PROSPERITY CAPITAL MANAGEMENT SICAV Société d'investissement à capital variable (a Luxembourg domiciled open-ended investment company)
Annual report, including audited financial statements, as at December 31, 2016
R.C.S. Luxembourg B174912
PROSPERITY CAPITAL MANAGEMENT SICAV Société d'investissement à capital variable (a Luxembourg domiciled open-ended investment company)
Annual report, including audited financial statements, as at December 31, 2016
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PROSPERITY CAPITAL MANAGEMENT SICAV
Annual report, including audited financial statements, as at December 31, 2016
No subscription can be received on the basis of this report. Subscriptions are only valid if made on the basis of the current prospectus accompanied by the Key Investor Information Document ("KIID"), the latest annual report, including audited financial statements, and the most recent semi-annual report, if published thereafter.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Table of contents
Organisation of the SICAV 4
General information 6
Distribution abroad 7
Management report 8
Report of the Réviseur d’Entreprises agréé 16
Financial statements
Statement of net assets 18
Statement of operations and changes in net assets 19
Number of shares outstanding and net asset value per share 20
Sub-fund : PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG) - Statement of investments and other net assets 21 - Geographical and industrial classification of investments 23
Notes to the financial statements 24
Total Expense Ratio ("TER") (unaudited appendix) 31
Performance (unaudited appendix) 32
Other information to Shareholders (unaudited appendix) 33
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PROSPERITY CAPITAL MANAGEMENT SICAV
Organisation of the SICAV
REGISTERED 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg OFFICE
BOARD OF DIRECTORS OF THE SICAV
CHAIRMAN Mr Joseph KEANE, Director, Prosperity Capital Management (UK) Ltd, 2nd Floor, Cavendish Square, London W1G OPD, United Kingdom
MEMBERS Mr John ALLDIS, Director, Carne Global Financial Services S.à r.l. 6B, route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg
Ms Veronica BUFFONI, Director, Carne Global Financial Services S.à r.l. 6B, route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg
Mr Cédric BIART, Independant Board Member, 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg
CENTRAL FundPartner Solutions (Europe) S.A., 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand ADMINISTRATION Duchy of Luxembourg AND MANAGEMENT COMPANY
BOARD OF DIRECTORS OF THE MANAGEMENT COMPANY
CHAIRMEN Mr Marc BRIOL, Executive Vice President, Banque Pictet & Cie SA, 60, route des Acacias, CH- 1211 Geneva 73, Switzerland (until December 1, 2016)
Mr Christian SCHRÖDER, Group Corporate Secretary and Head of Organisation, Banque Pictet & Cie SA, 60, route des Acacias, CH-1211 Geneva 73, Switzerland (since December 1, 2016)
MEMBERS Mr Pierre ETIENNE, Managing Director, Pictet & Cie (Europe) S.A., 15A, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg (until December 1, 2016)
Mrs Michèle BERGER, CEO and Managing Director, FundPartner Solutions (Europe) S.A., 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg
Me. Claude KREMER, Partner, Arendt & Medernach - Avocats, 14, rue Erasme, L-2082 Luxembourg, Grand Duchy of Luxembourg
Mr Geoffroy LINARD DE GUERTECHIN, Independant Director, 2, rue Jean-Pierre Beicht, L 1226 Luxembourg, Grand Duchy of Luxembourg (since March 14, 2016)
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PROSPERITY CAPITAL MANAGEMENT SICAV
Organisation of the SICAV (continued)
MEMBERS OF THE Mrs Michèle BERGER, CEO and Managing Director, FundPartner Solutions (Europe) S.A., 15, MANAGEMENT Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg COMMITTEE Mr Pascal CHAUVAUX, Head of Central Administration, FundPartner Solutions (Europe) S.A., 15, Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg
Mr Cédric HAENNI, Head of Risk & Compliance, FundPartner Solutions (Suisse) SA, 60, route des Acacias, CH 1211 Geneva 73, Switzerland
Mr Dorian JACOB, Head of Investment Management Oversight, FundPartner Solutions (Europe) S.A., 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg
INVESTMENT Prosperity Capital Management (UK) Ltd, 2nd Floor, 6 Cavendish Square London W1G 0PD, MANAGER AND United Kingdom GLOBAL DISTRIBUTOR
DEPOSITARY BANK Pictet & Cie (Europe) S.A., 15A, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg
REVISEUR KPMG Luxembourg, Société coopérative, 39, avenue J.F. Kennedy, L-1855 Luxembourg, D’ENTREPRISES Grand Duchy of Luxembourg AGRÉÉ
LEGAL ADVISOR AS Elvinger Hoss Prussen, 2, place Winston Churchill BP 425, L-2014 Luxembourg, Grand Duchy TO LUXEMBOURG of Luxembourg LAW
LEGAL ADVISOR AS CMS International B.V. Presnenskaya Nab., 10, 123317, Moscow, Russian Federation TO RUSSIAN LAW
INFORMATION Zeidler Legal Services, 48 Bettinastraße, D-60325 Frankfurt am Main, Germany AGENT IN GERMANY
LEGAL BNP Paribas Securities Services, Paris, succursale de Zurich, 16 Selnaustrasse, CH-8002 REPRESENTATIVE Zurich, Switzerland AND PAYING AGENT IN SWITZERLAND
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PROSPERITY CAPITAL MANAGEMENT SICAV
General information
PROSPERITY CAPITAL MANAGEMENT SICAV (the "SICAV") publishes an annual report, including audited financial statements, within four months after the end of the business year and an unaudited semi-annual report within two months after the end of the period to which it refers.
Annual reports, including audited financial statements, and semi-annual reports provide information on each sub-fund and, on a consolidated basis, the SICAV as a whole.
The following documents are also available, free of charge, and copy thereof may be obtained at the registered office of the SICAV:
(i) the Articles of Incorporation; (ii) the annual report, including audited financial statements, and semi-annual reports of the SICAV; (iii) the Prospectus; (iv) the KIIDs; and (v) a copy of the changes in the investment portfolio for the year ended December 31, 2016
Additional information is made available by the Management Company at its registered office, upon request, in accordance with the provisions of Luxembourg laws and regulations. This additional information includes the procedures relating to complaints handling, the strategy followed for the exercise of voting rights of the SICAV, the policy for placing orders to deal on behalf of the SICAV with other entities, the best execution policy as well as the arrangements relating to the fee, commission or non-monetary benefit in relation to the investment management and administration of the SICAV.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Distribution abroad
Distribution in Switzerland
The SICAV has been authorised in Switzerland as a foreign investment fund.
Representative and The representative and paying agent in Switzerland is BNP Paribas Securities Services, Paris, Paying Agent succursale de Zurich (the "Representative"), with its registered office in 16 Selnaustrasse, CH 8002 Zurich, Switzerland.
Place of distribution of The prospectus, the Key Investor Information Documents of the sub-fund distributed in reference documents Switzerland, the Articles of Incorporation and the annual and semi-annual reports are available free of charge from the Representative in Switzerland.
The list of purchases and sales that have taken place during the financial year under review is available free of charge on request to the Representative in Switzerland.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Management report
Russian equities experienced high volatility in January, along with other markets, commodities and the ruble. The month ended with a 1.8% drop of the index. The sub-fund was 4.6% lower in the month. Our oil and gas holdings were flat in the period. The main news of the month were the government’s attempts to increase budget revenues by both increasing the pay-out for state-owned companies from 25% to 50% and increasing taxes for oil companies to the magnitude of 15% to 20% of 2016 profit. Our metals and mining companies were 6% lower on lower steel prices. Trade updates from our steel companies came in line with expectations. We added to Evraz and Norilsk Nickel from Lukoil on valuation grounds. Our retail stocks were 5% lower in the month. Dixy lost 11% on weaker than expected December sales. We expect further management changes. Magnit was flat on strong Q4 margins, while X5 was 3% lower despite decent Q4 sales. Our agro holdings were 6% lower in the month. Cherkizovo was 3% higher on an in line trade update for Q4, while MHP lost 14% despite a decent trade update for Q4. Ukraine is going through further deterioration on governance following the resignation of the liberal and trustworthy economy minister and a lack of clarity with respect to further reforms and the IMF package. We see no serious risks to MHP, which earns close to 50% of EBITDA forecast for 2016 from export operations, while risks of further political vulnerability increased. Financials lost 7%, in line with the ruble more or less, despite strong December figures from Sberbank. We met with the chairman of Tinkoff Bank and feel comfortable about the bank’s ability to earn money and we welcome the improved corporate governance as the bank will stop the expensive cycling team sponsorship from 2017. Kcell was weak in the month on poor Q4 financials, which overshadowed the high pending dividend. MTS rallied in the month for what seems to be a relief that it will not buy an Indian operator, which used to be owned by Sistema. Our power stocks were 5% lower in the month on no particular news flow. LSR (-9%) published a decent trade update for Q4 and won another large land plot auction in Moscow and we added on this weakness.
Russian equities rebounded in February. The sub-fund was 4.3% higher in the month, above the 2.6% rise of the index. Our oil and gas holdings were 7% higher in the month. Bashneft common shares performed strongly on news that the Russian State plans to privatise a controlling stake in the company in 2016. Other oil companies performed in line with the market. Gazprom was supported by the news that the Russian state may increase dividend payout to 50% from IFRS profits to cover budget deficit, which is estimated at 3% to 4% of GDP in 2016. We sold some Lukoil and Surgutneftegas and bought into underperforming retailers. Our materials holdings were 5% higher in the period, of which less-liquid Highland Gold was a notable outperformer. We took some profits in Nord Gold and made a switch into Evraz. We also added to Norilsk Nickel from sale of MTS to balance liquidity. Our retailers were flat in the period. We added 1% of the sub-fund to Magnit, which lost 9% in the period on excessive (in our view) market reaction to the January sales, which were up by 15% from the previous high base. Dixy announced the appointment of Pedro Silva, a well-respected international executive to the position of CEO, which we view positively and we added 1% of the sub-fund to the position. MD Medical rose by 45% in the month on management guidance of strong 2015 results, which are broadly in line with our forecast. Our agro holdings were 5% lower in the month. We added to MHP, which asked bondholders to remove covenants from its bond prospectus in order to pay dividends (and got it approved later in March). Cherkizovo was 6% lower in the month on no particular news. Our financials were 11% higher as both Sberbank and Tinkoff bank positively reacted to a stronger ruble. Tinkoff bank published decent Q4 IFRS financials and established a dividends policy, which we lobbied for. We took profits in selling MTS position as valuation approached fair levels vs. other stocks. Kcell rebounded from the lows, which coincided with the news that Turkcell may buy control stake in the company from Telia. Our power stocks were 6% higher in the month. MRSKs published generally in-line Q4 financials. We kept adding to underperforming LSR, which early in March proposed strong dividend and more balanced board for election.
Past performance is not an indicator of current or future returns.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Management report (continued)
The Russian market rallied in March being up by 16% in dollar terms with support both from the rising oil price and a stronger ruble. Our oil and gas holdings were 12% higher in the month. Gazprom rallied by 18%, catching up its previous underperformance, and supported by the news on a possible 50% IFRS dividend payout. Bashneft was up 11%, Surgutneftegas and Lukoil were 12% higher for the month. The Q4 financials for oil companies were generally in line with our expectations. We are waiting for the government to sell its stake in Bashneft in the autumn for a possible further value realisation. Metals and mining rallied by 17% in the month. Both Evraz and MMK produced significant gains (around 30%) and we took some profits in Evraz later in the month. Gold stocks’ performance was modest (from -8% to 9%) as well as those of Akron and Norilsk Nickel. Reported financials were in line with our expectations, except for KBTK, which continues to suffer from low coal prices. Our retail stocks were 16% higher in the month. Dixy (+25%) finally reacted to the news on the strengthening of its management team with experienced international executives which we had lobbied for. Dixy’s Q4 financials were in line with expectations. M.video rose by 22%. H2 financials were a disappointment to us, while it seems that we misunderstood the previous positive one-off impact of the weaker ruble on its gross margin, and cost control was exceptional as well as dividend policy with a 60% payout (8% yield). Magnit and X5 were in line with the market. Our agro holdings were 11% higher with MHP’s 10% DY boosting the performance. Cherkizovo was not so strong as its Q4 financials were below expectations and we are not very keen on its capex hike. Financials were 15% stronger, both from Sberbank and TCS. Q1 RAS financials provided room for some profit upgrades. Power was 18% stronger in the month as MRKSs jumped significantly, probably ahead of the government’s privatisation meeting this month. LSR also rallied in the month (+31%) as the company reported in line financials and more importantly announced a 13% dividend representing a 70% payout, in line with expectations. We were pleased to see that the controlling shareholder accepted our recommendation to the BoDs, which now includes two candidates suggested by Prosperity. Overall, the sub-fund trades at 5.5x 2016 P/E at our 45 oil and 67 ruble forecast.
The Russian market was strong in April with MSCI Russia 10/40 USD index rising by 8.5%. The sub-fund was 10.4% higher in the month. Our oil and gas holdings were 10% higher in the month. Gazprom was the big winner as Russia’s PM Medvedev offered all state-owned companies to pay 50% of international or Russian accounting (whichever is higher) profits in dividends to balance the budget. Russian oil production posted a 1.5% growth in April, lead by Bashneft, while Lukoil was disappointing as well as Rosneft and Surgutneftegas which were flat. It seems that there will be meaningful competition for a control in Bashneft, this is why the common shares rose by 15% in the month. KazMunaiGas was still a disappointment as Q1 financials were weak due to the sale to its parent company at below export netback. Our materials rose by a healthy 16%, as all materials (except for nickel) rebounded from the lows. Evraz was a champion (+60%), as well as HighlandGold (+45%). We visited MMK (+15%) in Magnitogorsk and were impressed with the management depth and capital discipline. Retail was flat in the month. M.video was strong (+19%) on above- expectations trade update for Q1, as well as Dixy, which seem to catch investor interest following recent management strengthening. Magnit disappointed as it posted weak Q1 financials, which resulted in our 10% profit cut for the year. The company showed resilient margins all last year. In the end they had to cut prices in the regions most exposed to economic weakness. As there is very little wage growth in the economy, we estimate the margin in the range of 5%. X5 in fact showed strong Q1 financials, while the stock was also not well supported. Financials rose by 14% as both Sberbank and Tinkoff showed strong Q1 profits and we raised both estimates for the year. Our agro stocks were 4% higher. MHP posted a decent trade update, while Ukrainian politics and reforms remain a challenge. Cherkizovo’s Q1 trade update showed overcapacity in the domestic poultry business, which should focus the company on costs, as we have argued for a long period of time. Rusagro, domestic agro producer, had a successful SPO for USD 250mn at 10x 2016 P/E, which we skipped.
Past performance is not an indicator of current or future returns.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Management report (continued)
The Russian market took a pause in May, being down 4.5%. The sub-fund performed better, just 2% lower in the month. Our oil and gas exposure was 5% lower in the month. Gazprom lost 13% as the actual payout for 2015 will be less than the 50% asked for by the government. We take a more constructive view on this as the company will also buy its own shares from the state-owned development bank. We count on a 50% IFRS payout going forward. Bashneft was well supported by privatisation talks and the company actually recommended a 50% payout. We took some profits in Bashneft and added to Surgutneftegas. Our cyclicals were 5% lower. MMK and Acron were supported after decent Q1 financials, while Evraz lost some of its April gains. The sub-fund sold its position in Norilsk Nickel as we think the company enters into a period of deteriorating corporate governance. We put the proceeds into FSK and Aeroflot. Retail was 3% lower as Dixy saw some profit taking despite a significant improvement in sales since the arrival of the new CEO and we view weak Q1 margins as historical information. Magnit sales were below forecast in April on what we think are company-specific issues, which is worrying. Financials had a great run in May being 11% higher. We had positive impressions from meeting with Oleg Tinkov and Tinkoff bank published a very strong Q1 result and the stock jumped by 26%. Sberbank also had a good ride on strong 4mo RAS figures suggesting faster than we anticipated margin recovery. Our agriculture investments (MHP and Cherkizovo) were 1% lower. MHP was down 2%, while Cherkizovo lost 4% on worse-than expected Q1 margins. Our power stocks were 3% higher, mainly driven by FSK’s strong performance (+19%). LSR was 6% higher in the month. We are pleased to note that the company elected two board members, suggested by Prosperity. Aeroflot was 5% higher in the month as operating data suggests continuation of market share gains.
Russian equities and the ruble took the Brexit vote in stride, with MSCI Russia 10/40 making a small loss in June. The sub-fund was 2.4% higher in June. Economy remains in no-growth zone with some modest recovery in rail shipments. Wage growth runs at 6% YoY in May, while inflation slowed down to 7.5% YoY. We are pleased to see very conservative budget projections from the finance ministry calling for flat nominal spending and no deficit in 3 years at USD45 oil. Our oil and gas exposure was flat in the month. Bashneft’s common shares were well supported by its’ privatisation expectations. Lukoil was strong (+4%) following surprisingly good Q1 financials. Cyclicals were 3% higher, driven by strength in gold price and gold stocks (HGM, Nord Gold). Evraz rebounded by 7%. Retail stocks were 3% higher on positive performance of M.video and MD Medical, while others were negative. We spent a day in Krasnodar with Magnit’s CEO, Sergei Galitsky and its top-management and feel comfortable with our investment despite temporary like-for-like slowdown and some blip in margins. X5 started a search for a new CFO to replace Elena Milinova, while we do not think this will have a serious impact on operations given the CFO’s limited operational role in X5. The Russian state Duma passed amendments to the retail law, which we see as having limited negative one-off impact on 2017 profits. Financials were 2% higher. Sberbank continues to show precrisis record monthly financials for its Russian business. Tinkoff bank delivered a very strong message on profit growth at its analyst day in Moscow. Our agriculture investments (MHP and Cherkizovo) were up 1%. Our trip to Kiev revealed no real news and we remain to be solely invested in MHP among listed Ukrainian companies. Our power stocks were 10% higher following a rally in FSK (+25%). LSR was 20% higher in the month. Aeroflot was 7% higher as operating data suggests continuation of market share gains. Overall the sub-fund trades at 5.7x 2016 P/E at our 48 USD/bbl oil and 66 ruble forecast.
Despite renewed weakness in the oil price (-15%), Russian equities held their ground, as the economy showed more signs of stabilisation. The sub-fund was 4.5% higher in July.
Past performance is not an indicator of current or future returns.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Management report (continued)
Our oil and gas stocks were 3% lower. Bashneft was 6% lower on weaker oil price. Privatisation process speeds up and it seems that there will be a serious competition for a controlling stake, sold by the government in the autumn. KazMunaiGas was higher on the back of a possible buy-back by the company, while PCM funds chose to vote against amendments to the relationship agreement with its parent state-owned company. Russian oil statistics shows decent 1.5% growth in production for 8mo with Bashneft, Gazpromneft and Tatneft being the leaders and Lukoil and Rosneft underperforming.
Our materials were 15% higher in the month with strong gains from all stocks. Q2 financials were strong for Russian steels and valuation remains cheap. Acron underperformed for unclear reasons and gold stocks were additionally boosted by rising gold prices. Our retail stocks were 8% higher in the period. Magnit rose by 9% as it posted very strong Q2 margins and held a capital markets day in Krasnodar. X5 caught up being also 9% higher on no news. Dixy showed a substantial improvement in sales in July, while the market is awaiting Q2 financials in August. M.video posted a surprising sales growth in another quarter in a row and we revised up our forecasts up. MD Medical announced the start of construction in 2 regional cities and posted a strong Q2 trade update and the share rose by 11%. Sberbank was flat despite further improvements in MoM profit statistics, while Tinkoff bank rose by a further 16%. Our agro stocks (MHP and Cherkizovo) were without movement, while both trade updates showed weaker-then expected realised chicken prices. Power stocks were 13% higher in the month as all MRSKs rallied. LSR posted above-expectations trade update for Q2 showing volume recovery by 10% to 15% and shares were 7% higher.
Russian stocks gained 4.4% in August. A lot of companies reported their Q2 results, with many beating expectations. The sub-fund was up by 5.4% in the period. Our agro stocks were flat overall (+1%). MHP posted in-line Q2 financials and provided upbeat expectations of grain yields for the 2016 harvest. Cherkizovo profits improved from the low point of Q1 as poultry prices started to increase in Russia. We added to both MHP and Cherkizovo. Finance stocks were strong (+8%) as Sberbank RAS accounts started to show pre-crisis levels as cost of funding and cost of risk contracted considerably. Tinkoff bank posted an exceptionally strong Q2 for similar reasons and we upgraded earnings for both stocks. Our metals and mining stocks were 4% lower in the period. Evraz lost 25% of its value on belowexpectations 1H financials. NLMK was flat, while MMK gained a further 11% on decent Q2 results and progress with the disposal of non- core assets. Acron was 13% higher on decent Q2 results. KBTK recovered from the lows as coal prices started to tick up. Oil and gas stocks were 2% higher in the month. Gazprom was 1% lower on proposals of higher taxation from 2017, while it also seems that the 50% IFRS pay-out will be enforced as well. Bashneft rallied further on the privatisation news flow. We added to Surgutneftegas, which underperformed. The power sector went up by 7%. FSK added a further 12% on good cost control, revealed by Q2 financials. MRSK Center was 18% higher on privatisation rumours. Our retail investments jumped by 11%. X5 rallied by 24% on aboveexpectations Q2 results. Dixy also showed better than expected Q2 profits and was 14% higher. Magnit lagged being 4% higher and we added to it. MD Medical rose by 21% on news of further regional expansion. M.video 1H profits were somewhat below expectations, while we feel comfortable with FY forecasts after we met with the CEO. LSR was 2% lower on below- forecast 1H financials. We like the CEO’s commitment to high dividend pay-out’s and the valuation remains attractive. Finally, Aeroflot posted very strong 1H financials and rose by 20%.
Past performance is not an indicator of current or future returns.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Management report (continued)
Despite some oil price volatility, the Russian ruble and stocks continued to strengthen. Election results in Russia gave a super majority to United Russia in the parliament and some more changes were made to the government and presidential administration with focus on more efficient state management. The sub-fund added 3.0% in September, being slightly ahead of the index. While official numbers still show recession, other indicators like power consumption and wage inflation, which is kicking in, show signs of recovery.
Our oil and gas stocks were 4% higher. Lukoil and KazMunaiGas outperformed, while Bashneft prefs were weaker as the market is digesting news on the possible acquisition by Rosneft. Bashneft common shares now trade at a 12% to 15% discount to an approved takeover price and prefs at a further 40% discount, which seems too high for us. Our metals and mining stocks were 6% higher as Evraz and Highland Gold rallied, while MMK was weaker on news of its CFO resignation. We met MMK’s controlling shareholder and continue to see significant free-cash flow yield in MMK and a potential to increase dividends.
Our retail stocks were 5% higher, lead by X5 in anticipation of its capital markets day. Dixy was down as its sales momentum slowed down, reflecting adjustment to assortment in stores, as a part of a repositioning strategy, which CEO, Pedro Silva discussed during our investor conference. Financials were 4% higher as Tinkoff bank jumped by 6% following the investor day and broker upgrades and Sberbank was 2% higher. Our agro stocks were lower in the month. MHP’s CFO gave a rather upbeat outlook on agriculture segment and confirmed its Vinnitsa-2 expansion plans and dividends. Cherkizovo was 3% lower on swine flu outbreak recorded on its facility. Power stocks were 2% higher in a month. LSR was 4% above in a reaction to its investor day in Moscow and its CEO, Andrey Molchanov gave a very impressive speech about company growth ambitions. Aeroflot rallied further by 21% in a response to strong 1H financials. Overall, the sub-fund trades at 6.1x 2016 P/E and 4.3x 2017 P/E.
Past performance is not an indicator of current or future returns.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Management report (continued)
The Russian equity market hardly moved in October; however, this masked the quite diverse performance of individual stocks. The sub-fund was 2% higher in the period. Oil and gas stocks were 4% lower in the month. Rosneft became the only buyer for a 60.2% stake in Bashneft, paying RUB 329bn or USD 58bn per share at todays exchange rate, which translates at 11x 2016 P/E at our forecast. Republic of Bashkiria, a holder of 25% stake in common shares and a sizeable holder of preferred shares chose not to sell and agreed in principle how Bashneft will be run. Later in the month, Rosneft also applied to FAS and CBR for a MTO in common shares at the acquisition price. We plan to tender our common shares (approx. half of the position) and we think that the preferred shares, which have the same dividend rights as common shares and now trade at a 50% discount to the takeover price, will be consolidated by Rosneft in the future. For now, they offer close to 7% dividend yield at a minimum 25% payout, guaranteed by Rosneft to Bashkiria. Nevertheless, preferred shares lost 20% on the news, while common shares rose by 9%. Surgutneftegas was also remarkably weak declining 11% for no particular reason. Gazprom and Lukoil were 3% and 1% up respectively. Metals and mining were 5% higher in the month on strong results, a dividend from NLMK (+16%) and a rally in coalrelated Evraz and KBTK. Overall, our steel stocks trade at acceptable mid-cycle multiples and attractive FCF yields despite the YTD rally. Retail was flat in the month. X5 was strong on a consistent message from its capital markets day, while Dixy lost 4% on slower sales momentum as assortment adjustment initiatives by the new management takes time to implement. Financial stocks were 8% higher in the month mainly on a further 20% re-rating of Tinkoff bank, which held an upbeat capital markets day in London. Valuation remains acceptable in our view. Sberbank posted strong RAS financials, which imply an upside to our full-year forecast on a lower cost of risk. Our agro stocks were flat in the month. Cherkizovo posted a Q3 trade update, pointing out a recovery in local poultry and pork prices, which is beneficial to the profits. MHP trade update showed the same trends in Ukraine and increased export sales, inline with our estimates. Both stocks trade at 2x to 3x normalised earnings. There was a formal explanation for a rally in MRSKs’ shares earlier in the year, they are officially planned to be privatised in the coming 3 years. Finally, worth mentioning, Aeroflot was 10% higher on a strong message from its capital markets day in Moscow.
Past performance is not an indicator of current or future returns.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Management report (continued)
The Russian market rallied by 4% in November as investors viewed the outcome of the US election and a possible OPEC deal as a positive sign for Russia. The sub-fund was 2.8% higher for the period. Our oil and gas stocks were 4% higher as Gazprom finally outperformed as well as Surgutneftegas common shares. We sold almost our entire Bashneft common shares at a slight discount to MTO price and placed the proceeds into Gazprom and Magnit. We met with the KazMunaiGas top-management to press for an extraordinary dividend as a source of value crystallisation. Our metals and mining stocks were strong in the month being 7% higher. Steel companies rose by 10% to 20% on a serious rebound in coal, iron ore and steel prices, while gold companies (Nord Gold, HGM) were lower on a falling gold price. We continue to see value in MMK, NLMK and Evraz as Russian producers clearly fall into the category of low-cost global producers and will benefit from rising global prices. Retail stocks were 1% lower in the period. The consumer environment remains sluggish with insignificant growth in nominal income, while some of the cyclical items (cars, electronics) seem to have reached the bottom and are rebounding from the lows. Magnit was 5% lower in the month as sales growth remains sluggish with zero LFL in core format. We met with the CEO, Sergei Galitsky, who stressed his focus on profitability and dividends and shared his optimism with respect to store facelifting program. X5 was flat in the period despite plans to accelerate the number of store openings in 2017. Dixy lost on a weak November trade update. We visited Ufa greenfield hospital of MD Medical together with its CEO Mark Kurtser to get a better grasp on economics of regional expansion and it seems to be on track for a 7- year payback. Financials were 4% higher as Sberbank and Tinkoff Bank rose in line with the market on multiple broker upgrades. Our agro stocks were lower. We met with Cherkizovo’s CEO, Sergei Mikhailov, to discuss the ongoing recovery in market prices for poultry and pork and pressed for better capex discipline and higher dividend payout. Our power stocks were 20% higher on rally in FSK, Enel Russia and MRKSs. We added to Enel Russia on the news of a possible divestment of its Russian business. Aeroflot posted recordhigh 9mo financials and made positive comments about a 50% IFRS payout, which translates into potentially serious double-digit dividend yield. Among other news which is worth mentioning, was an appointment of Maksim Oreshkin to the position of minister of economic development and trade of the Russian Federation. We know Maksim well from his previous roles in Finance Ministry and VTB and think that he is liberal, reform oriented and competent.
Past performance is not an indicator of current or future returns.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Management report (continued)
December price gain for Russian equities was 11.1%, making Russia the 4th best performing stock market in the world for 2016, after a brutal 2014 and lacklustre 2015. The sub-fund was 6.8% higher in December. Our retail holdings were 7% higher in the month. Magnit sales momentum disappointed, while our conversation with CEO Sergey Galitsky outlined its focus on profitability and ambitious store revamp programme, planned to refurbish store base in 4 years. X5 gave its sales guidance late in the year, which was in line with our expectations. M.video was in the centre of corporate news as it was announced that the controlling shareholder and CEO is selling its stake to Safmar, a domestic financial group at a 17% premium to the market price at the time of the announcement, which we think is a good value for the asset. Important enough, the transaction is structured in a way that minorities will get the same price as the controlling shareholder, offered through a voluntary tender offer, which was confirmed to us by the buyer, whom we met late in the month. Oil and gas stocks were 8% higher in the month. The Russian government sold a 19.5% stake in Rosneft to a consortium consisting of Glencore and QIA to fund part of the budget deficit. Our metals and mining stocks were flat in the month taking a pause after a serious rally during the year. Financials rallied further by 16% on higher oil price and stronger ruble. Sberbank provided its 2016 guidance, which was the highest absolute profit in ruble terms made by the bank in its history. Tinkoff bank was also popular, following a wave of upgrades. The power sector stocks were 6% higher in the period as MRSK Center was particularly strong. We met FSK CEO and were pleasantly surprised by its cost control, albeit dividend payout remains somewhat questionable. MHP and Cherkizovo were flat in the period and lacked any company-specific news. Aeroflot once again demonstrated strong passenger data for November and its CEO, Vitaly Saveliev, said that the company can afford paying 50% of its profits as dividends. Among other sectors, LSR was 11% higher in the month ignoring the news of CFO dismissal.
Overall, the Russian stock market performed strongly in 2016 despite negative economic growth and very high domestic interest rates, while supported by rising oil price and less political damage. We anticipate a change in economic cycle this year as inflation has come down very considerably and real rate will come down. We have almost no expectations for reforms this year, while there could be positive surprises from the work, which former finance minister Kudrin is doing for Putin in his 2018-2024 strategy.
January 2017
Established by Prosperity Capital Management (UK) Ltd
Approved by the Board of Directors of the SICAV
Past performance is not an indicator of current or future returns.
15
KPMG Luxembourg Société coopérative 39, Avenue John F. Kennedy L-1855 Luxembourg
To the Shareholders of PROSPERITY CAPITAL MANAGEMENT SICAV 15, avenue J.F. Kennedy, L-1855 Luxembourg
REPORT OF THE RÉVISEUR D’ENTREPRISES AGRÉÉ
We have audited the accompanying financial statements of PROSPERITY CAPITAL MANAGEMENT SICAV (the "SICAV"), which comprise the statement of net assets and the statement of investments and other net assets as at December 31, 2016 and the statement of operations and the statement of changes in net assets for the year then ended, and a summary of significant accounting policies and other explanatory information.
Board of Directors of the SICAV responsibility for the financial statements
The Board of Directors of the SICAV is responsible for the preparation and fair presentation of these financial statements in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the financial statements, and for such internal control as the Board of Directors of the SICAV determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Responsibility of the Réviseur d’Entreprises agréé
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. 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 judgement of the Réviseur d’Entreprises agréé, 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 Réviseur d’Entreprises agréé 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 the Board of Directors of the SICAV, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
16
Opi11io11
In our opinion, the financial statements give a true and foi r view of the financial pos1t1on of PROSPERITY CAPITAL MANAGEMENT SICAV as ofDecember31,2016. and of the results of its operations and changes in its net assets for the year then ended in accordance with Luxembourg lega l and regulatory requirements relating to the preparation of the fin ancial statements.
Other i1 1/or111a1io11
The Board of Directors of the SICA V is responsible fo r the other in fornw tion. The other in fo rmation comprises the in formatio n inelud ecl in the annual report but docs not include the finan cial statements and our report of Rev iseur er Ent repri ses agree thereon. Our opinion on the financial statements docs not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the fina ncial statements, our responsibility is 10 reac.l the other in format ion and, in doing so, consider whether the other in formation is materially inconsistent with the finan cial statements or our knowledge obtained in the audit or otherwise appears 10 be materially mi sstated. If, based on the work we have performed, we conclude that there is a material misstatement or this other information, we are required lo report this foci. We have nothing to report in this regard.
Luxembourg, April 3, 20 17 KPMG Luxembourg, Societe cooperative ;.t01et de revision agree
\R\ets
17 PROSPERITY CAPITAL MANAGEMENT SICAV
Statement of net assets as at December 31, 2016
COMBINED PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG)
EUR USD
ASSETS
Investments in securities at acquisition cost (note 2.f) 372,672,657.79 393,076,471.26 Net unrealised gain on investments 38,319,638.55 40,417,637.27 Investments in securities at market value (note 2.d) 410,992,296.34 433,494,108.53
Cash at banks (note 2.d) 14,225,979.05 15,004,850.85 Formation expenses (note 2.g) 22,175.33 23,389.43 425,240,450.72 448,522,348.81
LIABILITIES
Investment management fee payable (note 4) 359,840.86 379,542.13 Performance fee payable (note 5) 12,552,845.18 13,240,112.96 "Taxe d’abonnement" payable (note 3) 28,562.33 30,126.12 Other fees payable (note 6) 201,373.71 212,398.91 13,142,622.08 13,862,180.12
TOTAL NET ASSETS AS AT DECEMBER 31, 2016 412,097,828.64 434,660,168.69
TOTAL NET ASSETS AS AT DECEMBER 31, 2015 237,122,112.75 257,585,755.53
TOTAL NET ASSETS AS AT DECEMBER 31, 2014 149,489,761.36 181,697,451.64
The accompanying notes form an integral part of these financial statements.
18
PROSPERITY CAPITAL MANAGEMENT SICAV
Statement of operations and changes in net assets for the year ended December 31, 2016
COMBINED PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG)
EUR USD
NET ASSETS AT THE BEGINNING OF THE YEAR 237,122,112.75 257,585,755.53
INCOME
Dividends, net (note 2.h) 11,712,255.10 12,353,500.61 Other income 2,553.28 2,693.07 11,714,808.38 12,356,193.68
EXPENSES
Amortization of formation expenses (note 2.g) 19,795.54 20,879.34 Investment management fee (note 4) 3,155,546.80 3,328,312.86 Performance fee (note 5) 12,552,845.18 13,240,112.96 Depositary Bank and Central Administration fee 319,284.36 336,765.17 Audit and legal fees 98,703.54 104,107.55 Printing and publishing fees 4,644.18 4,898.45 "Taxe d’abonnement" (note 3) 90,221.47 95,161.09 Transaction fees (note 2.i) 18,248.45 19,247.55 Other expenses 800,875.08 844,722.96 17,060,164.60 17,994,207.93
NET INVESTMENT LOSS -5,345,356.22 -5,638,014.25 Net realised loss on sales of investments (note 2.e) -12,363,459.37 -13,040,358.29 Net realised gain on foreign exchange 9,860.03 10,399.87
NET REALISED LOSS -17,698,955.56 -18,667,972.67
Change in net unrealised appreciation:
- on investments 159,845,258.93 168,596,780.62
INCREASE IN NET ASSETS AS A RESULT OF OPERATIONS 142,146,303.37 149,928,807.95 Proceeds from subscriptions of shares 60,067,474.26 63,356,166.13 Cost of shares redeemed -34,330,943.12 -36,210,560.92 Revaluation difference on the net assets at the beginning of the year* 7,092,881.38
NET ASSETS AT THE END OF THE YEAR 412,097,828.64 434,660,168.69
* The difference mentioned above results from the conversion of the net assets at the beginning of the year (for the sub-funds denominated in currencies other than Euro) at exchange rates applicable on December 31, 2015 and exchange rates applicable on December 31, 2016.
The accompanying notes form an integral part of these financial statements.
19
PROSPERITY CAPITAL MANAGEMENT SICAV
Number of shares outstanding and net asset value per share
Sub-fund Class Currency Number of shares Net asset Net asset Net asset outstanding value value value per share per share per share
31.12.2016 31.12.2016 31.12.2015 31.12.2014
PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN A EUR EUR 122,197.47 104.73 63.48 53.98 PROSPERITY FUND (LUXEMBOURG) A USD USD 893,455.57 83.33 52.27 49.50 B EUR EUR 154,132.77 104.48 65.36 55.00 B USD USD 343,181.01 85.70 55.22 51.76 I USD USD 259,140.87 157.35 98.05 - R EUR EUR 1,100,888.48 111.15 68.90 57.77 RE1 EUR EUR 665,513.33 105.77 69.09 - S EUR EUR 36,611.91 125.81 75.89 64.21 X EUR EUR 412,772.71 118.13 69.85 57.91
The accompanying notes form an integral part of these financial statements.
20
PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG)
Statement of investments and other net assets as at December 31, 2016 (expressed in USD)
Description Quantity Market value (note 2) % of net assets
I. TRANSFERABLE SECURITIES ADMITTED TO AN OFFICIAL STOCK EXCHANGE LISTING OR DEALT IN ON ANOTHER REGULATED MARKET
SHARES
CYPRUS
MD MED GROUP INVESTMENT GDR 1,166,357.00 11,080,391.50 2.55 TCS GROUP HOLDING 'A' GDR 1,762,339.00 18,504,559.50 4.26
29,584,951.00 6.81
JERSEY
HIGHLAND GOLD MINING 5,845,935.00 10,157,407.06 2.34
10,157,407.06 2.34
KAZAKHSTAN
KAZMUNAIGAS EXPLORATION PRODUCTION GDR -SPONS.- 796,609.00 5,974,567.50 1.37 KCELL GDR -SPONS.- REG.S 174,958.00 584,797.12 0.13
6,559,364.62 1.50
NETHERLANDS
NORD GOLD GDR -SPONS.- 2,666,336.00 9,052,210.72 2.08
9,052,210.72 2.08
RUSSIA
ACRON 127,453.00 7,370,576.40 1.70 AEROFLOT 7,328,764.00 18,199,299.78 4.19 BASHNEFT PFD 450,285.00 8,982,294.19 2.07 CHERKIZOVO GROUP 501,916.00 6,278,025.56 1.44 CHERKIZOVO GROUP GDR -SPONS- 1,038,829.00 8,933,929.40 2.06 DIXY GROUP 3,069,279.00 13,945,361.21 3.21 ENEL RUSSIA 674,383,000.00 10,864,310.13 2.50 FGC UES 3,681,665,970.00 12,112,681.04 2.79 GAZPROM 9,641,861.00 24,004,377.15 5.52 GAZPROM ADR -SPONS.- 2,417,818.00 12,069,747.46 2.78 GROUP LSR GDR -SPONS.- REG.S 969,744.00 3,297,129.60 0.76 I.D.G.C. CENTER & VOLGA 830,180,338.00 1,992,432.81 0.46 IDGC OF CENTRE 550,809,276.00 3,894,221.58 0.90 IDGC OF SOUTH PJSC 1,425,065,773.00 1,182,804.59 0.27 KUZBASSKAYA TOPLIVNAYA COMPANY 4,209,854.00 5,812,840.11 1.34 LSR GROUP 689,653.00 10,861,248.55 2.50 LUKOIL ADR -SPONS.- 54,576.00 3,039,337.44 0.70 LUKOIL OIL COMPANY 279,427.00 15,562,303.95 3.58 M.VIDEO 3,166,005.00 19,697,521.73 4.53 MAGNIT 196,356.00 34,706,785.00 7.97 MAGNITOGORSK IRON & STEEL 41,792,041.00 22,469,490.84 5.17 MAGNITOGORSK IRON GDR -SPONS.- REG.S 1,441,055.00 10,087,385.00 2.32 NOVOLIPETSK STEEL 2,270,052.00 4,233,306.47 0.97 NOVOLIPETSK STEEL GDR -SPONS.- 276,000.00 5,140,500.00 1.18 SBERBANK OF RUSSIA ADR -SPONS.- 2,780,695.00 31,894,571.65 7.34 SBERBANK PFD 4,474,400.00 9,475,392.14 2.18 SURGUTNEFTEGAS 33,555,804.00 16,852,731.44 3.88
The accompanying notes form an integral part of these financial statements.
21
PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG)
Statement of investments and other net assets as at December 31, 2016 (expressed in USD)
Description Quantity Market value (note 2) % of net assets
SURGUTNEFTEGAZ ADR -SPONS.- 379,212.00 1,901,748.18 0.44 T PLUS PJSC 35,240,089.00 266,062.67 0.06 X5 RETAIL GROUP GDR -SPONS.- 628,864.00 20,306,018.56 4.67
345,434,434.63 79.48
SWEDEN
ENERGYO SOLUTION RUSSIA 372,565.00 422,602.37 0.10
422,602.37 0.10
UKRAINE
MHP GDR -SPONS.- -S- 1,878,651.00 16,701,207.39 3.84
16,701,207.39 3.84
UNITED KINGDOM
EVRAZ 5,015,542.00 13,517,638.02 3.11
13,517,638.02 3.11
TOTAL I. 431,429,815.81 99.26
II. OTHER TRANSFERABLE SECURITIES
SHARES
CYPRUS
MRIYA AGRO HOLDING GDR -SPONS.- 1,490,861.00 0.00 0.00
0.00 0.00
RUSSIA
ORSKNEFTEORGSINTEZ PFD 7,728.00 87,708.16 0.02
87,708.16 0.02
TOTAL II. 87,708.16 0.02
III. UNITS OF INVESTMENT FUNDS
GUERNSEY
NEW RUSSIAN GENERATION B USD 6,376,079.21 1,976,584.56 0.45
1,976,584.56 0.45
TOTAL III. 1,976,584.56 0.45
TOTAL INVESTMENTS 433,494,108.53 99.73
CASH AT BANKS 15,004,850.85 3.45 OTHER NET LIABILITIES -13,838,790.69 -3.18
TOTAL NET ASSETS 434,660,168.69 100.00
The accompanying notes form an integral part of these financial statements.
22
PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG)
Geographical and industrial classification of investments as at December 31, 2016
Geographical classification Industrial classification (in % of net assets) (in % of net assets) Russia 79.50 Oil and gas 20.36 Cyprus 6.81 Mining and steelworks 15.09 Ukraine 3.84 Food and soft drinks 11.18 United Kingdom 3.11 Banks and credit institutions 9.52 Jersey 2.34 Retail and supermarkets 9.20 Netherlands 2.08 Holding and finance companies 6.81 Kazakhstan 1.50 Public utilities 5.63 Guernsey 0.45 Transport and freight 4.19 Sweden 0.10 Food and other agricultural products 3.84 99.73 Utilities 3.50
Construction and building materials 3.26 Utilities electric 2.79 Precious metals and stones 2.08 Pharmaceuticals and cosmetics 1.70 Units of investment funds 0.45 Communications 0.13 99.73
23
PROSPERITY CAPITAL MANAGEMENT SICAV
Notes to the financial statements as at December 31, 2016
NOTE 1 GENERAL
PROSPERITY CAPITAL MANAGEMENT SICAV (the "SICAV") is a limited liability company organised as a société d'investissement à capital variable incorporated in Luxembourg on January 30, 2013 for an unlimited duration. The SICAV is subject to the provisions of the the Law of August 10, 1915 on commercial companies, as amended (the "Law of 1915"), and of Part I of the amended Law of December 17, 2010 (the "Law") relating to undertakings for collective investment.
The SICAV qualifies as an undertaking for collective investment in transferable securities under article 1(2) of the Directive 2009/65/EC, as modified. Directive 2014/91/EU of the European Parliament and the Council of July 23, 2014 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities modifying Directive 2009/65/EC was implemented in national law under the Luxembourg Law of May 10, 2016 amending the modified Law of December 17, 2010.
The Articles of Incorporation were published in the Mémorial C, Recueil Spécial des Sociétés et Associations du Grand-Duché de Luxembourg on February 18, 2013 and deposited with the Registre de Commerce et des Sociétés of Luxembourg, where they are available for inspection.
The share capital of the SICAV shall at any time be equal to the total net assets of the various sub-funds and is represented by registered shares of no par value and fully paid up. The minimum capital is EUR 1,250,000.
The SICAV has appointed FundPartner Solutions (Europe) S.A., a public limited company (société anonyme) with registered office at 15, avenue J.F. Kennedy, L-1855 Luxembourg, as its management company as of July 2, 2015. It is registered on the official list of Luxembourg management companies governed by Chapter 15 of the Law.
The SICAV provides the investors with an opportunity for investment in all types of transferable securities and/or in other liquid financial assets referred to in Article 41 of the Law through professionally managed sub-funds, which are distinguished mainly by their specific investment policy and objective, and, as the case may be, by the currency in which they are denominated or other specific features applicable to each of them.
As at December 31, 2016, the following sub-fund is available to investors:
• PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG) (denominated in US Dollar)
The following share-classes are issued as at December 31, 2016:
PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG): • A EUR • A USD • B EUR • B USD • I USD • R EUR • RE1 EUR • S EUR • X EUR
24
PROSPERITY CAPITAL MANAGEMENT SICAV
Notes to the financial statements as at December 31, 2016 (continued)
Class A and B shares are capitalisation shares and may be held by natural persons or legal entities.
The issue of Class I shares is restricted to institutional investors within the meaning of Article 174 (2) of the Law ("Institutional Investors").
Class S shares are shares with no rebate to be paid and which may be offered in certain limited circumstances for distribution in certain countries and through distributors, platforms and/or brokers/dealers who (i) have separate fee arrangements with their clients and (ii) who, at the discretion of the Board of Directors of the SICAV and/or the Global Distributor, may be considered wholesale investors (i.e. intermediaries (such as platforms) providing financial services to other financial institutions, rather than to individuals) by dealing in large volume and/or providing services to other investors. In addition, Class S shares may be offered to professional investors and/or other investors at the discretion of the Board of Directors of the SICAV and/or the Global Distributor.
Class R shares are restricted to Institutional Investors specially approved by the Board of Directors of the SICAV and/or the Global Distributor.
Class X shares are restricted to investors who are approved by the Board of Directors of the SICAV and are party to a discretionary management agreement with the Investment Manager or one of its affiliates (including any sub-fund of the SICAV).
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) General
The financial statements are prepared in accordance with generally accepted accounting principles and presented in accordance with the legal reporting requirements applicable in Luxembourg relating to undertakings for collective investment.
b) Foreign exchange translation
Assets and liabilities expressed in currencies other than the sub-fund’s reporting currency are translated into the currency of the sub-fund at the exchange rate prevailing at the reporting date.
Income and expenses in currencies other than the sub-fund’s reporting currency are translated into the currency of the sub-fund at the exchange rate prevailing on the payment date.
Resulting realised and variation on unrealised foreign exchange gains and losses are included in the statement of operations and changes in net assets.
c) Combined financial statements
The combined financial statements of the SICAV are equal to the sum of the various corresponding positions in the financial statements of each sub-fund converted into euros (EUR) at the exchange rate prevailing at the date of the financial statements.
At the date of the financial statements, the exchange rate is the following:
1 EUR = 1.054750 USD.
25
PROSPERITY CAPITAL MANAGEMENT SICAV
Notes to the financial statements as at December 31, 2016 (continued)
d) Valuation of assets
1) The value of any cash on hand or on deposit, bills and demand notes and accounts receivable, prepaid expenses, cash dividends and interest declared or accrued as aforesaid and not yet received are deemed to be the full amount thereof, unless in any case the same is unlikely to be paid or received in full, in which case the value thereof is arrived at after making such discount as the SICAV considers appropriate in such case to reflect the true value thereof;
2) Transferable securities and money market instruments which are quoted or dealt in on any stock exchange or dealt in on any other Regulated Market are, where such transferable security or money market instrument has been traded since the last Valuation Point, valued according to the following principles:
(i) Where the last trade price falls within the bid/ask spread at the applicable Valuation Point on the stock exchange or any other Regulated Market on which it is traded, such transferable security or money market instrument is valued at the last trade price; and (ii) Where the last trade price at which such transferable security or money market instrument has been traded on the applicable Valuation Day falls outside the bid/ask spread at the relevant Valuation Point on the stock exchange and any other Regulated Market on which it is traded, such transferable security or money market instrument is valued at the average of the bid and ask price at this Valuation Point;
3) Transferable securities and money market instruments which have not been traded on any stock exchange or any other Regulated Market since the last Valuation Point shall be valued at the average of the closing bid and closing ask price at which it traded most recently prior to the applicable Valuation Day. For the purpose of this provision, the reference to "closing" bid or ask price means to be the last bid or ask price of the relevant transferable securities and money market instruments at the Valuation Point on the stock exchange or other Regulated Market on which the relevant transferable securities and money market instruments traded most recently prior to the applicable Valuation Day;
4) Units or shares in undertakings for collective investments are valued on the basis of their last available Net Asset Value ("NAV");
5) Liquid assets and money market instruments are valued at nominal value plus any accrued interest or on an amortised cost basis. All other assets, where practice allows, are valued in the same manner;
6) In the event that any of the transferable securities and money market instruments held in the SICAV's portfolios are not quoted or dealt in on any stock exchange, over-the-counter market or other Regulated Market or if, with respect to transferable securities and money market instruments quoted or dealt in on any stock exchange or dealt in on any over-the-counter market or other Regulated Market, the price as determined pursuant to the above valuation rules is not representative of the fair market value of the relevant transferable securities and money market instruments, the value of such transferable securities and money market instruments is determined based on the reasonably foreseeable sales price determined prudently and in good faith by the Board of Directors of the SICAV.
e) Net realised gain/loss on sales of investments
The net realised gain/loss on sales of investments is calculated on the basis of the average cost of the investments sold.
26
PROSPERITY CAPITAL MANAGEMENT SICAV
Notes to the financial statements as at December 31, 2016 (continued)
f) Cost of investment securities
Cost of investment securities in currencies other than the sub-fund’s reporting currency is converted into the sub-fund’s reporting currency at the exchange rate applicable at purchase date.
g) Formation expenses
Formation expenses are amortised on a straight line basis over a period of 5 years.
h) Income
Dividends are recorded at ex-date. Interest is recorded on an accrual basis.
i) Transaction fees
The transaction fees represent the costs incurred by each sub-fund in connection with purchases and sales of investments.
Transactions fees include brokerage fees, bank commissions, foreign tax and other transaction fees. They are included in the statement of operations and changes in net assets.
NOTE 3 "TAXE D’ABONNEMENT"
The SICAV is not subject to taxation in Luxembourg on its income, profits or gains.
No stamp duty, capital duty or other tax are payable in Luxembourg upon the issue of the shares of the SICAV.
The SICAV is however subject to a subscription tax ("taxe d’abonnement") levied at the rate of 0.05% per annum based on its NAV at the end of the relevant quarter, calculated and paid quarterly. A reduced subscription tax of 0.01% per annum is applicable to classes of the sub-fund which are reserved to one or more institutional investors.
NOTE 4 INVESTMENT MANAGEMENT FEE
The Investment Manager is entitled to an investment management fee payable monthly by the SICAV at the following rates:
PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG) Class A : 2.50% of the NAV per annum Class B : 1.50% of the NAV per annum Class I : 1.875% of the NAV per annum Class R : 0.40% of the NAV per annum Class S : 2.00% of the NAV per annum Class X : none
27
PROSPERITY CAPITAL MANAGEMENT SICAV
Notes to the financial statements as at December 31, 2016 (continued)
When a sub-fund invests in the units/shares of other UCITS and/or other UCIs linked to the SICAV by common management or control, or by a substantial direct or indirect holding, or managed by a management company linked to the relevant investment manager, the total management fee (excluding any performance fee, if any) charged to the sub-fund and each of the UCITS or other UCIs concerned shall not exceed 2.50% of the relevant net assets under management.
NOTE 5 PERFORMANCE FEE
The Investment Manager receives, out of the portion of the NAV attributable to the Class B Shares a performance fee equal to 15% of the excess of the NAV attributable to the Class B Shares, before deduction of accrued performance fees, over the Target NAV (as defined hereunder).
The Investment Manager receives, out of the portion of the NAV attributable to the relevant R share Class, a performance fee equal to 25% of the excess of the NAV attributable to the relevant R share Class over the Target NAV of the relevant R Class (as defined hereunder) and 40% of the NAV of the relevant R Class attributable to the Threshold NAV (as defined hereunder) of the relevant R Class.
The performance fee is accrued at each Valuation Day and becomes payable on the last Valuation Day of the year. In the case of redemptions, the pro rata portion of the accrued performance fee attributable to those shares becomes payable immediately upon the Valuation Day as of which the shares are redeemed.
The Target NAV is defined as the greater of:
i) The High Water Mark NAV, which is the highest year end NAV on which performance fees were previously paid (adjusted for subscriptions and redemptions); and
ii) The NAV as at close of business on the last Valuation Day of the previous year (the "Base NAV") (adjusted for subscriptions and redemptions) plus 10% (17% in relation to Class R Shares) (such amount is calculated daily on a pro rata basis).
The Threshold NAV is:
i) nil if the High Water Mark NAV is the Target NAV;
ii) the difference between the Target NAV and the High Water Mark NAV if the High Water Mark NAV is greater than the Hurdle NAV (as defined hereunder) but less than the Target NAV; or
iii) the difference between the Target NAV and the Hurdle NAV if the High Water Mark NAV is less than the Hurdle NAV.
For the purpose of determining the Threshold NAV, the Hurdle NAV is the Base NAV (adjusted for subscriptions and redemptions) plus 15% (such amount to be calculated daily on a pro rata basis).
28
PROSPERITY CAPITAL MANAGEMENT SICAV
Notes to the financial statements as at December 31, 2016 (continued)
In order to achieve individualised performance tracking for shares issued in the respective R share Classes, the performance fee and High Water Mark NAV are calculated and allocated on Class by Class basis. Redemptions are taken into account by reducing the High Water Mark NAV and the Base NAV for each shareholder proportionally to the number of shares redeemed. The monetary value of subscriptions is added to the High Water Mark NAV and the Base NAV for each shareholder.
For shares other than Class R shares, redemptions are taken into account by reducing the High Water Mark NAV and the Base NAV proportionally to the number of shares redeemed. The monetary value of subscriptions is added to the High Water Mark NAV and the Base NAV.
For the year ended December 31, 2016, the sub-fund PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG) was charged USD 13,240,112.96 in performance fees.
NOTE 6 OTHER FEES PAYABLE
As at December 31, 2016, the other fees payable include mainly directors, administration, Management Company, depositary and audit expenses.
NOTE 7 SUBSCRIPTION AND REDEMPTION COMMISSION
A subscription fee of up to 2.5%, and a redemption fee of 0.5%, calculated as a percentage of the NAV of the shares subscribed/redeemed, may be charged by the SICAV on behalf of the relevant Class of shares (except for Class X shares) and may be payable to the Global Distributor.
Swing Pricing
If on any Valuation Day the aggregate transactions in shares of a sub-fund result in a net increase or decrease of shares which exceeds a threshold set by the Board of Directors of the SICAV from time to time for that sub-fund (relating to the cost of market dealing for that sub-fund), the NAV of the sub-fund is adjusted by an amount (not exceeding 2% of that NAV) which reflects both the estimated fiscal charges and dealing costs that may be incurred by the sub-fund and the estimated bid/offer spread of the assets in which the sub-fund invests. The adjustment is an addition when the net movement results in an increase of all shares of the sub-fund and a deduction when it results in a decrease.
Since the inception of the SICAV, the Board of Directors of the SICAV has not applied swing pricing.
Dilution
The SICAV has the power to charge a ‘dilution levy’ of up to 1% of the applicable NAV on individual subscriptions or redemptions, such ‘dilution levy’ to accrue to the affected sub-fund. The SICAV operates this measure in a fair and consistent manner to reduce dilution and only for that purpose and such dilution levy is not be applied if the swing pricing mechanism is used.
The Board of Directors of the SICAV decided on May 17, 2013 not to apply the swing pricing at least during the first year of the SICAV. Additionally, during the years ended December 31, 2014, December 31, 2015, and during the year ended December 31, 2016 the Board of Directors of the SICAV has not taken any further decision to start the application of the swing pricing.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Notes to the financial statements as at December 31, 2016 (continued)
NOTE 8 EXCHANGE RATES AS AT DECEMBER 31, 2016
The following exchange rate was used to convert the different items related to unit classes denominated in a currency other than the USD:
1 USD = 0.948092 EUR
NOTE 9 SUBSEQUENT EVENTS
No significant events occurred after the year end.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Total Expense Ratio ("TER") (unaudited appendix)
Pursuant to the Swiss Fund & Asset Management Association ("SFAMA") Directive of May 16, 2008 (hereafter "the Directive"), the "Guidelines on the calculation and disclosure of the TER", the Company is required to publish a TER for the last twelve-month period.
The TER is defined as the ratio between the total operating expenses (operating charges primarily consist of management and investment advisory fees, depositary fees, bank charges and interest, service fees, performance fees, taxes and duties) and the relevant sub-fund’s / share class’ average NAV (calculated on the basis of the daily average of the total net assets for the relevant period) expressed in its reference currency.
For the year from January 1, 2016 to December 31, 2016, the TER were the following:
Class Annualised TER including Annualised TER excluding performance fees performance fees
PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG) A EUR 2.93% 2.93% A USD 2.93% 2.93% B EUR 7.10% 1.94% B USD 6.27% 1.93% I USD 2.28% 2.28% R EUR 6.03% 0.80% RE1 EUR 11.17% 0.80% S EUR 2.46% 2.46% X EUR 0.45% 0.45%
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PROSPERITY CAPITAL MANAGEMENT SICAV
Performance (unaudited appendix)
The performance per share class was calculated by comparing the net assets per share as at December 31, 2015 with the net assets per share as at December 31, 2016.
The performance data do not take into account subscription and/or redemption fees.
Performances were the following:
Class Currency Performance Performance Performance for the fiscal year ending for the fiscal year ending for the fiscal year ending December 31, 2016 December 31, 2015 December 31, 2014
PROSPERITY CAPITAL MANAGEMENT SICAV - RUSSIAN PROSPERITY FUND (LUXEMBOURG) A EUR EUR 64.98% 17.60% -43.61% A USD USD 59.42% 5.60% -50.21% B EUR EUR 59.85% 18.84% -42.99% B USD USD 55.20% 6.68% -49.68% I USD USD 60.48% -1.95%* - R EUR EUR 61.32% 19.27% -42.23%* RE1 EUR EUR 53.09% 2.33%* - S EUR EUR 65.78% 18.19% -35.79%* X EUR EUR 69.12% 20.62% -42.09%*
* The performance of share classes launched during the year was calculated by comparing the net assets per share as at the launch date of the share class with the net assets per share as at the end of the year.
Past performance is no indication of current or future performance. The performance data do not take into account subscription and/or redemption fees.
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PROSPERITY CAPITAL MANAGEMENT SICAV
Other information to Shareholders (unaudited appendix)
1. Remuneration of the members of the Management Company
European Directive 2014/91/EU amending Directive 2009/65/EC on undertakings for collective investment in transferable securities, which is applicable to the SICAV, came into force on March 18, 2016. It is implemented in national law under the Luxembourg Law of May 10, 2016 implementing Directive2014/91/EU. Due to these new regulations, the SICAV is required to publish information relating to the remuneration of identified employees within the meaning of the Law in the annual report. The Management Company will have such remuneration-related information by the time of the next annual financial statement, so that this information will be included in the SICAV’s next annual report.
Details of the Remuneration Policy, including the persons in charge of determining the fixed and variable remunerations of the staff, a description of the key remuneration elements and an overview of how remuneration is determined, is available on the website www.group.pictet/fps. A paper copy of the summarised Remuneration Policy is available free of charge to the Shareholders upon request.
2. Securities Financing Transactions and of Reuse ("SFTR")
As at December 31, 2016, the SICAV is currently not in the scope of the requirements of the Regulation (EU) 2015/2365 on transparency of Securities Financing Transactions and of Reuse ("SFTR"). Furthermore, no corresponding transactions were carried out during the period referring to the financial statements.
3. Information on risk measurement
The global risk exposure is monitored by using the Commitment approach. In that respect, financial derivatives instruments are converted into their equivalent position in the underlying asset. The global risk exposure shall not exceed the sub-fund’s net asset value.
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