 (2014 - €45,255; 2013 - €41,711).

Note 6 - Income taxesProvision for income tax substantially represents tax withheld for income subject to final tax. Provision for income tax for the year ended December 31, 2015 amounts to €2,542 (2014 - €3,176; 2013 - €20,311).

The Fund did not recognize deferred income tax assets on NOLCO in view of its limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund’s income is tax exempt or subject to final tax. The details of the Fund’s unused NOLCO at December 31 are as follows:

Note 7 - Redeemable sharesThe details of the Fund’s authorized shares at December 31, 2015 and 2014 follow:



As at December 31, 2015, the Fund has 615 shareholders (2014 - 557).

Earnings per shareEarnings per share is calculated by dividing net income by the weighted average number of outstanding redeemable shares during the year.


Net realized gains Net unrealized (losses) gains

2015286,158

(382,647)(96,489)

2013-

(171,120)(171,120)

2014119,47383,776

203,249


20152,198,530833,598

20132,158,5751,718,251

20141,782,6652,993,433


20153,141

44,9950. 07

201320,968

45,7700.46

2014373,445

42,8948.71

At January 1AdditionsAmortization of premiumAt December 31

2015751,852

3,289,591(66,279)

3,975,164

2014753,472

-(1,620)751,852

Year of Incurrence

201320122011

Year ofExpiration

201620152014

EUR79,721 80,551

-

EUR79,721 80,551 83,129

PHP4,525,7424,374,549

-

PHP4,525,7424,374,5494,514,578

2015 2014

EUR160,272(80,551)79,721

30%

23,916

EUR243,401(83,129) 160,272

30%

48,082

PHP8,900,291

(4,374,549)4,525,742

30%

1,357,723

PHP13,414,869(4,514,578)8,900,291

30%

2,670,087

Expired NOLCO Income tax rate Unrecognized deferred income tax asset

2015 2014


80,000P10,000 (€144.36)

€11.5 million

At January 1Issuance of sharesRedemption of sharesAt December 31

201539,86110,628(4,046)46,443

201343,61411,013(8,760)45,867

201445,8678,781

(14,787)39,861

93 94

Note 8 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for redeemable shares issued or re-purchased, respectively, is based on the value of the Fund’s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund’s NAV based on PFRS (“PFRS NAV”).

In accordance with the provisions of the Fund’s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the PFRS NAV to arrive at the Fund’s NAV for purposes of share subscriptions and redemptions (“trading NAV”). The policy which has been adopted for the best interest of the Fund’s investors is designed to protect the Fund against sharp fluctuations, thereby allowing the Fund to meet its investment objective, which is to generate a steady stream of income through investments in a diversified portfolio of high-grade fixed-income instruments. The allowance for market risk shall be subject to the BOD’s periodic review.

The movement in accumulated adjustment for market risk follow:


The Fund computes its NAV per share by dividing the trading NAV as at reporting date by the number of issued and outstanding share during the year including share for issuances covered by deposits for future subscription, if any.

The trading NAV per share at December 31 is calculated as follows:



Note 9 - Related party transactionsBPI Investment Management, Inc (BIMI) and BPI - Asset Management Trust Group (BPI - AMTG) were designated as fund manager and investment advisor of the Fund, respectively.

As fund manager, BIMI shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BIMI to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BIMI a fee of not more than 0.375% p.a. of the Fund’s average trading NAV. The Fund’s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the said advisory services, the Fund pays BPI-AMTG a fee of not more than 0.375% p.a. of the Fund’s average trading NAV.

The Fund has distribution agreements with subsidiaries of BPI, namely, BIMI, BPI Capital Corporation (BPI Capital), and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BIMI, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Bank, Inc. act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders.

The table below summarizes the Company’s transactions and balances with its related parties:

At January 1Reversal of provisions for market risk during the yearAt December 31

201549,061

(28,611)20,450

201480,685

(31,624)49,061

PFRS NAVAllowance for market riskOthersTrading NAV per share

20159,629,996(20,450)

(8)9,609,538

20148,261,923(49,061)

-8,212,862

Trading NAV Total number of shares issued and outstandingTrading NAV per share

20159,609,538

46,443206.91

20148,212,862

39,861206.04

Note

7

The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of €92 (P5,000) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31, 2015, total remunerations paid to directors and officers charged to profit or loss amount to €1,734 (2014 - €1,629; 2013 - €1,842). As at reporting date, there were no outstanding balances related to these fees.

Note 10 - Custodian agreementThe Fund has an existing custodian agreement with Hongkong & Shanghai Banking Corporation Ltd. (HSBC) and Bank of New York (BONY) for custodial services of the Fund’s proprietary assets and/or the assets owned in the Philippines. Under this agreement, the Fund pays HSBC and BONY a fixed monthly custodian fee of P4,900 or its Euro equivalent. As at December 31, 2015, the aggregate market value of securities held by the custodian amounts to €8,127,743 (2014 - €7,545,485).

Custodian fee as of December 31, 2015 amounts to €1,196 (2014 - €1,024 ; 2013 - €847).

Note 11 - Critical accounting judgmentEstimates, assumptions and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The judgment that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year is discussed below.

Held-to-maturity classification Notwithstanding the open-ended nature of the Fund, a portion of the Fund’s investments are classified as held-to-maturity. The Fund follows the guidance of PAS 39 in classifying these investments as held-to-maturity. This classification requires significant judgment. In making this judgment, the Fund evaluates its intention and ability to hold such investments to maturity and such evaluation takes into consideration the Fund’s historical experience on the characteristics and profile of its shareholders, the level of contributions and redemptions at any given period and average holding period of its shareholders.


As at December 31, 2015, the Fund’s held-to-maturity securities amount to €3,975,164(2014 - €751,852).


12.1. Strategy in using financial instrumentsThe Fund’s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund’s asset exposure to foreign exchange risk is considered limited. The Fund’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund’s financial performance.


2,5922,592

9

5,193




fee is incurred.

Transactions

34,91034,910

114

69,934

December 31, 2015



2,2932,293

4,586




fee is incurred.

Transactions

32,25432,254

64,508

December 31, 2014



2,4452,444

4,889




fee is incurred.

Transactions

33,66833,667

67,335

December 31, 2013


95 96

The management of these risks is carried out by the Fund Manager under the policies approved by the BOD of the Fund. The BOD approves written principles for overall risk management as well as written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the risk exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks.


The Fund’s objective is to exceed the performance of 3-month German Treasury Bills by investing in a diversified portfolio of Euro denominated fixed income instruments issued by foreign and local entities.

12.2. Interest rate riskThe Fund trades in financial instruments, taking positions in traded and over-the-counter instruments, to take advantage of short-term market movements primarily in the bond markets. Trading positions are reported at estimated market value with changes reflected in profit or loss. Trading positions are subject to various risk factors, which primarily include exposures to changes in interest rates.

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Fund takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates primarily on its fair value interest rate risk.

The Fund’s financial assets at fair value through profit or loss are mostly non-repricing and hence exposed to fair value interest rate risk. The Fund’s fair value interest rate risk exposure principally relates to debt securities classified as financial assets at fair value through profit or loss whose values fluctuate as a result of changes in interest rates or factors specific to their issuers. The Fund’s interest-bearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund’s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a monthly basis by the BOD.

The Fund’s fair value interest rate risk is managed through diversification of the investment portfolio by exposures. The Fund is also actively managed via portfolio duration management, yield curve positioning, credit diversification, portfolio quality and liquidity management.

The Fund also sets up a provision for market risk on its investment portfolio which is deducted from the Fund’s PFRS net asset value to protect the Fund from market price fluctuations (see Note 8). To estimate its exposure to market risk, the Fund Manager computes the statistical “value at risk” (VAR) of its investments. The VAR measurement estimates the maximum loss due to adverse market movements that could be incurred by a portfolio during a given holding period with a given level of confidence. The Fund Manager uses a one month holding period, estimated as the number of days required to liquidate the investment portfolio, and a 99% degree of confidence in the computation of VAR. As such, there remains a 1% statistical probability that the portfolios’ actual loss could be greater than the VAR estimate.

As at December 31, 2015, the Fund’s VAR with respect to market interest rate volatilities amounts to € 65,479 (2014 - €62,434).

12.3. Credit riskThe Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation.

The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund’s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. Credit risk is minimized through diversification or by investing in a variety of investments belonging to different sectors or industries.


Cash and cash equivalentsShort term investmentsFinancial assets at fair value through profit or lossHeld to maturity securities Other receivables

2014413,048

-

6,894,741751,852210,750

8,270,391

2015576,342651,141

4,152,5793,975,164280,878

9,636,104

Notes23

45

As at December 31, 2015 and 2014, the Fund’s financial assets as shown in the table above are neither past due nor impaired. There were no renegotiated financial assets as at December 31, 2015 and 2014.

The Fund’s cash in bank and short-term investments (Note 3) were placed with a local universal bank while its cash equivalents are composed of short-term time deposits with the same universal bank (Note 2).

Pursuant to the guidelines issued by the SEC, the Fund is allowed to invest in debt instruments registered and traded in an organized market in another country which are rated at least “BBB” by a reputable credit rating agency. For unrated securities, a rating is assigned using an approach that is consistent with that used by rating agencies.


Details of ratings of the Fund’s investments based on various rating agencies follow:

In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s credit position on a daily basis, and the BOD reviews it on a monthly basis. Further, the Fund’s

investment advisor regularly reviews the credit quality of the Fund’s investments and receivables by assessing the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty.

12.4. Liquidity riskLiquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous.




The Fund’s financial liability pertains to management fee payable which is contractually due in less than 1 month. The Fund expects to settle its obligation in accordance with the maturity date.

12.5. Capital managementThe capital of the Fund is represented by total equity as shown in the statement of financial position. The BOD and the Fund Manager monitor capital on the basis of the value of total equity. The Fund’s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund’s objectives when managing capital are as follows:




Held-to-maturity 212,802

-

-

3,529,311233,051

3,975,164


1,035,624547,308900,134195,356612,602479,287382,268

4,152,579

At December 31, 2015Moody’s/PRSC A1 A3 Aa2 Aa3 Baa1 Baa2 Baa3

Held-to-maturity

------

751,852-

751,852


280,448874,724216,052369,691

1,660,133216,126

2,868,578408,989

6,894,741

At December 31, 2014Moody’s/PRSC A1 A2 A3 Aa3 Aaa Aa1u Baa2 Baa3

97 98


In order to maintain or adjust the capital structure, the Fund’s policy is to perform the following:



12.6. Fair value estimationThe following table presents the fair value hierarchy of the Fund’s assets and liabilities measured at fair value at December 31:


The fair value of held-to-maturity securities as at December 31, 2015 amounts to €3,946,692 (2014 - €786,955). The fair value of held-to-maturity securities is based on market prices or broker/dealer price quotations and classified under Level 1 of the fair value hierarchy.

The Fund’s other financial assets and liabilities at reporting period approximate their fair values considering that they have short-term maturities or the impact of discounting is not significant.


Note 13 - Summary of significant accounting policiesThe principal accounting policies applied in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

13.1 Basis of preparationThe financial statements of the Fund have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS), and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC.


The preparation of these financial statements in conformity with PFRS requires the use of certain estimates. It also requires management to exercise its judgment in the process of applying the Fund’s accounting policies. There are no areas where assumptions and estimates are significant to the financial statements of the Fund as at reporting date. The area involving a higher degree of judgment or complexity is disclosed in Note 11.


• Amendments to PAS 24, ‘Related party disclosures’ on key management personnel. This amendment clarifies that where an entity receives management personnel services from a third party (a management entity), the fees paid for those services must be disclosed by the reporting entity, but not the compensation paid by the

2015Financial assets at fair value through profit or loss Debt securities US corporate bonds European corporate bonds Asia Pacific corporate bonds Asia Pacific government bonds Latin American sovereign bonds Philippine government bonds

Level 1

1,047,0901,035,624885,818596,824308,176279,047

4,152,579

Level 2

-------

Level 3

-------

Fair value

2014Financial assets at fair value through profit or loss Debt securities Philippine government bonds Supranational debt Asia Pacific corporate bonds European government bonds European corporate bonds US corporate bonds Asia Pacific government bonds

Level 1

2,610,2031,092,172915,818784,086659,838473,261359,363

6,894,741

Level 2

--------

Level 3

--------

Fair value

management entity to its employees or directors. The amendment did not have a significant effect on the Fund’s financial statements.


Other standards, amendments and interpretations which are effective for the financial year beginning on January 1, 2016 are considered not relevant and significant to the Fund.


• PFRS 9, ‘Financial instruments’ will replace the multiple classification and measurement models in PAS 39 ‘Financial instruments: Recognition and measurement’ with a single model that has initially only two classification categories: amortized cost and fair value. Classification of debt assets will be driven by the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. A debt instrument is measured at amortized cost if: a) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and b) the contractual cash flows under the instrument solely represent payments of principal and interest. All other debt and equity instruments, including investments in complex debt instruments and equity investments, must be recognized at fair value. All fair value movements on financial assets are taken through the statement of profit or loss, except for equity investments that are not held for trading, which may be recorded in the statement of profit or loss or in reserves (without subsequent recycling to profit or loss). For financial liabilities that are measured under the fair value option, entities will need to recognize the part of the fair value change that is due to changes in their own credit risk in other comprehensive income rather than in profit or loss. The new hedge accounting rules (released in December 2013) align hedge accounting more closely with common risk management practices. As a general rule, it will be easier to apply hedge accounting going forward. The new standard also introduces

expanded disclosure requirements and changes in presentation. In December 2014, the International Accounting Standards Board (IASB) made further changes to the classification and measurement rules and also introduced a new impairment model. With these amendments, PFRS 9 is now complete. The changes introduce: (1) a third measurement category (FVOCI) for certain financial assets that are debt instruments, and (2) a new expected credit loss (ECL) model which involves a three-stage approach whereby financial assets move through the three stages as their credit quality changes. The stage dictates how an entity measures impairment losses and applies the effective interest rate method. A simplified approach is permitted for financial assets that do not have a significant financing component (e.g. trade receivables). On initial recognition, entities will record a day-1 loss equal to the 12-month ECL (or lifetime ECL for trade receivables), unless the assets are considered credit impaired.

For financial years commencing before February 1, 2015, entities can elect to apply PFRS 9 early for any of the following: (1) the own credit risk requirements for financial liabilities, (2) classification and measurement (C&M) requirements for financial assets, (3) C&M requirements for financial assets and financial liabilities, or (4) C&M requirements for financial assets and liabilities and hedge accounting. After February 1, 2015, the new rules must be adopted in their entirety. The standard is effective for accounting periods beginning on or after January 1, 2018. Early adoption is permitted. The amendment did not have a significant effect on the Fund’s financial statements.


13.2 Cash and cash equivalentsCash and cash equivalents include deposits held at call with a bank and short-term highly liquid investments with original maturities of three months or less from the date of acquisition.



Financial assets at fair value through profit or loss are classified as held for trading if they are acquired principally for the purpose of selling in the near term or they are part of a

99 100

portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.

Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Fund’s management has the positive intention and ability to hold to maturity.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of being traded. The Fund’s loans and receivables include cash and cash equivalents and other receivables.

As at December 31, 2015 and 2014, the Fund has no financial assets under the available-for-sale category.

Recognition and derecognitionRegular-way purchases and sales of financial assets are recognized on trade date, the date on which the Fund commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition.

Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all the risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income.

Subsequent measurementFinancial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

ImpairmentThe Fund assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on

the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Fund first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Fund determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are considered indicators that a financial asset is impaired. The amount of provision for impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of loss has been determined. If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of reversal is recognized in profit or loss as a reduction of impairment loss for the year.



Financial liabilities at fair value through profit or loss comprise two sub-categories: financial liabilities classified as held for trading, and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition.

A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is

evidence of a recent actual pattern of short-term profit-taking. Financial liabilities designated at fair value through profit or loss are those that are not classified as held-for-trading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss as at December 31, 2015 and 2014.

Financial liabilities that are not classified as at fair value through profit or loss fall into the category of other liabilities measured at amortized cost. Financial liabilities measured at amortized cost pertain to management fee payable.




13.6 Fair value measurementFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

The quoted market price used for financial assets held by the Fund is the last traded market price for financial assets where the last traded price falls within the bid-ask

spread. In circumstances where the last traded price is not within the bid-ask spread, management determines the point within the bid-ask spread that is most representative of fair value.







The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: (i) the puttable instruments must entitle the holder to a pro-rata share of net assets; (ii) the puttable instruments must be the most subordinated class and the features of that class must be identical; (iii) there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares’ terms or conditions change such that they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument’s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity.

101 102


13.8 Deposits for future subscriptionsDeposits for future subscriptions represent funds received by the Fund with a view of applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares or from a proposed increase in authorized share capital, or as share premium.






If any or all of the foregoing elements are not present, the Fund recognizes the deposit as a liability. Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund’s trading net asset value. Upon approval, the amount will be credited to share capital for the par value of the shares and share premium for the amount in excess of the par value.

13.9 Revenue and expense recognition

Interest income is recognized on a time-proportion basis using the effective interest method.

Other income is recognized when earned.


13.10 Foreign currency transactions and translations

Functional and presentation currencySubscriptions and redemptions of the Fund’s redeemable shares are denominated in Euro. The primary activity of the Fund is to invest in Euro-denominated fixed-income instruments. The performance of the Fund is measured and reported to the investors in Euro. The BOD considers the Euro as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Euro, which is the functional and presentation currency.

Transactions and balancesForeign 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 translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.

Foreign exchange gains and losses relating to the financial assets and liabilities carried at fair value through profit or loss are presented in the statement of total comprehensive income within Net gains (losses) on financial assets at fair value through profit or loss.



13.12 Income tax








13.13 Related party relationships and transactionsRelated party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control

with the reporting enterprise, or between, and/or among the reporting enterprise and its key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.


There are no subsequent events that have occurred that would require recognition or disclosure in the financial statements.


Documentary stamp tax Total documentary stamp taxes paid on share subscriptions for the year ended December 31, 2015 amount to €11,063 (P571,333). There are no documentary stamp taxes accrued as at December 31, 2015.

Withholding taxWithholding taxes for the year ended December 31, 2015 amount to €10,825(P545,400), of which €915 (P47,254) is outstanding as at December 31, 2015.


In EuroMunicipal and other related taxesCommunity taxOthers

Amount

969 21120

1,200

103 104



Tax cases and assessmentsAs at December 31, 2015, open taxable years are 2014, 2013, and 2012. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR.

In Philippine PesoMunicipal and other related taxesCommunity taxOthers

Amount

51,17910,9161,011

63,106

INDEPENDENT AUDITOR’S REPORTTo the Board of Directors and Shareholders ofALFM Growth Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City


We have audited the accompanying financial statements of ALFM Growth Fund, Inc., which comprise the statements of financial position as at December 31, 2015 and 2014, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information.







Opinion

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Growth Fund, Inc. as at December 31, 2015 and 2014, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2015 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.




To the Board of Directors and Shareholders ofALFM Growth Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City

We have audited the financial statements of ALFM Growth Fund, Inc. as at and for the year ended December 31, 2015, on which we have rendered the attached report dated April 15, 2016. The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, 2015, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code, and Schedules A,B,C, D,E,F,G and H, as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code.

Isla Lipana & Co.



105 106

ALFM GROWTH FUND, INC.Statements of Financial Position

December 31, 2015 and 2014(All amounts in Philippine Peso)

Notes

ASSETS


ASSETS Cash in bank Financial assets at fair value through profit or loss Due from brokers and other receivables

Total assets

EQUITY Redeemable shares Share premium Deposit for future subscriptions Retained earnings

Total equity


LIABILITIES Accrued expenses Deposits for future subscriptions

Total liabilities

234

7

7

8

57

414,016,4938,542,671,610

6,846,071

8,963,534,174

3,430,966,0003,976,223,577530,051,213997,403,590

8,934,644,380

8,963,534,174

28,889,794-

28,889,794

464,329,4769,191,603,412

14,168,868

9,670,101,756

3,299,894,4003,761,103,896

-1,547,595,822

8,608,594,118

9,670,101,756

69,731,786991,775,852

1,061,507,638

2015 2014


ALFM GROWTH FUND, INC.Statements of Total Comprehensive Income

For each of the three years in the period ended December 31, 2015(All amounts in Philippine Peso)

Notes

INCOME Net (losses) gains on financial assets at fair value through profit or loss Dividend income Interest income Other loss income

(LOSS) INCOME BEFORE INCOME TAXPROVISION FOR INCOME TAX

NET (LOSS) INCOME FOR THE YEAROTHER COMPREHENSIVE INCOME

TOTAL COMPREHENSIVE (LOSS) INCOME FOR THE YEAR

BASIC AND DILUTED (LOSS) EARNINGS PER SHARE

EXPENSES Management fees Taxes and licenses Custodian fees Professional fees Others

33

2,3

6

7

9

10

7

(485,531,643)142,408,05510,924,201

(37,789)

(332,237,176)

(534,763,531)2,184,840

(536,948,371)

-(536,948,371)

(16.77)

1,256,246,614678,978

1,255,567,636-

1,255,567,636

41.77

(248,783,323)1,212,831

(249,996,154)-

(249,996,154)

(9.12)

192,175,1412,624,4811,155,698898,089

5,672,946

202,526,355

(223,629,995)110,433,232

6,064,1532,882,463

(104,250,147)

1,242,337,526176,523,622

3,394,889862,032

1,423,118,069

131,564,6778,088,458925,165

1,606,2552,348,621

144,533,176

153,685,9359,908,5051,249,9741,173,518853,523

166,871,455

2015 20132014


107 108

ALFM GROWTH FUND, INC.Statements of Changes in Equity



















2,170,852,600

--

-

1,489,022,400(894,679,400)

594,343,000

2,765,195,600

--

-

1,474,302,200(939,603,400)

534,698,800

3,299,894,400

--

-

548,966,900(417,895,300)

-

131,071,600

3,430,966,000

1,731,219,502

--

-

2,157,884,918(1,006,380,943)

1,151,503,975

2,882,723,477

--

-

2,231,893,929(1,353,513,510)

878,380,419

3,761,103,896

--

-

911,594,252(696,474,571)

-

215,119,681

3,976,223,577

Sharepremium

-

--

-

--

-

-

--

-

--

-

-

---

-

--

530,051,213

530,051,213

530,051,213

Deposit for futuresubscriptions

(Note 7)

903,168,019

(249,996,154)-

(249,996,154)

-(285,149,466)

(285,149,466)

368,022,399

1,255,567,636-

1,255,567,636

-(75,994,213)

(75,994,213)

1,547,595,822

(536,948,371)-

(536,948,371)

-(13,243,861)

-

(13,243,861)

997,403,590

Retainedearnings

4,805,240,121

(249,996,154)-

(249,996,154)

3,646,907,318 (2,186,209,809)

1,460,697,509

6,015,941,476

1,255,567,636-

1,255,567,636

3,706,196,129(2,369,111,123)

1,337,085,006

8,608,594,118

(536,948,371)-

(536,948,371)

1,460,561,152(1,127,613,732)

530,051,213

862,998,633

8,934,644,380

Totalequity


ALFM GROWTH FUND, INC.Statements of Cash Flows


Notes

CASH FLOWS FROM OPERATING ACTIVITIES (Loss) income before income tax Adjustments for: Unrealized fair value losses (gains), net Dividend income Interest income

Operating income (loss) before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Due from brokers and other receivables (Decrease) increase in accrued expenses

Cash absorbed by operations Dividend received Interest received Income taxes paid


CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemption of shares Proceeds from deposits for future subscriptions

Net cash (used in) financing activities

NET (DECREASE) INCREASE IN CASH IN BANKCASH IN BANK January 1

December 31

33

2,3

7

2

(534,763,531)

783,860,953(142,408,055)(10,924,201)

95,765,166

(134,929,151)13,442,305

(13,531,318)

(39,252,998)136,278,13110,934,618(2,184,840)

105,774,911

468,785,300(1,154,924,407)

530,051,213

(156,087,894)

(50,312,983)

464,329,476

414,016,493

(248,783,323)

298,769,236(110,433,232)

(6,064,153)

(66,511,472)

(1,547,346,421)(5,529,680)37,771,303

(1,581,616,270)110,433,232

6,064,153(1,212,831)

(1,466,331,716)

3,646,907,318(2,183,623,805)

-

1,463,283,513

(3,048,203)

12,033,575

8,985,372

1,256,246,614

(1,087,285,862)(176,523,622)

(3,394,889)

(10,957,759)

(2,070,140,643)22,897,443

(23,127,381)

(2,081,328,340)176,523,622

2,668,325(678,978)

(1,902,815,371)

3,706,196,129(2,339,812,506)

991,775,852

2,358,159,475

455,344,104

8,985,372

464,329,476

2015 20132014


109 110

Notes to Financial StatementsAs at December 31, 2015 and 2014 andfor each of the three years in the period ended December 31, 2015(All amounts are in Philippine Peso, unless otherwise stated)

Note 1 - General informationALFM Growth Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to establish and carry on the business of an open-end investment company. It was registered on November 26, 2007 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799).

The Fund aims to provide long-term capital appreciation through investments in a diversified portfolio of equity and fixed-income securities. As an open-end investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund’s prospectus (Note 8).

The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on February 17, 2016 (Note 7).


The Fund has no employees. The principal management and administration functions of the Fund are outsourced from BPI Investment Management, Inc. (BIMI) (the “Fund Manager”) (Note 9).


Note 2 - Cash in bankThe account at December 31 consists of:

Short-term time deposits bear interest rates in 2015 ranging from 2% to 2.5% (2014 – 2.60% to 3%).

Interest income earned from cash in bank as at December 31, 2015 amounts to P10,924,201 (2014 - P3,394,889; 2013 - P606,144).

Note 3 - Financial assets at fair value through profit or lossThe account at December 31 consists of investments in:

The unit investment trust funds have placements in short-term and medium-term fixed income instruments. Investment in mutual fund is concentrated on short-term money market placements. Financial assets at fair value through profit or loss are considered held for trading.

Dividend income arising from investments in listed equity securities recognized in the statement of total comprehensive income for the year ended December 31, 2015 amounts to P 142,408,055 (2014 - P176,523,622; 2013 - P110,433,232).

Interest income earned from financial assets at fair value through profit or loss for the year ended December 31, 2015 amounts to nil (2014 - nil; 2013 - P5,458,009).

Net (losses) gains in fair value of financial assets at fair value through profit or loss for the years ended December 31 are summarized as follows:

Note 4 - Due from brokers and other receivablesThe account at December 31 consists of:

Amounts due from brokers represent receivables for securities sold but not yet settled on reporting date. Due from brokers is required to be settled within three days from transaction date.


2015400,000,65614,015,837

414,016,493

2014-

464,329,476464,329,476

Listed equity securitiesUnit investment trust fundsMutual funds

20157,495,286,7081,011,476,185

35,908,7178,542,671,610

20148,842,247,798298,922,53650,433,078

9,191,603,412

Unrealized (losses) gains, netRealized gains

2015(783,860,953)298,329,310

(485,531,643)

2013(298,769,236)

75,139,241(223,629,995)

20141,087,285,862155,051,664

1,242,337,526

Due from brokersAccrued interest receivableDividend income receivableOther receivables

2015-

716,1476,129,924

-6,846,071

201411,304,623

726,564-

2,137,68114,168,868

Other receivables pertain to securities sold with proceeds still to be collected as at reporting date.

Note 5 - Accrued expensesThe account at December 31 consists of:

Capital shares redeemed payable represents outstanding redemptions as at reporting date which have not been settled. The amounts have been paid in the subsequent month after the reporting date.

Due to brokers represents payables for securities purchased that have been contracted for but not yet settled as at reporting date. Due to brokers are required to be settled within three days from transaction date.

Note 6 - Income taxesProvision for income tax substantially represents tax withheld for income subject to final tax. Provision for income tax for the year ended December 31, 2015 amounts to P2,184,840 (2014 - P678,978; 2013 - P1,212,831).

The Fund did not recognize the related deferred income tax assets on net operating loss carryover (NOLCO) in view of the Fund’s limited capacity to generate sufficient taxable income to allow the utilization of NOLCO since the bulk of income generated by the Fund is tax-exempt or subject to final tax. Details of unrecognized deferred income tax assets are as follows:

Note 7 - Redeemable sharesThe details of the Fund’s authorized shares at December 31 follow:

On November 21, 2014, the Board of Directors approved an increase in the Fund’s authorized shares from 36 million to 51 million with par value of P100 per share. The SEC approved the application for increase in authorized share capital on April 16, 2015. The corresponding shares for the cash received by the Fund from various investors as deposits for future subscriptions amounting to P991,775,852 were issued in 2015.

On July 28, 2015, the Board of Directors approved additional increase in the Fund’s authorized shares from 51 million to 59 million with par value of P100 per share. The Fund received cash from investors as deposits for future subscriptions amounting to P530,051,213. On February 17, 2016, the SEC approved the application for increase in authorized share capital. The Fund filed an application with the SEC for the authority to sell the increase in share capital on March 3, 2016.

During the year ended December 31, 2015, the Fund incurred SEC filing and registration fees related to the application for increase in authorized share capital. The total fees amounts to P4,619,378 (2014: nil; 2013: P2,149,951) which is presented as part of Other expenses in the statement of total comprehensive income.




Earnings per shareEarnings per share is calculated by dividing the net income by the weighted average

Capital shares redeemed payableDue to brokersManagement fee payableWithholding tax payable

201433,870,85319,417,68514,440,2842,002,964

69,731,786

20156,560,1797,190,434

13,317,5111,821,670

28,889,794

Notes

9


2015202,586,446166,009,423141,650,71482,272,866

-592,519,449(82,272,866)510,246,583

30%153,073,975

2014-

166,009,423141,650,71482,272,86655,933,946

445,866,949(55,933,946)389,933,003

30%116,979,901



Number of authorized sharesPar value per shareAmount

201551 million

P100P5.1 billion

201436 million

P100P3.6 billion

Outstanding, January 1Issuance of sharesRedemptions of sharesOutstanding, December 31

201532,998,9445,489,669

(4,178,953)34,309,660

201321,708,52614,890,224(8,946,794)27,651,956

201427,651,95614,743,022(9,396,034)32,998,944


20151,460,561,1521,127,613,732

20133,646,907,3182,186,209,809

20143,706,196,1292,369,111,123

111 112

number of outstanding redeemable shares during the year.


Note 8 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for redeemable shares issued or re-purchased, respectively, is based on the value of the Fund’s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund’s NAV based on PFRS (“PFRS NAV”).

In accordance with the provisions of the Fund’s prospectus, financial assets at fair value through profit or loss are valued based on the last traded market prices in the computation of the NAV for the purpose of share issuances and redemptions (“trading NAV”).


The Fund computes its trading NAV per share by dividing the trading net asset value as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions.

The trading NAV per share at December 31 is calculated as follows:


The Fund’s retained earnings may exceed 100% of its paid-up capital from time to time. This, however, is not construed as a compelling factor for the Fund to declare dividends given the nature of its business. Such retained earnings may be used for reinvestment and will effectively be converted into realized profits by the shareholders upon redemption of their shareholdings in the Fund.


As fund manager, BIMI shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BPI Investment to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BIMI a fee of not more than 1% p.a. of the Fund’s average trading NAV.

The Fund’s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the said advisory services, the Fund pays BPI-AMTG a fee of not more than 1% p.a. of the Fund’s average trading NAV.

The Fund has distribution agreements with subsidiaries of BPI, namely, BIMI, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BIMI, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund for a fee of 0.75% p.a. of the Fund’s average trading NAV. Such agreements are effective year after year unless terminated by each party. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders.

Net (loss) income for the yearWeighted average number of shares outstanding during the yearBasic and diluted (loss) earnings per share

2015(536,948,371)

32,023,717

(16.77)

2013(249,996,154)

27,408,665

(9.12)

20141,255,567,636

30,062,265

41.77

PFRS NAVDeposit for future subscriptionsOthersTrading NAV

20158,934,644,380

-667

8,934,645,047

20148,608,594,118991,775,852

22,3029,600,392,272

Trading NAV Total number of shares issued and outstandingTotal number of shares covered by deposits for future subscriptions

20158,934,645,047

34,309,660

2,000,000

20149,600,392,272

32,998,944

3,750,000

Note

7

7

Total number of sharesTrading NAV per share

201536,309,660

246.07

201436,748,944

261.24

Note The table below summarizes the Fund’s transactions and balances with its related parties:

The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of P10,000 (in absolute amount) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31, 2015, total remunerations paid to directors and officers charged in profit or loss

amount to P465,000 (2014 - P460,000; 2013 - P535,000). As at reporting date, there were no outstanding balances related to these fees.

Note 10 - Custodian agreementThe Fund has an existing custodian agreement with Hongkong & Shanghai Banking Corporation Ltd. (HSBC) for custodial services of the Fund’s proprietary assets and/or assets owned in the Philippines. Relative to this, the Fund pays monthly custodian fees of not more than 0.015% of the average daily market value of the assets. As at December 31, 2015, the market value of securities in custody of HSBC amounts to P7,488,024,548 (2014 - P8,842,247,798).

Custodian fee for the year ended December 31, 2015 amounts to 1,155,698 (2014 – P1,249,974;2013 – P925,165)


11.1 Strategy in using financial instrumentsThe Fund’s activities expose it to financial risks, namely market risk (primarily price risk and interest rate risk), credit risk and liquidity risk. All of the Fund’s assets and liabilities are denominated in Philippine Peso and is not therefore exposed to foreign exchange risk. The Fund’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund’s financial performance

The management of financial risks is carried out by the Fund Manager under the policies approved by the BOD of the Fund. The BOD approves written principles for overall risk management as well as written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks.


The Fund’s objective is to outperform its composite benchmark, 75% of the Philippine Stock Exchange Index and 25% of 91-day Philippine Treasury Bills, by investing in a diversified portfolio of equity instruments.


6,389,5106,389,510

483

12,779,503




fee is incurred.

Transactions

62,947,52062,947,520

24,127

125,919,167

December 31, 2015



5,842,0105,842,010

993

11,684,013




fee is incurred.

Transactions

74,118,90674,118,906

12,606

148,250,418

December 31, 2014



4,485,3364,485,335

8,970,671




fee is incurred.

Transactions

65,782,33965,782,338

131,564,677

December 31, 2013


113 114

11.2 Price riskThe Fund trades in financial instruments, taking positions in traded equity and over-the-counter instruments to take advantage of short-term market movements in the equity markets. Trading positions are reported at estimated market value with changes reflected in profit or loss. Trading positions are subject to the risk of loss arising from adverse movement in equity prices.

All investment securities present a risk of loss of capital. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund’s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a quarterly basis by the BOD.

The Fund’s policy is to concentrate the equity investment portfolio in sectors where management believes the Fund can maximize the returns derived for level of risk to which the Fund is exposed.

Below is a summary of the significant sector concentrations within the portfolio at December 31:

The Fund’s equity securities are susceptible to market price risk arising from uncertainties about future prices of the instruments. The Fund’s market price risk is managed through diversification of the investment portfolio ratios by exposures.

If the investments of the Fund have strengthened/weakened by 13.81% (2014 - 10.67%) based on the volatility of the Fund for the past one year with all other variables held constant, net income and equity would have been approximately P1,180 million (2014 – P981 milion) higher/lower mainly due to marked-to-market fluctuations of financial assets at fair value through profit or loss.

11.3 Credit riskThe Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.



As at December 31, 2015 and 2014, the Fund’s financial assets as shown in the table above are neither past due nor impaired.

The Fund’s cash in bank as at December 31, 2015 and 2014 consists of regular savings deposit and short-term time deposit with a reputable local universal bank with solid financial standing.

All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation.


The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s liquidity position on a daily basis to ensure that excess cash positions are invested in the desired mix of equity and fixed-income securities and redemptions are funded within the prescribed period indicated in the Fund’s prospectus.

HoldingsPropertyElectricity, energy, power and waterBanksFood, beverage and tobaccoTransportation servicesMiningTelecommunications

201533%21%12%12%7%3%2%

10%100%

201420%26%14%11%21%5%3%

-100%

Cash in bankDue from brokers and other receivables

2015414,016,493

6,846,071420,862,564

2014464,329,47614,168,868

478,498,344

The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market. The Fund’s investments in listed equity securities classified as financial assets at fair value through profit or loss are considered readily realizable as these are listed in the PSE and are heavily traded being component stocks of PSE’s main index. The Fund’s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date.


The Fund’s financial liabilities include due to brokers, management fee payable and capital shares redeemed payable which are all contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their contractual maturity dates.

11.5 Capital risk managementThe capital of the Fund is represented by total equity as shown in the statement of financial position. The Fund’s BOD and the Fund Manager monitor capital on the basis of the value of total equity. The Fund’s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund’s objectives when managing capital are as follows:



iii) Comply with the minimum subscribed and paid-in capital of P50 million required for investment companies under Investment Company Act of 1960.







The carrying amounts of the Fund’s other financial assets and financial liabilities at reporting period approximate their fair values considering that these have short-term maturities.


Note 12 - Summary of significant accounting policiesThe principal accounting policies applied in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

12.1 Basis of preparationThe financial statements of the Fund have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS), and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC.The financial statements have been prepared under the historical cost convention, as

2015Financial assets at fair value through profit or loss Listed equity securities Unit investment trust funds Mutual fund

Level 1

7,495,286,7081,011,476,185

35,908,7178,542,671,610

Level 2

----

Level 3

----

Fair value

2014Financial assets at fair value through profit or loss Listed equity securities Unit investment trust funds Mutual fund

Level 1

8,842,247,798298,922,53650,433,078

9,191,603,412

Level 2

----

Level 3

----

Fair value

115 116

modified by the revaluation of financial assets at fair value through profit or loss.

There are currently no areas involving higher degree of judgment or complexity, or areas where assumption and estimate are significant to the Fund’s financial statements.






• PFRS 9, ‘Financial instruments’ will replace the multiple classification and measurement models in PAS 39 ‘Financial instruments: Recognition and measurement’ with a single model that has initially only two classification categories: amortized cost and fair value. Classification of debt assets will be driven by the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. A debt instrument is measured at amortized cost if: a) the objective of the business model is to hold the financial asset

for the collection of the contractual cash flows, and b) the contractual cash flows under the instrument solely represent payments of principal and interest. All other debt and equity instruments, including investments in complex debt instruments and equity investments, must be recognized at fair value. All fair value movements on financial assets are taken through the statement of profit or loss, except for equity investments that are not held for trading, which may be recorded in the statement of profit or loss or in reserves (without subsequent recycling to profit or loss). For financial liabilities that are measured under the fair value option, entities will need to recognize the part of the fair value change that is due to changes in their own credit risk in other comprehensive income rather than in profit or loss. The new hedge accounting rules (released in December 2013) align hedge accounting more closely with common risk management practices. As a general rule, it will be easier to apply hedge accounting going forward. The new standard also introduces expanded disclosure requirements and changes in presentation. In December 2014, the International Accounting Standards Board (IASB) made further changes to the classification and measurement rules and also introduced a new impairment model. With these amendments, PFRS 9 is now complete. The changes introduce: (1) a third measurement category (FVOCI) for certain financial assets that are debt instruments, and (2) a new expected credit loss (ECL) model which involves a three-stage approach whereby financial assets move through the three stages as their credit quality changes. The stage dictates how an entity measures impairment losses and applies the effective interest rate method. A simplified approach is permitted for financial assets that do not have a significant financing component (e.g. trade receivables). On initial recognition, entities will record a day-1 loss equal to the 12-month ECL (or lifetime ECL for trade receivables), unless the assets are considered credit impaired.



12.2 Cash and cash equivalentsCash and cash equivalents include deposits held at call with a bank and short-term

highly liquid investments with original maturities of three months or less from the date of acquisition.




Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of being traded. The Fund’s loans and receivables include cash in bank, due from brokers, accrued interest receivable and other receivables (Note 4).

As at December 31, 2015 and 2014, the Fund has no financial assets under the available-for-sale and held-to-maturity categories.


Financial assets are derecognized when the rights to receive the cash flows from the financial assets have expired or where the Fund has transferred substantially all the risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income.

Subsequent measurementFinancial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are included within Net gains (losses) on financial assets at fair

value through profit or loss in the statement of total comprehensive income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

ImpairmentThe Fund assesses at each reporting date whether there is an objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is an objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.


A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are considered indicators that a financial asset is impaired. The amount of provision for impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of loss has been determined. If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of reversal is recognized in profit or loss as a reduction of impairment loss for the year.

117 118



Financial liabilities at fair value through profit or loss comprises two sub-categories: financial liabilities classified as held for trading and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition.


Financial liabilities that are not classified as at fair value through profit or loss fall into the category of other liabilities measured at amortized cost. Financial liabilities measured at amortized cost include capital shares redeemed payable, due to brokers and management fee payable (Note 5).










12.7 Due from and due to brokersDue from brokers pertains to receivables for securities sold that have been contracted for but not yet settled as at reporting date. Due to brokers pertains to payables for securities purchased that have been contracted for but not yet delivered as at reporting date. These accounts are required to be settled within three days from transaction date.





12.9 Deposits for future subscriptionsDeposits for future subscriptions represent funds received by the Fund with a view of applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium.








12.10 Revenue and expense recognitionDividend income is recognized when the Fund’s right to receive payment is established.



12.11 Functional and presentation currencySubscriptions and redemptions of the Fund’s redeemable shares are denominated in Philippine Peso (“Peso”). The primary activity of the Fund is to invest in portfolio of equity securities traded in the Philippine Stock Exchange (“PSE”) and other fixed income securities or instruments which are denominated in Peso. The BOD considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Peso, which is the functional and presentation currency of the Fund.

12.12 Earnings per shareBasic earnings per share is calculated by dividing the net income attributable to shareholders over the weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares.


119 120

12.13 Income tax


The Fund primarily earns dividend income from its investments in equity securities which is tax-exempt. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax. Such income is presented gross of taxes paid or withheld and the related tax is presented in the statement of total comprehensive income as Provision for income tax.

Deferred income taxDeferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.




Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred

income tax assets and liabilities relate to income taxes levied by the same taxation authority and where there is an intention to settle the balances on a net basis.




Note 13 - Supplementary information required by the Bureau of Internal RevenueBelow is the additional information required by Revenue Regulations No. 15-2010 that is relevant to the Fund. This information is presented for the purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements.

Documentary stamp tax Total documentary stamp taxes paid on share subscriptions for the year ended December 31,2015 amount to P1,927,915. There are no documentary stamp taxes accrued as at December 31, 2015.

Withholding taxWithholding taxes for the year ended December 31, 2015 amount to P21,308,287 of which P1,821,670 is outstanding as at December 31, 2015.



Tax cases and assessmentsAs at December 31, 2015, open taxable years are 2014, 2013 and 2012. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR.

Municipal and other related taxesCommunity tax

Amount686,06610,500

696,566

INDEPENDENT AUDITOR’S REPORTTo the Board of Directors and Shareholders ofPhilippine Stock Index Fund Corp.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City


We have audited the accompanying financial statements of Philippine Stock Index Fund Corp., which comprise the statements of financial position as at December 31, 2015 and 2014, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information.






121 122


Opinion

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Philippine Stock Index Fund Corp. as at December 31, 2015 and 2014, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2015 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.




To the Board of Directors and Shareholders ofPhilippine Stock Index Fund Corp.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City

We have audited the financial statements of Philippine Stock Index Fund Corp. as at and for the year ended December 31, 2015, on which we have rendered the attached report dated April 15, 2016. The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, 2015, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code, and Schedules A,B,C, D,E,F,G and H, as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code.

Isla Lipana & Co.



PHILIPPINE STOCK INDEX FUND CORP.Statements of Financial Position

December 31, 2015 and 2014(All amounts in thousands of Philippine Peso)

Notes

ASSETS


ASSETS Cash in bank Financial assets at fair value through profit or loss Other receivables

Total assets


Total equity


LIABILITIES Deposits for future subscriptions Management fee payable Other liabilities

Total liabilities

234

7

8

795

19,49211,768,602

8,946

11,797,040

1,518,0386,924,7633,326,741

11,769,542

11,797,040

- 13,19514,303

27,498

22,93415,427,019

20,632

15,470,585

1,838,5719,142,5073,840,558

14,821,636

15,470,585

486,97416,010

145,965

648,949

2015 2014


123 124

PHILIPPINE STOCK INDEX FUND CORP.Statements of Total Comprehensive Income

For each of the three years in the period ended December 31, 2015 (All amounts in thousands of Philippine Peso, except per share amounts)

Notes

INCOME Net (losses) gains on financial assets at fair value through profit or loss Dividend income Interest income Other income

(LOSS) INCOME BEFORE INCOME TAXPROVISION FOR INCOME TAX

NET (LOSS) INCOME FOR THE YEAROTHER COMPREHENSIVE INCOME

TOTAL COMPREHENSIVE (LOSS) INCOME FOR THE YEAR

BASIC AND DILUTED (LOSS) EARNINGS PER SHARE

EXPENSES Management fees Taxes and licenses Professional fees Custodian fees Others

332

6

7

9

10

(581,229)303,077

72558

(277,522)

(513,817)-

(513,817)-

(513,817)

(27.34)

1,886,641-

1,886,641-

1,886,641

143.48

(47,119)-

(47,119)-

(47,119)

(3.98)

229,1521,108756

2,1193,160

236,295

(130,999)242,755

1353,809

115,700

1,847,400205,275

711,003

2,053,749

150,8158,4051,8781,711

10

162,819

154,5568,4871,3041,915846

167,108

2015 20132014


PHILIPPINE STOCK INDEX FUND CORP.Statements of Changes in Equity













Comprehensive loss Net loss for the year Other comprehensive income






1,136,868

--

-

830,327(734,124)

96,203

1,233,071

--

-

1,114,915(509,415)

605,500

1,838,571

--

-

322,234(642,767)

(320,533)

1,518,038

3,190,493

--

-

5,141,639(3,443,065)

1,698,574

4,889,067

--

-

7,605,385(3,351,945)

4,253,440

9,142,507

--

-

2,355,238(4,572,982)

(2,217,744)

6,924,763

Sharepremium

3,102,116

(47,119)-

(47,119)

-(1,101,080)

(1,101,080)

1,953,917

1,886,641-

1,886,641

--

-

3,840,558

(513,817)-

(513,817)

--

-

3,326,741

Retainedearnings

7,429,477

(47,119)-

(47,119)

5,971,966(5,278,269)

693,697

8,076,055

1,886,641-

1,886,641

8,720,300(3,861,360)

4,858,940

14,821,636

(513,817)-

(513,817)

2,677,472(5,215,749)

(2,538,277)

11,769,542

Totalequity


125 126

PHILIPPINE STOCK INDEX FUND CORP.Statements of Cash Flows


Notes

CASH FLOWS FROM OPERATING ACTIVITIES (Loss) Income before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income

Operating loss before change in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Other receivables Increase (decrease) in: Management fee payable Other liabilities

Cash generated from (absorbed by) operations Interest received


CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemptions of shares Proceeds from deposit for future subscriptions

Net cash (used in) from financing activities

NET (DECREASE) INCREASE IN CASH IN BANK CASH IN BANK January 1

December 31

32

7

2

(513,817)

1,180,162(72)

666,273

2,478,25511,686

(2,815)(131,662)

3,021,73772

3,021,809

2,190,498 (5,215,749)

-

(3,025,251)

(3,442)

22,934

19,492

(47,119)

751,293(135)

704,039

(1,355,690)46,701

1,706 (93,647)

(696,891)

135

(696,756)

5,971,966(5,278,269)

-

693,697

(3,059)

15,094

12,035

1,886,641

(1,761,647)(71)

124,923

(5,579,978)53,776

6,51859,675

(5,335,086)71

(5,335,015)

8,720,300(3,861,360)

486,974

5,345,914

10,899

12,035

22,934

2015 20132014


Notes to Financial StatementsAs at December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015(All amounts are in thousands of Philippine Peso, except for number of shares and per share amounts)

Note 1 - General informationPhilippine Stock Index Fund Corp. (the “Fund”) was incorporated in the Philippines primarily to establish and carry on the business of an open-end investment company. It was registered on December 11, 2002 with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799).

The Fund aims to provide the Fund’s investors with a return that tracks the performance of Philippine Stock Exchange (PSE) index (PSEi), the main stock index of the PSE, through investments in the component stocks of PSEi. As an open-end investment company, the Fund stands ready at any time to redeem its outstanding shares at a value determined under the Fund’s prospectus (Note 8).

The Fund is considered to be an issuer of securities that are registered with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on May 6, 2015 (Note 7).

The Fund’s registered office, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City, Philippines.


The financial statements have been approved and authorized for issue by the Fund’s Board of Directors (BOD) on April 15, 2016.

Note 2 - Cash in bankCash in bank at December 31, 2015 amounts to P19,492 (2014 - P22,934) and earns interest at the prevailing bank deposit rates.

Interest income earned from deposits during the year amounts to P72 (2014 - P71; 2013 - P135).

Note 3 - Financial assets at fair value through profit or lossThe account at December 31 consists of investments in:

The unit investment trust fund (the “Fund”) has investments in a diversified portfolio of high-grade fixed income instruments. Financial assets at fair value through profit or loss are considered held for trading.

Dividend income arising from investments in listed equity securities recognized in profit or loss for the year ended December 31, 2015 amounts to P303,077 (2014 - P205,275 ; 2013 - P242,755).

Net (losses) gains in fair value of financial assets at fair value through profit or loss for the years ended December 31 are summarized as follows:

Note 4 - Other receivables Other receivables pertain to dividend income still to be collected as at reporting date. The account amounts to P8,946 as at December 31, 2015 (2014 - P20,632).

Note 5 - Other liabilitiesThe account at December 31 consists of:

Capital shares redeemed payable represents outstanding redemptions as at reporting date which have not been settled. The amounts have been paid in the subsequent month after the reporting date.

Note 6 - Income taxesThe Fund has no provision for income tax for the years ended December 31, 2015 and 2014 since the bulk of income generated by the Fund is tax exempt and subject to final tax.

Unrealized fair value (losses) gains, netRealized gains

2015(1,180,162)

598,933(581,229)

2013(751,293)620,294

(130,999)

20141,761,647

85,7531,847,400

Listed equity securitiesUnit investment trust fund

201511,723,438

45,16411,768,602

201415,247,531

179,48815,427,019

Capital shares redeemed payableWithholding tax payable on management fees

201512,6171,686

14,303

2014143,717

2,248145,965

127 128

The Fund did not recognize the related deferred income tax assets on the net operating loss carry over (NOLCO) in view of the Fund’s limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The details of the Fund’s unused NOLCO at December 31 are as follows:

Note 7 - Redeemable sharesThe details of the Fund’s authorized number of shares at December 31 follow:

On November 21, 2014, the Board of Directors approved an increase in the Fund’s authorized shares from 20 million to 22.4 million with par value of P100 per share. On May 6, 2015, the SEC approved the increase in authorized shares and subsequently issued a certificate of permit to offer securities for sale on November 16, 2015. The corresponding shares for the cash received by the Fund from various investors as deposits for future subscriptions amounting to P486,974 were issued in 2015.

The movement in the number of redeemable shares for the years ended December 31 follow:




The information used in the computation of basic and diluted earnings for the years ended December 31 follow:

Note 8 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for ordinary shares issued or re-purchased, respectively, is based on the value of the Fund’s NAV per redeemable share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund’s NAV based on PFRS (“PFRS NAV”).

In accordance with the provisions of the Fund’s prospectus, a portion of dividend income is appropriated for the Fund’s provision for market risk and is not included in the computation of the NAV for purposes of share issuances and redemptions (“trading NAV”) to ensure that the Fund exactly replicates the performance of PSEi. The accumulated adjustment for market risk shall be subject to the BOD’s periodic review.

On July 25, 2011, the Fund’s BOD approved the distribution of the provision for market risks of the Fund for a fixed amount per share over a period of three (3) years or until the amount is fully distributed which was implemented on September 11, 2011 to coincide with the rebalancing of the PSE indices. Effective on the date of the distribution of the market reserves, (i) the Fund will cease booking or releasing market reserves other than for the purpose of distribution, (ii) dividend payments received by the Fund will be reinvested, and (iii) the reporting of the performance of the Fund will then include: Fund Return - Net of Fees and Expenses, Fund Return - Gross of Fees and Expenses, PSEI Price Return and PSEI Total Return.


2015235,737166,106158,98476,135

-636,962(76,135)560,827

30%168,248

2014-

166,106 158,984 76,13546,796

448,021(46,796)401,225

30%120,368




201522.4 million

P100P2.24 billion

201420 million

P100P2 billion

Outstanding, January 1Issuance of sharesRedemptions of sharesOutstanding, December 31

201518,385,7103,222,335

(6,427,662)15,180,383

201311,368,6838,303,273

(7,341,244)12,330,712

201412,330,71211,149,151(5,094,153)18,385,710

Net (loss) income for the yearWeighted average number of shares outstanding during the year (in thousands)Basic and diluted earnings per share

2015(513,817)

18,791(27.34)

2013(47,119)

11,850(3.98)

20141,886,641

13,149143.48


20152,677,4725,215,749

20135,971,9665,278,269

20148,720,3003,861,360

There is no allowance for market risk as at December 31, 2015 and 2014.


The Fund computes its NAV per share by dividing the trading net asset value as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The NAV per share at December 31 is calculated as follows:


The Fund’s retained earnings generally exceed 100% of its paid-up capital. This, however, is not construed as a compelling factor for the Fund to declare dividends given the nature of its business. Such retained earnings may be used for reinvestment and will effectively be converted into realized profits by the shareholders upon redemption from the Fund.

Note 9 - Related party transactionsBPI Investment Management Inc. (BIMI) and BPI - Asset Management Trust Group (BPI - AMTG) were designated as fund manager and investment advisor of the Fund, respectively.

As fund manager, BIMI shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BIMI to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the

Fund pays BIMI a fee of not more than 0.75% p.a. of the Fund’s average trading NAV.

The Fund’s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the said advisory services, the Fund pays BPI-AMTG a fee of not more than 0.75% p.a. of the Fund’s average trading NAV.

The Fund has distribution agreements with subsidiaries of BPI, namely, BIMI, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BIMI, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders.

The table below summarizes the Company’s transactions and balances with its related parties.

PFRS NAVDeposit for future subscriptionsTrading NAV

201511,769,542

-11,769,542

201414,821,636

486,97415,308,610

Trading NAV Total number of shares issued (in thousands)Total number of shares covered by deposits for future subscriptions (in thousands)Total number of sharesNAV per share

201511,769,542

15,180

-15,180775.33

201415,308,610

18,386

60018,986806.31

Note

7

7Outstanding

balances

4,5674,567

98

9,232




fee is incurred.

Transactions

88,50888,5081,278

178,294

December 31, 2015



6,1226,122133

12,377




fee is incurred.

Transactions

63,73363,7333,240

130,706

December 31, 2014


129 130

The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of P10,000 (in absolute amount) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31, 2015, total remunerations paid to directors and officers charged to profit or loss amount to P174 (2014 - P P180; 2013 - P240). As at reporting date, there were no outstanding balances related to these fees.

Note 10 - Custodian agreementThe Fund has an existing custodian agreement with The Hongkong & Shanghai Banking Corporation Ltd. (HSBC) for custodial services of the Fund’s proprietary assets and/or assets owned in the Philippines. Relative to this, the Fund pays monthly custodian fees of not more than 2% of the average daily market value of the assets. As at December 31, 2015, the market value of securities in custody of HSBC aggregates to P11,723,438 (2014 - P15,247,531 ).

Custodian fee for the year ended December 31, 2015 amounted to P2,119 (2014 – P1,915; 2013 – P1,711).


11.1 Strategy in using financial instrumentsThe Fund’s activities expose it to financial risks, mainly market price risk, credit risk and liquidity risk. The Fund has minimal exposures on interest rate risk and foreign exchange risk. The Fund’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund’s financial performance.

The management of financial risks is carried out by the Fund Manager under policies approved by the Board of Directors (BOD) of the Fund. The BOD approves written

principles for overall risk management as well as written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks.


The Fund’s objective is to provide investment returns that track the performance of the PSEi through investing in equity securities comprising the PSEi.

11.2 Price riskThe net asset value (NAV) per share of the Fund will behave depending on the movement of the shares included in the PSEi. There is a possibility that when stock prices go down, the market value of the stock will be less than its purchase price. As a result, an investor might incur losses when stock prices fall. The Fund’s price risk exposure principally relates to financial assets at fair value through profit or loss whose values fluctuate as a result of changes in market prices.

Below is a summary of the significant sector concentrations within the portfolio at December 31:

The primary responsibility of the Fund Manager is to reflect changes in the allocation and composition of the shares comprising the PSEi in the Fund’s net asset value by adjusting and re-balancing the shares that make up the portfolio. The Fund’s risk policy requires daily tracking of the movement of the PSEi with the intention of limiting the deviation from the movement of the index. Tracking errors are monitored and reported by the


4,7464,746

9,492




fee is incurred.

Transactions

75,40875,407

150,815

December 31, 2013


HoldingsProperty BanksFoodCommunications Power and energy TransportationMining Others

201538%18%14%10%9%7%2%1%1%

100%

201439%11%15%10%12%7%4%1%1%

100%

risk manager on a daily basis to ensure that the Fund closely mimics the movement of the PSEi. The tracking error percentage of the Fund as at December 31, 2015 is 0.44% (2014 - 1.21% ).

If the PSEi has strengthened/weakened by 14.93% (2014 - 12.36%) based on the volatility of PSEi for the past one year with all other variables held constant, net income and equity would have been approximately P1,115 million (2014 - P1,357 million) higher/lower mainly due to mark-to-market fluctuations of financial assets at fair value through profit or loss.

11.3 Credit riskThe Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund’s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. Credit risk is also minimized through diversification or by investing in a variety of investments belonging to different sectors or industries.


As at December 31, 2015 and 2014, the Fund’s financial assets as shown in the table above are neither past due nor impaired.

The Fund’s cash in bank as at December 31, 2015 and 2014 is placed with a reputable local universal bank with solid financial standing.

All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation.


The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s liquidity position on a daily basis to ensure that excess cash positions are invested in equity securities and redemptions are funded within the prescribed period indicated in the Fund’s prospectus.

The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market. The Fund’s investments in listed equity securities classified as financial assets at fair value through profit or loss are considered readily realizable as they are listed in the PSE and are heavily traded being component stocks of PSE’s main index. The Fund’s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date.


The Fund’s financial liabilities pertain to management fee payable and capital shares redeemed payable which are contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their contractual maturity date.

11.5 Capital managementThe capital of the Fund is represented by total equity as shown in the statement of financial position. The Fund’s BOD and the Fund Manager monitor capital on the basis of the value of total equity. The Fund’s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund’s objectives when managing capital are as follows:

(i) Safeguard the Fund’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders;

(ii) Maintain a strong capital base to support the development of the investment activities of the Fund; and

(iii) Comply with the minimum subscribed and paid-in capital of P50 million required for investment companies under Investment Company Act of 1960.


Cash in bankOther receivables

201519,4928,946

28,438

201422,93420,63243,566

131 132


(i) Monitor the level of daily subscriptions and redemptions relative to the assets it expects to be able to liquidate within 7 days; and

(ii) Redeem and issue new shares in accordance with the Fund’s prospectus, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions.

11.6 Fair value estimationThe following table presents the fair value hierarchy of the Fund’s assets and liabilities measured at fair value as at December 31:


The carrying amounts of the Fund’s other financial assets and financial liabilities at reporting period approximate their fair values considering that these have short-term maturities.

There were no transfers between the fair value hierarchy categories during 2015 and 2014.

Note 12 - Summary of significant accounting policiesThe principal accounting policies applied in the preparation of the Fund’s financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

12.1 Basis of preparationThe financial statements of the Fund have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS), and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC.


There are currently no areas involving higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Fund’s financial statements.






2015Financial assets at fair value through profit or loss Listed equity securities Unit investment trust funds

Level 1

11,723,43845,164

11,768,602

Level 2

---

Level 3

---

Fair value

2014Financial assets at fair value through profit or loss Listed equity securities Unit investment trust funds

Level 1

15,247,531179,488

15,427,019

Level 2

---

Level 3

---

Fair value




12.2 Cash and cash equivalentsCash and cash equivalents include deposits held at call with a bank and other short-term highly liquid investments with original maturities of three months or less from the date of acquisition.

As at December 31, 2015 and 2014, the Fund does not have cash equivalents.



Financial assets at fair value through profit or loss are classified as held for trading as they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of being traded. The Fund’s loans and receivables include in cash in bank and other receivables.

As at December 31, 2015 and 2014, the Fund has no financial assets under the available-for-sale and held-to-maturity categories.


Financial assets are derecognized when the rights to receive the cash flows from the financial assets have expired or where the Fund has transferred substantially all the risks and rewards of ownership. Related gains and losses realized at the time of derecognition

133 134

are recognized within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income.

Subsequent measurementFinancial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in fair value of the financial assets at fair value through profit or loss are included within Net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

ImpairmentThe Fund assesses at each reporting date whether there is an objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of an asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Fund first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Fund determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are considered indicators that a financial asset is impaired. The amount of provision for impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of loss has been determined. If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement

in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in profit or loss as a reduction of impairment loss for the year.



Financial liabilities at fair value through profit or loss comprises two sub-categories: financial liabilities classified as held for trading and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition.


Financial liabilities that are not classified as at fair value through profit or loss fall into the second category and are measured at amortized cost. Financial liabilities measured at amortized cost include, management fee payable and other liabilities except withholding tax payable.


12.5 Fair value measurementFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on

the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.








The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: the puttable instruments must entitle the holder to a pro-rata share of net assets; the puttable instruments must be the most subordinated class and the features of that class must be identical; there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares’ terms or conditions change such that

they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument’s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity.


12.7 Deposits for future subscriptionsDeposits for future subscriptions represent funds received by the Fund with a view to applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium.

Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the approval by its Board of Directors, stockholders and the SEC.



• There is Board of Directors’ approval on the proposed increase in authorized share capital (for which a deposit was received by the Fund);

• There is shareholders’ approval of said proposed increase; and• The application for the approval of the proposed increase has been filed with the

SEC.

If any or all of the foregoing elements are not present, the Fund recognizes the deposit as a liability.

Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund’s trading net asset value. Upon application, the

135 136

amount will be credited to share capital for the par value of the shares and to share premium for the amount in excess of the par value.

12.8 Revenue and expense recognitionDividend income is recognized when the Fund’s right to receive payment is established.



12.9 Functional and presentation currencySubscriptions and redemptions of the Fund’s redeemable shares are denominated in Philippine Peso (“Peso”). The primary activity of the Fund is to invest in equity securities comprising the PSEi to track the performance of the PSEi. Such securities are denominated in Peso. The performance of the Fund is measured and reported to the investors in Peso. The Board of Directors considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions of the Fund. The financial statements are presented in Peso, which is the Fund’s functional and presentation currency.



12.11 Current and deferred income tax

Current income taxThe current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

The Fund primarily earns dividend income from its investments in equity securities which is tax-exempt. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax. Such income is presented net of taxes paid or withheld.







12.13 Subsequent events (or Events after reporting date)Post year-end events that provide additional information about the Fund’s financial

position at reporting date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes to financial statements when material.


Note 13 - Supplementary information required by the Bureau of Internal Revenue Below is the additional information required by Revenue Regulations No. 15-2010 that is relevant to the Fund. This information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements.

Documentary stamp tax The documentary stamp taxes paid on share subscriptions for the year ended December 31,2015 amount to P497. There are no documentary stamp taxes accrued as at December 31, 2015.

Withholding taxesWithholding taxes for the year ended December 31, 2015 amount to P25,894 of which P1,686 is outstanding as at December 31, 2015.



Tax cases and assessmentsAs at December 31, 2015, open taxable years are 2014, 2013 and 2012. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR.

Municipal and other related taxesCommunity tax

Amount60011

611

137 138

BPI INVESTMENT MANAGEMENT INC.The Fund Manager

BPI Investment Management, Inc. (“BPI Investment” or “BIMI”) is the Fund Manager of the ALFM Mutual Funds and is responsible for formulating and executing the Fund’s investment strategy. BPI Investment, a wholly-owned subsidiary of the Bank of the Philippine Islands, was incorporated on July 30, 1974 as Ayala Investment Management, Inc. to principally engage in the business of managing an investment company. On March 5, 1991, the Securities & Exchange Commission approved the change in the company’s name to BPI Investment Management, Inc. Backed by state-of-the-art technology and financial experience, BPI Investment carefully balances the Fund’s investment risks and returns to guard against potential losses.

BOARD OF DIRECTORS AND OFFICERS OF BIMI

Mercedita S. Nolledo ChairmanJose Mari L. Valmayor PresidentMa. Ysabel P. Sylianteng DirectorJesus V. Razon, Jr. DirectorAdelbert A. Legasto DirectorAngela Pilar Maramag Corporate SecretaryJosenia Jessica Nemeno Asst. Corporate Secretary

BPI ASSET MANAGEMENT AND TRUST GROUPThe Investment Advisor

BPI Asset Management is a leading investment manager in the Philippines with an established track record of managing assets of both institutional and individual investors through innovative investment products and solutions which are considered to be the most complete in the industry. BPI Asset Management caters to the diverse investment requirements of a broad client base and as a result of intensive financial experience, BPI Asset Management is also able to guide its fund managers in formulating investment strategies for their funds. As the Investment Advisor, BPI Asset Management renders services to BIMI which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. BPI Asset Management serves as investment advisor to all the mutual funds managed and distributed by BPI Investment Management, Inc.

THE DISTRIBUTORSBPI Investment Management Inc.(02) 845-5033 to 35

BPI Capital Corporation(02) 845-5696 or 5708

Citi Financial Services & Insurance Brokerage Philippines Inc.*for ALFM Growth Fund and PSIF

(02) 995-5985

COL Financial Group Inc.*for ALFM Money Market Fund, ALFM Peso Bond Fund, ALFM Growth Fund and PSIF

(02) 651-5888

ALFM ONLINE

Visit www.alfmmutualfunds.com,the official website of the ALFM Mutual Funds,

to get all the information you need, easily and conveniently.

For internet-savvy clients who are active on Twitter,follow us @ALFMMutualFunds.

Be in the loop with timely updates and insights! Visit our ALFM Facebook page and join in the conversations of

thousands of investment enthusiastsfrom all over the country.

Subscribe to our YouTube channel ALFMmutualfundsand watch videos of our professional fund managers

discussing different investment related topics.

144

18th Floor BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City, 1226 PhilippinesTel.: (63 2) 845-5033 • 845-5899 • 845-5770 • 816-9971

Email: [email protected]: www.alfmmutualfunds.com

2015 ANNUAL REPORT - ALFM Mutual Funds - ALFM | Home · PDF file3 4 CORPORATE GOVERNANCE The Board of Directors of the ALFM Mutual Funds (the “Funds”), working closely with the

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