Asia Value Formula Fund SEMI-ANNUAL REPORT 2010 FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2010 Sensible Asset Management Limited 9th Floor, Nexxus Building 41 Connaught Road Central, Hong Kong Tel: (852) 2868 6848 Fax: (852) 2810 9948 Email: [email protected] Website: www.samfund.com.hk In the event of inconsistency, the English text of this Semi-Annual Report shall prevail over the Chinese text. ASIA VALUE FORMULA FUND (A Cayman Islands Unit Trust) CONTENTS Pages General information 2 Manager’s report 3-7 Statement of financial position (unaudited) 8 Investment portfolio (unaudited) 9-13 Investment portfolio movements (unaudited) 14 SEMI-ANNUAL REPORT 2 0 1 0 1 F O R T H E SIX MONTHS ENDED 30 SEPTEMBER 2 0 1 0 ASIA VALUE FORMULA FUND (A Cayman Islands Unit Trust) GENERAL INFORMATION Manager Legal Advisors Sensible Asset Management Limited With respect to Cayman Islands law 9th Floor, Nexxus Building Campbells 41 Connaught Road Central Scotia Centre, P.O. Box 884 Hong Kong Grand Cayman KY1-1103 Cayman Islands Directors of the Manager British West Indies Mr Law Ka Kin (resigned on 21 June 2010) Mr So Chun Ki Louis With respect to Hong Kong law Mr Tam Raymond Hin Tat Deacons Mr Tse Wai Ming (appointed on 28 October 2010) 5/F, Alexandra House Mr Valadao Mark Paul (resigned on 16 July 2010) 18 Charter Road Central Sub-Investment Manager Hong Kong Value Partners Limited Auditor 9th Floor, Nexxus Building 41 Connaught Road Central PricewaterhouseCoopers Hong Kong PO Box 258GT Strathvale House Directors of the Sub-Investment Manager North Church Street George Town Mr Cheah Cheng Hye Grand Cayman Mr Ho Man Kei Cayman Islands Mr So Chun Ki Louis British West Indies Trustee, Registrar, Administrator and Information available from: Principal Office Sensible Asset Management Limited Bank of Bermuda (Cayman) Limited 9th Floor, Nexxus Building PO Box 513 41 Connaught Road Central HSBC House Hong Kong 68 West Bay Road Grand Cayman KY1-1106 Telephone : (852) 2868 6848 Cayman Islands Fax : (852) 2810 9948 Email : [email protected] Registrar’s Agent and Custodian Website : www.samfund.com.hk HSBC Institutional Trust Services (Asia) Limited 1 Queen’s Road Central Hong Kong 2 SEMI-ANNUAL REPORT 2 0 1 0 F O R T H E SIX MONTHS ENDED 30 SEPTEMBER 2 0 1 0 ASIA VALUE FORMULA FUND (A Cayman Islands Unit Trust) MANAGER’S REPORT The investment objective of the Asia Value Formula Fund (“the Fund”) is to provide long-term capital growth over an investment horizon of three to five years, by investing primarily in the constituents of the MSCI Asia ex-Japan Index. However, investors should note that this is not an index tracking fund. It aims to identify undervalued securities within the Index that will benefit from the upside correction between the market’s short-term inefficiency and long-term efficiency. We are pleased to present the semi-annual report of the Fund for the six months ended 30 September 2010. Performance and market overview The Fund increased by 14.6% during the six months ended 30 September 2010, and gained 29.0% over the past twelve months. For reference, the MSCI Asia (ex-Japan) Index returned 10.9% over the six months ended 30 September 2010, and it increased by 19.8% over the past twelve months. The Fund’s out-performance compared to the MSCI Asia (ex-Japan) Index in the past six months was attributable to our good stock selection, particularly in industrials and information technology sectors, which significantly contributed to the portfolio’s return throughout the same period. We deployed cash throughout the fund performance period, as the cash level was less than 1% at the end of September, making the portfolio fully invested. During the second quarter of 2010, the Greater China and Asian markets generally weakened on the back of persistent concerns about sovereign debt risks in the Euro zone, and the unclear macro policy outlook in China. Rising geopolitical tensions in North and South Korea triggered a wave of risk aversion across the stock markets in Asia, particularly in South Korea. The Taiwanese market was also impacted by the concerns of depreciation of the Euro and weakening demand from European countries. SEMI-ANNUAL REPORT 2 0 1 0 3 F O R T H E SIX MONTHS ENDED 30 SEPTEMBER 2 0 1 0 ASIA VALUE FORMULA FUND (A Cayman Islands Unit Trust) MANAGER’S REPORT (Continued) Performance and market overview (Continued) In China, the domestic economy continued to grow at full strength, accompanied by inflationary pressure heightened by soaring property prices and food prices. To prevent inflationary stresses and spiraling property prices from causing a bubble, the Chinese government unveiled polices to control credit expansion through raising the reserve requirement ratio, and rolled out a string of strict measures to crack down on property speculation in April. In this environment, the portfolio’s investments in banking stocks were trimmed along with select consumer discretionary stocks based on valuation reasons. We added investment levels in energy and industrial sectors. At the start of the third quarter, market sentiment was generally weak as investors were concerned over the risk of a double-dip recession in developed economies. Subsequent to reports of various solid second quarter corporate earnings in the United States and Asia, the overall market has regained positive momentum. Furthermore, the likelihood that the US Federal Reserve would unveil a second round of quantitative easing triggered a strong liquidity-driven rally. Led by the globally- synchronized rally seen during September, stock markets in Greater China robustly surged, with Hong Kong, Taiwan and the South Korean markets hitting record highs for the year. During the third quarter, the South Korean market bounced back from July levels, as global risk aversion fell. South Korea’s economy strongly recovered from the economic downturn, on the back of low interest rates and robust exports, as well as capital and consumer spending. The country is showing signs of moderation in GDP growth in the third quarter, following a 7.6% year-on-year economic growth in the first half of this year. The country’s GDP is likely to grow 5.1% in 2010, according to the Bank of Korea. With the current level of growth, and lower inflationary pressures, the central bank was able to pause from raising interest rates in October. Taiwan’s recovery since 2008 has been impressive and its macro data continued to be strong as it entered the second half of 2010. Therefore, Taiwan’s 2010 GDP growth forecast was revised upward to 8.1%, according to the Consensus Economic Corporation. Additionally, the signing of the Cross-Straits Economic Framework Agreement (ECFA) boosted Taiwan’s Consumer Confidence Index in September on better economic prospects. Since the signing of the ECFA, we have seen various degrees of liberalization in the financial service sector and an increase in direct cross-Straits flights. Additionally, starting next year, China is considering an increase to the limit of the daily quota for Chinese tourists traveling to Taiwan, and allowing individuals to enter Taiwan for independent travel. Based on Hong Kong’s experience in 2004, the ‘individual travel scheme’ is very likely to provide another huge boost to consumption in Taiwan. 4 SEMI-ANNUAL REPORT 2 0 1 0 F O R T H E SIX MONTHS ENDED 30 SEPTEMBER 2 0 1 0 ASIA VALUE FORMULA FUND (A Cayman Islands Unit Trust) MANAGER’S REPORT (Continued) Market outlook We believe the market outlook remains promising. Stock market sentiment in East and Southeast Asia has improved sharply during the third quarter as the much-feared “hard landing” for the Chinese economy is looking less and less likely. The Chinese economy, which grew 9.1% last year, seems on track to grow 9.5% this year, easing to a “soft landing” of 8% to 8.5% growth next year. Meanwhile, large parts of Asia are experiencing negative real interest rates and surplus liquidity, as governments keep interest rates low and try to prevent their currencies from too much appreciation against a falling U.S. dollar. Regional economies are adjusting through rising inflation and asset prices – a setting generally positive for equities, but with clear winners and losers. Within China, the nation’s leaders are preparing the country’s 12th five-year plan, covering 2011 to 2016. The plan will be made public early next year, but don’t expect big surprises. The government can be expected to continue with efforts to promote a “harmonious society”. Look for significant new spending on “soft infrastructure” such as healthcare, education and social security, a continuing campaign to clean up the environment and further initiatives to rebalance the economy by encouraging domestic spending. Although rapid economic growth remains a priority, it is no longer the only one, and we have seen projections that Chinese economic growth in this current decade is likely to average 8% per annum, compared to 10.3% per annum during the period from 2000 to 2009. SEMI-ANNUAL REPORT 2 0 1 0 5 F O R T H E SIX MONTHS ENDED 30 SEPTEMBER 2 0 1 0 ASIA VALUE FORMULA FUND (A Cayman Islands Unit Trust) MANAGER’S REPORT (Continued) Worth mentioning In its October 2010 edition, the widely followed AsianInvestor magazine, based in Hong Kong, published a list of “The 25 Most Influential People in Asian Hedge Funds”. Mr Cheah Cheng Hye, Value Partners’ chairman and co-chief investment officer, was among those named, and was described in the AsianInvestor list as “a godfather of the Asian hedge fund industry”.