annual report 2013 - alfm · php7.43 billion. on the aggregate, the six funds comprising the alfm...

AnnuAl RepoRt 2013

1annual RepoRt 2013

ContentS

Message to Shareholders

ALFM Mutual Funds

Fund Performance Review

ALFM Peso Bond Fund

ALFM Dollar Bond Fund

ALFM Euro Bond Fund

Philippine Stock Index Fund

ALFM Growth Fund

ALFM Money Market Fund

Audited Financial Statements

ALFM Peso Bond Fund

ALFM Dollar Bond Fund

ALFM Euro Bond Fund

Philippine Stock Index Fund

ALFM Growth Fund

ALFM Money Market Fund

Board of Directors

Officers

Investment Advisor & Distributors

2

4

58111417

20

243241495765

73

74

73

2 3ALFM MUTUAL FUNDS ANNUAL RepoRT 2013

The six funds

comprising the

ALFM Mutual

Funds grew

by 49.7% in

combined net

asset value, to

PhP 68.50 billion

at end-2012 from

PhP 45.75 billion

as of end-2011.

”

Message to Shareholders

The benign inflationary environment allowed monetary policy to remain accommodative. In 2013, policy actions from the Bangko Sentral ng Pilipinas (BSP) increased liquidity in the system, beginning with three Special Deposit Account (SDA) rate cuts during the first four months of the year – 50 basis points each in January, March, and April – ultimately limiting access to SDAs in May, and a total phaseout by November. Fiscal prudence was likewise evident as the full-year revenue shortfall amounted to Php164 billion, safely below the ceiling of Php238 billion. The three major credit rating agencies (Standard & Poor’s, Moody’s, and Fitch) acknowledged these strengths, awarding the Philippines with the much-coveted investment grade credit rating.

Philippine assets showed lower returns in 2013 amid the volatility in global financial markets. The local stock market started the year on a strong note, as investors adopted a “risk-on” sentiment that generally boosted emerging market assets. The Philippine Stock Exchange Index (PSEi) soared 27.2% to a high of 7,392.20 before former US Federal Reserve Chairman Ben S. Bernanke announced in May 2013 that the US central bank would begin to cut back on its stimulus program. Following the announcement, the market fell and tested the 5,700 support level. This decline was attributed to the substantial outflows of foreign funds.Compared to an overall robust performance in 2012, the PSEi managed to end with a modest gain of 1.3% in 2013, closing at the 5,889 level.

Consequently, the Philippine peso depreciated 7.2% against the US dollar, wiping out the gains made in 2012 to close at 44.395.

Philippine local currency bonds, as represented by the HSBC local currency bond index, pared gains by as much as 15.0% in May, to end the year just 5.2% higher than the previous year. However, the local fixed income space continued to be supported by the country’s strong fundamentals, prudent fiscal management, abundant money supply, and sustained investor interest.

Moving forward, we expect the country’s fundamentals to remain solid, with GDP growth, supported by increased infrastructure outlays and continued healthy consumer spending, seen to remain above 6% for 2014. Inflation should remain manageable at below 4%, as global commodity prices remain anemic, and barring any weather-related supply disruptions. Moreover, the high level of gross international reserves affirms the strong external position of the country.

We continue to position each of the ALFM Mutual Funds to take advantage of positive trends in the Philippine and global financial markets.

The ALFM Peso Bond Fund continues to be the country’s largest mutual fund with a net asset value increasing by 38.6% from Php46.5 billion at the end of 2012 to Php66.6 billion at the end of 2013. The ALFM Peso Bond Fund registered a 4.65% net return on investment in 2013, higher by 176 basis points than its benchmark, 50% 91-day Treasury bills and 50% HSBC Local Bond Index.

The ALFM Money Market Fund, now the country’s largest money market mutual fund, dominates the money market segment with an 83% market share. Its net asset value more than doubled, from Php1.05 billion to Php2.21 billion at the end of 2013.

the Board of Directors of AlFM Mutual Funds

Romeo L. BernardoChairman

Maria Theresa Marcial-Javier Director

Sherisa P. NuesaPresident

John Philip S. OrbetaDirector

The ALFM Money Market Fund achieved a net return on investment of 1.98%, the highest yield in its segment, exceeding the 91-day T-bill benchmark by 134 basis points.

The ALFM Dollar Bond Fund, the country’s largest USD-denominated mutual fund, posted a negative 3.23% net return in 2013, underperforming its benchmark by 70 basis points. The fund’s benchmark, comprising of 50% 3-month U.S. T-bills and 50% JACI Philippines Index, was likewise negative. ALFM Dollar’s net asset value decreased by 3.5% from USD226.6 million in 2012 to USD218.67 million at the end of 2013.

The ALFM Euro Bond Fund continued to dominate the Euro bond fund segment with its 98% market share. Its net asset value increased by 5.3% from €8.63 million to €9.10 million at end-2013. The Fund achieved a net return of 0.73%, surpassing its benchmark, the 3-month German T-bills, by 72 basis points.

The ALFM Growth Fund, a mutual fund invested primarily in equities listed on the Philippine Stock Exchange, registered a net return of negative 1.71% in 2013, 285 basis points lower than its benchmark, 75% PSEi and 25% 91-day T-bills. Its net asset value grew by 25% from Php4.80 billion to Php6.01 billion at the end of 2013.

The Philippine Stock Index Fund, an index tracker fund which invests in the same issues comprising the PSEi, registered a 2.05% net return on investment in 2013. The Philippine Stock Index Fund’s net asset value grew to Php8.07 billion at the end of 2013 from Php7.43 billion.

On the aggregate, the six funds comprising the ALFM Mutual Funds grew by 41.5% in total net asset value, to Php96.96 billion at the end of 2013 from Php68.50 billion, previously. The growth can be attributed to the superior investment returns achieved by ALFM fund managers, coupled with new accounts, and additional subscriptions from you, our dear shareholders. We acknowledge as well the distributors, sales agents, investment counselors, and receiving banks which worked hand-in-hand in servicing your investment requirements.

As the Philippine economy continues to attract more investment capital from both domestic and foreign investors in 2014, we shall be constantly be vigilant for investment opportunities, striving to generate maximum returns while keeping investment risks to the minimum for your ALFM Mutual Funds. Rest assured that your Board of Directors shall be looking after the funds with professionalism, dedication, and prudence.

Mario T. MirandaDirector

The Philippines’ strong economic fundamentals continued to shine in 2013, as the country’s GDP expanded by an average of 7.2% year-on-year despite the damage caused by Typhoon Yolanda in the latter part of the year. Inflation averaged 3.0%, which was at the low end of the government’s target of 3.0% to 5.0%.


FUND NAME

PESO-DENOMINATED FUNDS

Base Currency

Minimum Initial Investment and Maintaining Balance

Minimum Additional Contribution and Partial Redemption

Management and Advisory Fee

Minimum Holding Period

EarlyRedemption Fee

Custodian Bank

THE FUND AT A GLANCE

Philippine Peso

PhP 10,000.00

PhP 1,000.00

1.5% p.a.

180 days

1.0% flat

HSBC

ALFM Peso Bond FundThe largest mutual fund in the Philippines

The ALFM Peso Bond Fund continued in its position as the most dominant mutual fund in the Philippines. The Fund further increased its market share of the Peso bond mutual fund segment to 77.6% from 75.2% as of December 31, 2013. It is the only mutual fund in the country that provides free life insurance coverage to its eligible primary investors. The coverage is a fixed amount of Php200,000 for each eligible primary investor maintaining at least a Php100,000 investment in the Fund.

The Fund was launched to the investing public in January 1999 and has grown to become the market leader and the most popular mutual fund in the country. The investment objective of the Fund is to generate a steady stream of income through investments in a diversified portfolio of high-grade fixed income securities issued by the Philippine government and by prime Philippine corporations.

History The ALFM Peso Bond Fund, Inc. was originally incorporated as Ayala Life Filipino Income Fund, Inc. on July 18, 1997. It started with an initial authorized capital stock of Php200 million, consisting of 200,000,000 common shares with a par value of Php1.00 per share.

On August 21, 1998, the Fund was renamed Ayala Life Fixed Income Fund, Inc. (ALFM) and its authorized capital stock was increased to Php1.0 billion, consisting of 10,000,000 shares and the new par value of Php100.00 per share. Due to the continuous strong demand for the Fund’s shares, the Fund has had ten increases in its authorized capital stock.

On November 16, 2006, shareholders approved the change in the Fund’s name to ALFM Peso Bond Fund, Inc. The SEC approved the new name on February 26, 2007.

The Fund’s authorized capital stock currently stands at Php34.0 billion, consisting of 340,000,000 shares with a par value of Php100.00 per share.

Investors’ No. 1 Choice Thousands of investors have discovered the convenience and simplicity of investing in the ALFM Mutual Funds. In 2011, investing became even more affordable with the lowering of the minimum investment amounts.

Investors can create their own diversified investment portfolio by investing in several funds with varying amounts depending on their tolerance for investment risk. For the appropriate mix that is suitable to you, you may contact your mutual fund sales agent who is prepared to advise you on the benefits, risks, and features of mutual funds investing*.

Come closer to achieving your financial goals! Invest in the ALFM Mutual Funds.

AlFM Mutual Funds – your wealth management products.

*Mutual funds are registered with the Securities and Exchange Commission as open-end investment companies and thus, are not bank deposit products. They are not guaranteed by the Fund Manager nor by the Philippine Deposit Insurance Corporation. Past investment performance is not indicative of future results.

FUND TYPE MINIMUM INVESTMENT AMOUNT

FOREIGN CURRENCY-DENOMINATED FUNDS

ALFM Peso Bond Fund Bond Fund Php10,000Philippine Stock Index Fund Equity Fund Php10,000ALFM Growth Fund Equity Fund Php10,000ALFM Money Market Fund Money Market Php10,000

ALFM Dollar Bond Fund Bond Fund USD500ALFM Euro Bond Fund Bond Fund €500

About AlFM Mutual Funds

77.6% Market share of ALFM Peso Bond Fund in the peso mutual fund bond segment

PESO CURRENCY-DENOMINATED FUNDS

INCREASES IN AUTHORIZED CAPITAL STOCK

Increase # Authorized Capital Stock Date of SEC Approval

1 10,000,000 shares August 21, 19982 20,000,000 shares December 15, 19993 50,000,000 shares June 13, 20004 70,000,000 shares January 16, 20025 90,000,000 shares June 20, 20026 120,000,000 shares November 15, 20027 170,000,000 shares October 17, 20038 200,000,000 shares April 18, 20059 268,000,000 shares September 2, 200510 340,000,000 shares October 17, 2005


NET ASSET VALUE In billions PhP

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

32.733.6

30.0 29.2

21.6 22.6 22.325.0

30.2 31.5 33.0

39.6

45.7

MATURITY PROFILEAs of 31 December 2013

28%More than 5 years

52%1-5 years

20%Less than 1 year

ALFM PESO BOND FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund Benchmark: 50% 91-day Treasury Bill and 50% HSBC Philippines Total Currency Bond Index, net of tax

Dec-08 Mar-10

250

225

300

275

325

Jun-11 Sep-12 Dec-13

The Fund ManagerBPI Investment Management, Inc. (BPI Investment) is the Fund Manager 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 and Exchange Commission (SEC) 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. The Fund’s Investment Advisor is the Bank of the Philippine Islands - Asset Management and Trust Group (BPI Asset Management).

Financial Environment Most will remember 2013 as the year when US Federal Reserve Chairman Ben Bernanke announced that the central bank was considering to scale back its US$85 billion-a-month bond-buying program, known as Quantitative Easing. This idea caused widespread panic in financial markets as investors anticipated tightening global liquidity levels, which would in turn push yields back to their historical norms. Concerns over the growth trajectory of Emerging Markets in view of their persistent structural issues further exacerbated the selloff.

Though not without volatility, 2013 was still a relatively good year for Philippine local currency bonds as yields declined by an average of 42 basis points across the curve. More importantly, it would be remembered as

the year of credit rating upgrades, as all three major rating agencies — Standard & Poor’s, Moody’s, and Fitch — upgraded the country’s sovereign credit rating to investment grade. These upgrades were given on the back of the government’s prudent fiscal management and political stability amid a backdrop of slow global economic growth and record low interest rates.

The Investors’ No. 1 ChoiceThe high domestic liquidity helped boost growth in the mutual fund industry, which grew by Php60.7 billion or 41.5% in 2013. For its part, the peso bond fund segment grew by Php29 billion or by 48% over the previous year’s level, with the aggregate fund value reaching Php90.4 billion by yearend. Your ALFM Peso Bond Fund grew by Php24.4 billion, or 53.4%, higher than the industry growth rate.

Profitable operationsThe Fund’s total income for the year was significantly higher at Php4.04 billion compared to just Php3.30 billion in 2012. The Fund registered gains on financial assets at fair value through profit or loss of Php1.52 billion in 2013. The large improvement came primarily from the increase in fair value gains on current holdings due to the sharp decline in interest rates in 2013. Total expenses stood at Php1.18 billion, accounted for by higher management fees due to the Fund’s net asset value growth, as well as documentary stamp taxes on new subscriptions, compared to Php689.7 million in 2012.

PORTFOLIO COMPOSITIONAs of 31 December 2013

40.29%Government Securities - Long-term

28.75%Government Securities - Medium-term

1.74%Preferred Shares

0.75%Index Bond Fund

8.28%Cash and Receivables

8.23%Corporate Notes

11.97%Corporate Bonds

Solid fund performance In terms of investment performance, your Fund gave a return on investment (ROI) for full-year 2013 of 4.65%, net of fees and taxes, 176 basis points higher than its benchmark return of 2.89%. The Fund’s NAVPS appreciated by Php13.96, increasing from Php299.80 per share at the end of 2012 to Php313.76 by year-end 2013. The Fund’s NAVPS experienced volatility of less than 1.3%, significantly lower than the peso bond index volatility of 4.07%.

Portfolio mixThe Fund continued to remain well diversified in 2013 with 69.0% of the Fund’s portfolio invested in government securities, 20.2% in corporate loans and receivables, 1.7% in preferred shares, 0.7% in an index bond fund, and 8.3% in cash and money market instruments. Corporate loans and receivables will continue to be a major investment of the Fund as we look to participate in corporate issuances given the prospect of yield enhancement and diversification.

Outlook for 2014The local market may come under pressure as global interest rates are seen to rise in the next year given the winding down of the FED’s Quantitative Easing (QE) Program and ultimately rising policy rates in the US and in the Philippines. Inflation may experience a spike in 2014, though it will likely remain within the target of the BSP, given proactive moves of the Monetary Board. Nonetheless, the Fund will continue to use its active management of duration, yield curve positions and credit exposure to capitalize on the possible volatility within the year.

24.4

Jun-06

74.370.2

Jun-13 Dec-13

45

35

65

55

75

25


AlFM Dollar Bond FundThe Leader in US$-Denominated Bond Mutual Funds

The ALFM Dollar Bond Fund is an open-end investment company (mutual fund) denominated in U.S. dollars. As of December 31, 2013, its share of the US$-denominated bond fund segment grew further to 66.6%, from 60.9% the previous year. It is the largest fund in its segment. Its fund value declined slightly from the previous year’s figure of USD222.40 million, settling at US$215.27 million as of December 31, 2013. The primary investment objective of the Fund is capital preservation with returns and inflows derived out of investments in primarily foreign currency denominated investment instruments which can provide the Fund with a steady stream of fixed income. In line with this objective, the Fund invests in a diversified portfolio of U.S. dollar-denominated fixed income securities issued by the Philippine government and major foreign governments, as well as by prime Philippine and foreign corporations and financial institutions.

History ALFM Dollar Bond Fund, Inc. was originally incorporated as Far East Fund, Inc. on October 23, 1993 to engage primarily in the business of investing, reinvesting and trading of securities and to operate as an open-end investment company (mutual fund). The Fund started its operations on May 10, 1999.

On November 16, 2000, the SEC approved the conversion of the Fund’s authorized capital stock of Php200.0 million, from 200,000,000 common shares of Php1.00 par value into an equivalent 2,000,000 common shares of Php100.00 par value. On December 12, 2001, the SEC approved the change in the Fund’s name from Far East Fund, Inc. to Far East Dollar Bond Fund, Inc.

Currently, the Fund has an authorized capital stock of Php6.79 billion, consisting of 679,000 common shares of Php10,000.00 par value.

Fund ManagerBPI Investment Management, Inc. (BPI Investment) is the Fund Manager and is responsible for formulating and executing the Fund’s investment strategy.

NAV marks new highALFM Dollar Bond Fund’s net asset value (NAV) declined by 3.22% to USD218.94 million as of December 31, 2013, a marked difference from the growth rate of 32.7% recorded in 2012. In spite of this, the Fund solidified its No. 1 ranking in the USD-denominated bond fund segment with its 66.6% market share.

Base Currency





EarlyRedemption Fee

Custodian Bank


US Dollar

USD 500.00

USD 100.00

1.25% p.a.

180 days

1.0% flat

HSBC

66.6% Market share of ALFM Dollar Bond Fund in the US dollar-denominated bond fund segment

Volatile year ALFM Dollar Bond Fund underperformed versus its benchmark. The Fund gave a full-year return of negative 3.23%, 70 basis points lower than its blended benchmark of 50% 3-month U.S. Treasury Bills and 50% JACI Philippines Index return of negative 2.53%. The underperformance was brought about by the shift in portfolio flows from emerging markets to the developed markets. However, active management of the duration of the Fund made it less vulnerable to price volatilities and market uncertainties caused by this general risk-off sentiment in the financial markets.

Yields of U.S. dollar-denominated sovereign (Republic of the Philippines) bonds increased by 94 basis points for the year, which was reflective of investors’ move from emerging markets to developed markets. This risk-off sentiment was sparked by comments of then U.S. Federal Reserve Chairman Ben Bernanke that hinted at tapering their Quantitative Easing (QE) stimulus. This QE stimulus called for the Federal Reserve to purchase US Treasuries and Mortgaged-Backed Securities at the pace of USD85 billion a month. The idea caused widespread panic in financial markets as investors anticipated tightening global liquidity levels, which would in turn push yields back to their historical norms.

On the local front, positive Philippine economic fundamentals remain to be supportive of ROP bond prices despite the uncertainties in other global markets.


36%Philippine Sovereign Bonds

28%Philippine Corporate Bonds

1%Offshore Mutual Funds

1%Supranational Bonds

15%Deposits and other receivables

6%Asia-Pacific Sovereign Bonds

2%US Corporate Bonds

1%US Sovereign Bonds

2%Bond Funds

8%Asia-Pacific Corporate Bonds

NET ASSET VALUE In millions USD

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

123.3

136.0

107.0 107.4115.5128.7

154.1164.2

167.6191.4

222.3 225.1 215.2

Dec-13Jun-12

100

50

200

150

250


1 540,000 shares January 21, 20042 600,000 shares February 27, 20063 679,000 shares June 05, 2013





1%US Sovereign Bonds

15%Deposits and Other Receivables

Base Currency





EarlyRedemption Fee

Custodian Bank


Euro

€ 500.00

€ 100.00

0.75% p.a.

180 days

1.0% flat

HSBC

98.3% Market share of ALFM Euro Bond Fund in the Euro-denominated bond fund segment

AlFM euro Bond FundThe Dominant Euro-Denominated Bond Fund

The ALFM Euro Bond Fund is an open-end investment company (mutual fund) denominated in the Euro currency.

As of December 31, 2013, its market share of the Euro-denominated bond fund segment increased to 98.3%, from 97.8% the previous year. The investment objective of the Fund is capital preservation with returns and inflows derived out of investments in primarily foreign currency denominated investment securities which can provide the Fund a steady stream of fixed income.

History The ALFM Euro Bond Fund, Inc. was originally incorporated as ALFM Euro Fund, Inc. on August 5, 2005 to operate as an open-end investment company under the Investment Company Act of 1960 (Republic Act No. 2629). The Fund’s initial authorized capital stock was Php200.0 million, consisting of 20,000 common shares with a par value of Php10,000 per share. It is the first fund in the Philippines incorporated with the Euro as the operating currency at inception.

On September 6, 2005, the SEC approved the change in the Fund’s name from ALFM Euro Fund, Inc. to ALFM Euro Bond Fund, Inc.

The Fund’s authorized capital stock currently stands at Php800.0 million, consisting of 80,000 common shares at Php10,000.00 par value.

ALFM DOLLAR BOND FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund

Dec-08 Mar-10

320

350


380

410

290

Operating performanceSubscriptions to ALFM Dollar Bond Fund, along with the Fund’s interest income, were invested primarily in U.S. dollar-denominated securities issued by the Philippine government, Philippine corporates and short-term money market placements, amidst market cautiousness brought about by the Federal Reserve’s comments on QE tapering.

By the end of 2013, the ROP portion comprised 36% of the Fund. This was followed by Philippine corporate bonds which comprised 28% of the Fund. The rest of the Fund’s portfolio was invested in securities issued by the United States, supranational institutions, Asian sovereigns and quasi-sovereign bonds.

The Fund decreased its duration in order to reduce the volatility of the portfolio. Duration stood at 4.31 by the end of 2013, as compared to 5.83 at the end of the previous year. This strategy enabled the Fund to outperform its competitors. The NAVPS still decreased though by 3.23%, from USD 398.11 at the end of 2012 to USD 385.25 at the end of 2013.

Market outlook In 2014, we remain to be bullish on the Philippine economy and will cautiously add duration to the Fund by purchasing longer-dated ROP bonds whenever we deem appropriate. This bullish view was validated by the investment grade status bestowed upon the Philippines by all three major credit ratings agencies last year. We expect volatility in the bond markets although we remain to be optimistic on global bond prices. Investors of the Fund should be ready to withstand volatility and pursue a medium-to-long-term investment perspective.

Between 1-3 years

Between 7-10 years

Between 5-7 years

Cash and less than 1 year

17.83%

9.75%


10.81%

15.38%

23.61%

22.61%

Between 3-5 years

More than 10 years

Benchmark: 50% 3-month U.S. Treasury Bill and 50% JP Morgan Asia Credit Phils. Total Return Index

28%Philippine Corporate Bonds

1%Offshore Mutual Funds

2%Bond Funds

6%Asia-Pacific Sovereign Bonds






1 50,000 shares October 13, 20062 80,000 shares May 30, 2007


5.9% Increase in Net Asset Value (NAV) in 2013

ALFM EURO BOND FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund Benchmark: 3-month German Treasury Bill

Dec-08 Mar-10

165

155

185

175

195






7%European Corporate Bonds

8%European Sovereign Bonds

8%Deposits and Other Receivables


The Fund ManagerBPI Investment is the Fund Manager and is responsible for formulating and executing the Fund’s investment strategy.

Recovering Euro Bond Fund SegmentThe Net Asset Value (NAV) of ALFM Euro Bond Fund grew by 5.9% in 2013, coming from a contraction of 20% in 2012. As of December 31, 2012, its NAV stood at €9.09 million, cornering 98.3% of the Euro-denominated bond fund segment while its lone competitor took up the remaining 1.7%.

Fund PerformanceThe Fund continues to have the ROP-Euro bond due in 2016 as its major holding comprising 48% of its portfolio. The Fund returned 0.73% in 2013, higher than the 0.01% yield of the benchmark 3-month German Treasury Bill as of year-end.

Asset AllocationSubscriptions 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 bonds issued by the Federal Republic of Germany and by France.

By the end of 2013, Philippine Euro denominated bonds comprised 48% of the Fund’s investments while 12% of the Fund was invested in supranational bonds. The remaining 40% was invested in Asia-Pacific, European and US corporate bonds, and European sovereign bonds and short-term money market placements, given our defensive strategy.

The Fund maintained its low duration in order to reduce the volatility of the portfolio. Duration stood at 3.12 by the end of 2013 compared to 3.08 at the end of 2012.

Market Outlook In 2014, we remain to be quite bullish on the Philippine economy and will cautiously add duration to the Fund by purchasing longer-dated bonds whenever we deem appropriate. This bullish view was validated by the investment grade status bestowed upon the Philippines by all three major credit ratings agencies last year.

We expect volatility in the ROP bond markets though we remain to be optimistic on global bond prices. Investors of the Fund should be ready to withstand volatility and pursue a medium- to long-term investment perspective.

NET ASSET VALUE In millions EUR


5.265.88

7.39 7.53

5.77 5.89

6.18

7.64

8.628.00

7.00

7.568.51

0.75

3.18

Dec-05 Jun-06 Jun-13 Dec-13

7.28

9.02

64.66%

Between 1-3 years

Between 7-10 years

Between 5-7 years

Cash and less than 1 year 7.90%

18.97%

8.47%


64.66%

4

2

8

6

10


philippine Stock Index FundA Mirror of the Philippine Stock Exchange Index

Base Currency





EarlyRedemption Fee

Custodian Bank


Philippine Peso

PhP 10,000.00

PhP 1,000.00

1.5% p.a.

180 days

1.0% flat

HSBC

The Philippine Stock Index Fund (PSIF) is an open-end investment company or (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.

Its investment objective is to mimic the performance of the PSEi. It is an index tracker fund that fully replicates the PSEi. As of December 31, 2013, its Net Asset Value reached a new high of Php8.08 billion, representing a growth of 10.68% over the previous year-end’s Php7.30 billion.

The Fund was launched to the investing public in February 2003.

History The Philippine Stock Index Fund Corp. was originally incorporated as Philippine Index Fund Corp. on December 11, 2002 with an authorized capital stock of Php200.0 million, consisting of 2,000,000 common shares with a par value of Php100.00 each. As an open-end investment company established under the Investment Company Act of 1960 (R.A. No. 2629), the Fund is engaged in the sale of its shares and in the investment of the proceeds of this sale into the component securities comprising the PSEi.

Currently, the Fund’s authorized capital stock stands at Php2 billion, consisting of 20,000,000 common shares with a par value of Php100.00 each.

Fund ManagerBPI Investment is the Fund Manager and is responsible for executing the Fund’s investment strategy.

Consistent Performance

Php2.0BCurrent authorized capital stock of the Philippine Stock Index Fund

PSIF’s net asset value (NAV) amounted to Php8.08 billion as of end-2013. The NAV increased dramatically by 10.68% from Php7.30 billion as of end-2012. The upbeat investor sentiment and changing investor risk profiles from conservative to aggressive contributed to the Fund’s growth in terms of new subscriptions. The PSEi grew by 0.98% in 2013.

PSEi – A Top Performer in the RegionPSIF’s NAV rose in tandem with the PSEi, sustaining its parallel performance with the Philippine stock market benchmark since inception. Major indices of the Holding (+5.41%) and Services (+8.20%) sectors outperformed the PSEi in 2013 while Property (-4.30%), Financial (-6.42%), Industrial (-2.11%), and Mining and Oil (-38.59%) underperformed on the back of the possible tapering (quantitative easing) of the monthly bond purchases of the Federal Reserve, which posed the risk of higher rates and an economic slowdown.

Operating performanceAs of end December 2013, PSIF’s NAV per share stood at Php655.06, up 2.05% increase from 2012’s Php641.90.

Total assets of the Fund amounted to Php8.172 billion, an increase of 7.29% from Php7.617 billion in assets reported in 2012. Subtracting liabilities of Php95.782 million, net assets amounted to Php8.076 billion, showing a 8.71% increase from the Php7.429 billion in 2012.

The growth in net assets was primarily a result of new subscriptions to the fund in 2013. Revenues totaled Php115.7 million in 2013 or a 90.44% decrease from the Php1.211 billion in 2012, due to losses on financial assets at fair value. Net loss on financial assets at fair value through profit or loss amounted to Php131 million from a net gain of Php1.12 billion in 2012.

In 2013, management fees rose to Php150.815 million from P61.944 million in 2012. Total expenses for 2013 is at Php162.819 million, 112.14% higher than the Php76.751 million registered the previous year.

In 2013, the Fund registered a net loss of Php47.119 million compared to 2012’s net gain of Php1.134 billion.


2,3342,455

3,224

1,935

1,426

2,518 2,531

2,310

2,7592,933

2,458

3,738

7,298

NET ASSET VALUE In millions PhP


10,216

8,077

Jun-13 Dec-13



1 5,000,000 shares February 15, 20032 6,800,000 shares September 5, 20063 14,680,000 shares September 13, 20074 20,000,000 shares July 12, 2013



7%Utilities

14%Communications

15%Property

10%Consumer

14%Banks

33%Holding Firms

4%Transportation

2%Mining and Oil

Base Currency





EarlyRedemption Fee

Custodian Bank


Philippine Peso

PhP 10,000.00

PhP 1,000.00

2.0% p.a.

180 days

1.0% flat

HSBC


PhP3.6BCurrent authorized capital stock of ALFM Growth Fund

Market Outlook2014 is likely to be driven by continued flows from emerging markets to developed markets, particularly to North Asia (South Korea, Taiwan). These countries are particularly leveraged to the recovery in the US market. Market players will still be watching out for upcoming data releases in the US, particularly GDP numbers, nonfarm payroll, and the unemployment rate. The decision of gradual tapering will still be very much data dependent. The announcement of Janet Yellen as the new Fed Chairman is viewed positively as this would mean a more dovish stance. QE tapering should not affect markets as much as it did in 2013, especially with strengthening of forward guidance.

Some possible risks in 2014 would include China’s hard landing, disappointing developments on the pace of US economic recovery, Philippine inflation surprises on the upside, geopolitical risks in Thailand, and the escalation of territorial disputes in Asia. Continued issues in peer markets will continue to drag down the Philippines along with it. Indonesia still has its current account deficit issue while Thailand has political concerns.

AlFM Growth FundA Mutual Fund Primed for Growth

ALFM Growth Fund is an open-end investment company or (mutual fund) denominated in Philippine pesos. It was launched to the investing public in January 2009. The Fund’s investment objective is to provide long-term capital appreciation through investment in a diversified portfolio of equity and fixed income securities. Under normal market conditions, the Fund invests at least 75% of its net asset value in equity securities and the remainder in fixed income securities.

Due to the aggressive nature of the Fund, ALFM Growth Fund best caters to investors who are aware of the risks in investing in stocks and who can tolerate interim price volatilities in exchange for long-term capital growth. The Fund’s Net Asset Value (NAV) was recorded at PhP6.02 billion as of December 31, 2013, growing by 25.2% from PhP4.81 billion as of December 31, 2012.

History ALFM Growth Fund, Inc. was incorporated on November 26, 2007 with an authorized capital stock of PhP400.0 million, consisting of 4,000,000 common shares with a par value of PhP100.00.

As an investment company established under the Investment Company Act of 1960 (R.A. No. 2629), the Fund is engaged in the sale of its shares and in the investment of the proceeds of this sale into equity and fixed income securities.

The Fund’s authorized capital stock currently stands at PhP3.6 billion, consisting of 36,000,000 common shares with a par value of PhP100.00 per share.

PHILIPPINE STOCK INDEx FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund PSEi

Dec-08 Mar-10

320

150

660

490

830


1%Gaming



1 10,000,000 shares February 15, 20102 20,000,000 shares January 19, 20113 30,000,000 shares December 21, 20114 36,000,000 shares February 25, 2013

Fund ManagerBPI Investment is the Fund Manager and is responsible for formulating and executing the Fund’s investment strategy.

Sophisticated Market SegmentALFM Growth Fund’s NAV has grown steadily from Php110 million as of Dec. 31, 2007 to Php6.02 billion as of December 31, 2013. The Fund is a suitable investment product for investors who seek an actively managed fund focusing on equity securities.


Surpassing the benchmarkALFM Growth Fund’s net asset value per share (NAVPS) has consistently outperformed the Fund’s benchmark which is a composite of 75% PSEi and 25% 91-day T-Bills.

Operating performanceAs of end December 2013, ALFM Growth’s trading net asset value (NAV) per share stood at Php217.56, down 1.71% compared to the end-December 2012 level of Php221.35. The decrease in NAV per share can be attributed to the Fund’s overweight position in some equities that underperformed for the year.

Total assets of the Fund amounted to Php6.080 billion as of end-2013, an increase of 25.91% compared to the Php4.828 billion as of end-2012. Net assets amounted to Php6.016 billion, up from Php4.805 billion in 2012.

Revenues registered at negative Php104.25 million in 2013, down by Php612.79 million from Php508.541 million in 2012. Net loss on financial assets at fair value through profit or loss was at Php223.630 million in 2013 from a net gain of Php452.220 million in 2012 due to increase in unrealized losses from equity investments during the year. Total expenses amounted to Php144.533 million in 2013, compared to Php84.04 million the previous year.

Management fees of Php131.565 million, and other expenses of Php12.968 million representing payment for documentary stamps and audit fees made up the bulk of the expenses in 2013. These resulted to a net loss of Php249.996 million in 2013 compared to a net income of Php423.653 million in 2012.


Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

11085 75

154

655

953

2,246

2,614

2,218

3,616

4,806


13.94%Financials

20.68%Holding firms 4.55%

Transportation

7.71%Industrials

11.66%Food

20.94%Property

5.14%Mining

Market Outlook 2014 is likely to be driven by continued flows from emerging markets to developed markets, particularly to North Asia (South Korea, Taiwan). These countries are particularly leveraged to the recovery in the US market. Market players will still be watching out for upcoming data releases in the US, particularly GDP numbers, nonfarm payroll, and the unemployment rate. The decision of gradual tapering will still be very much data dependent. The announcement of Janet Yellen as the new Fed Chairman is viewed positively as this would mean a more dovish stance. QE tapering should not affect markets as much as it did in 2013, especially with strengthening of forward guidance.

Some possible risks in 2014 would include China’s hard landing, disappointing US recovery, a higher-than-targeted Philippine inflation, geopolitical risks in Thailand, and escalation of territorial disputes in Asia.

Continued issues in peer markets will continue to drag down the Philippines. Indonesia still has its current account deficit issue while Thailand has political concerns.

We are still employing a bottom-up approach to stock selection given current market swings. Favored sectors include consumer (due to resilient remittances and rising per capita income) and real estate (driven by improved affordability, financial system liquidity, and the current negative real interest rate environment which supports the property sector).

We are also looking at companies that will benefit from the expected USD appreciation. Some mergers and acquisitions may possibly happen in the banking sector heading towards 2015 in preparation for the ASEAN integration.

Dec-13

ALFM GROWTH FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund Benchmark: 75% PSEi and 25% 91-day Philippine Treasury Bill

Dec-08 Mar-10750

375

3,000

1,500

Jun-11 Sep-12

5,000

6,9016,017

Jun-13 Dec-13

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10


AlFM Money Market Fund The Largest Money Market Mutual Fund

The ALFM Money Market Fund was launched to the investing public in December 2009 as an alternative investment product for investors seeking short-term investment outlets. The Fund is now the largest among the four funds comprising the money market fund segment, with a commanding market share of 83.1% as of December 31, 2013, growing from 66.1% market share as of the previous year-end. The investment objective of the Fund is to seek capital preservation and stable income from a diversified portfolio of money market instruments and bonds with a portfolio duration of less than one.

History The ALFM Money Market Fund, Inc. is a domestic corporation duly authorized to operate as an open-end investment company (mutual fund). The Fund was incorporated on October 19, 2009 with an authorized capital stock of Php20.0 million consisting of 2,000,000 common shares with a par value Php10.00 per share. The Fund was organized to engage in the sale of its shares and in the investment of the proceeds of this sale into a diversified portfolio of bonds and money market instruments.

The Fund’s authorized capital stock currently stands at Php200.0 million consisting of 20,000,000 shares with a par value of Php10.00 per share.

Base Currency





EarlyRedemption Fee

Custodian Bank


Philippine Peso

PhP 10,000.00

PhP 1,000.00

0.75% p.a.

30 days

1.0% flat

HSBC

Php200MCurrent authorized capital stock of the ALFM Money Market Fund

Fund ManagerBPI Investment is the Fund Manager and is responsible for formulating and executing the Fund’s investment strategy.

Attracting New Investors The ALFM Money Market Fund’s Net Asset Value (NAV) as of December 31, 2013 breached the Php2.0-billion mark for the first time as it settled at Php2.5 billion. This represents a spectacular growth rate of 145% from the Php1.05 billion level as of the previous yearend. It is now the largest fund in the money market fund segment. Investors who prefer 30-day tenors and those who want to avoid the hassle of monthly roll-over documentation have been shifting their investments to the Fund.

Market Review Most will remember 2013 as the year when US Federal Reserve Chairman Ben Bernanke announced that the central bank was considering to scale back its US$85 billion-a-month bond-buying program, known as quantitative easing. This idea caused widespread panic in financial markets as investors anticipated tightening global liquidity levels, which would in turn push yields back to their historical norms. Concerns over the growth trajectory of Emerging Markets in view of their persistent structural issues further exacerbated the selloff.

Though not without volatility, 2013 was still a relatively good year for Philippine local currency bonds as yields declined by an average of 42 basis points across the curve. More importantly, it would be remembered as the year of credit rating upgrades, as all three major rating agencies — Standard & Poor’s, Moody’s, and Fitch — upgraded the country’s sovereign credit rating to investment grade. These upgrades were given on the back of the government’s prudent fiscal management and political stability amid a backdrop of slow global economic growth and record low interest rates.

145% Increase in Net Asset Value (NAV) in 2013

Fund PerformanceThe fund’s total assets grew to Php2.56 billion from 2012’s Php1.05 billion. Correspondingly, total income increased to Php38.87 million from 2012’s Php28.11 million. The main driver was higher interest income Php28.24 million from Php13.15 million. The fund incurred expenses of Php14.62 million, higher than the prior year’s Php7.58 million.

In terms of return on investment, the Fund had a full year return of 1.98%, outperforming its benchmark by 134 bps. The Fund’s benchmark is the HSBC Philippines Money Market Index.


Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

49.8203.0

279.9 232.7 323.0

538.0

1,050.2

611

2,568

Dec-13Jun-13

1,000

500

2,000

1,500

2,500



1 5,000,000 shares November 18, 20102 10,000,000 shares November 17, 20113 20,000,000 shares November 12, 2012


Asset AllocationThe fund was invested mostly in cash and deposit instruments (76%) and corporate notes and bonds (24%). The fund’s duration was actively managed ending the year at 0.19.

Market OutlookThe local market may come under pressure as global interest rates are seen to rise in the next year given the winding down of the FED’s quantitative easing program and ultimately rising policy rates in the US and in the Philippines. Inflation may experience a spike in 2014, though it will likely remain within the target of the BSP, given proactive moves of the Monetary Board. Nonetheless, the Fund will continue to use its active management of duration, yield curve positions and credit exposure to capitalize on the possible volatility within the year.

ALFM MONEY MARKET FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund Benchmark: HSBC Philippines Money Market Index

Dec-10 Sep-11

103

100

109

106

Jun-12 Mar-13 Dec-13

112


24%Corporates

76%Cash

0.19 Duration of the ALFM Money Market Fund by end of 2013

AuDIteD FInAnCIAl StAteMentS

25annual RepoRt 2013 24

Independent Auditor’s Report

To the Board of Directors and Shareholders ofALFM Peso Bond 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 Peso Bond Fund, Inc., which comprise the statements of financial position as at December 31, 2013 and 2012, 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, 2013, 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.

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 Peso Bond Fund, Inc. as at December 31, 2013 and 2012, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2013 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 14 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.

Blesilda A. PestañoPartnerCPA Cert. No. 40446P.T.R. No. 0007713, January 3, 2014, Makati CitySEC A.N. (individual) as general auditors 0049-AR-3, Category A; effective until February 13, 2016SEC A.N. (firm) as general auditors 0009-FR-3; effective until August 15, 2015TIN 112-071-927BIR A.N. 08-000745-7-2013, issued on April 4, 2013; effective until April 3, 2016BOA/PRC Reg. No. 0142, effective until December 31, 2016

Makati CityMarch 22, 2014

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


We have audited the financial statements of ALFM Peso Bond Fund, Inc. as at and for the year ended December 31, 2013, on which we have rendered the attached report dated March 22, 2014. 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, 2013 as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components 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.



Statement Required by Section 8-A, Revenue Regulations No. V-1


None of the partners of the firm has any financial interest in the Fund or any family relationship with its directors or principal shareholder.

The supplementary information on taxes and licenses is presented in Note 14 to the financial statements.

Isla Lipana & Co.



27annual RepoRt 2013 AlFM MutuAl FunDS26

ALFM Peso Bond Fund, Inc.

Statements of Financial PositionDecember 31, 2013 and 2012

(All amounts in thousands of Philippine Peso)

ASSETS

LIABILITIES AND EQUITY

(The notes on pages 1 to 23 are an integral part of these financial statements)

ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Loans and receivables

Total assets

LIABILITIES Management fee payable Deposits for future subscriptions Other liabilities Total liabilities EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity

Notes

567

12109

11

2013

4,879,24251,523,65815,305,15471,708,054

77,9494,770,185

192,7735,040,907

20,864,54026,696,20119,106,40666,667,14771,708,054

2012

3,755,31729,645,30813,133,28546,533,910

49,390-

16,20365,593

15,257,69511,643,42819,567,19446,468,31746,533,910


Statements of Total Comprehensive IncomeFor each of the three years in the period ended December 31, 2013

(All amounts in thousands of Philippine Peso except per share amounts)


INCOMEInterest incomeNet gains on financial assets at fair value through profit or lossOther income

EXPENSESManagement and other professional feesTaxes and licensesOthers

PROFIT BEFORE INCOME TAX

PROVISION FOR INCOME TAXPROFIT FOR THE YEAROTHER COMPREHENSIVE INCOME FOR THE YEARTOTAL COMPREHENSIVE INCOME FOR THE YEARBASIC AND DILUTED EARNINGS PER SHARE

2013

2,452,8541,517,856

149,7664,120,476

1,012,267106,102

9,0111,127,3802,993,096

489,5562,503,540

-2,503,540

11.7462

2012

1,963,1981,343,783

-3,306,981

603,02573,21313,482

689,7202,617,261

240,1482,377,113

-2,377,113

17.6669

2011

1,595,9381,481,660

-3,077,598

481,57449,18217,690

548,4462,529,152

162,6692,366,483

-2,366,483

20.5545

Notes

5, 6, 76

12, 13

8

10


Statements of Cash FlowsFor each of the three years in the period ended December 31, 2013


CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Unrealized fair value losses (gains), 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 Loans and receivables Increase (decrease) in: Other liabilities Management fee payable (Forward)

2013

2,993,096

509,825(2,452,854)

1,050,067

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

28,559176,570

2012

2,617,261

(12,643)(1,963,198)

641,420

(14,373,675)(2,378,756)

4,57713,133

2011

2,529,152

540,074(1,595,938)

1,473,288

(2,687,469)619,123

(70,135)4,320

Notes

6


Statements of Changes in EquityFor each of the three years in the period ended December 31, 2013


Balance at January 1, 2010Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2011Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2012Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2013

Share

premium3,445,036

---

15,481,908(15,034,870)

447,0383,892,074

---

25,118,634(17,367,280)

7,751,35411,643,428

---

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

15,052,77326,696,201

Retained earnings

15,716,633

2,366,483-

2,366,483

---

18,083,116

2,377,113-

2,377,113

-(893,035)(893,035)

19,567,194

2,503,540-

2,503,540

-(2,964,328)(2,964,328)19,106,406

Total equity30,535,353

2,366,483-

2,366,483

24,643,049(23,916,975)

726,07433,627,910

2,377,113-

2,377,113

38,376,524(27,913,230)

10,463,29446,468,317

2,503,540-

2,503,540

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

17,695,29066,667,147

Redeemableshares

(Note 10)11,373,684

---

9,161,141(8,882,105)

279,03611,652,720

---

13,257,890(9,652,915)

3,604,97515,257,695

---

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

5,606,84520,864,540


29annual RepoRt 2013 28 AlFM MutuAl FunDS




Cash used in operations Interest received Income taxes paid Net cash (used in) from operating activitiesCASH FLOWS FROM FINANCING ACTIVITIES Deposits for future subscriptions Proceeds from issuance of shares Redemption of shares Net cash from financing activitiesNET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1 December 31

2013(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

3,755,3174,879,242

2012(16,093,301)

1,752,480(240,148)

(14,580,969)

-38,376,524

(27,913,230)10,463,294

(4,117,675)

7,872,9923,755,317

2011(660,873)1,482,950(162,669)

659,408

-24,643,049

(23,916,975)726,074

1,385,482

6,487,5107,872,992

Notes

1010

5


Notes to FiNaNcial statemeNtsAs at December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013(All amounts are in thousands of Philippine Peso, unless otherwise stated)

Note 1 - General information

ALFM 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 October 17, 2005 (Note 10).

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 are outsourced from BPI Investment Management, Inc. (BPI Investment) (the “Fund Manager”) (Note 13).

These financial statements have been approved and authorized for issuance by the Fund’s Board of Directors (BOD) on March 20, 2014. There are no material events that occurred subsequent to March 20, 2014 until March 22, 2014.

Note 2 - Summary of significant accounting policies

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

2.1 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 area involving a higher degree of judgment or complexity is disclosed in Note 4.New standards, interpretations and amendments to published standards

New standard adopted by the Fund

The following PFRS or IFRIC interpretations effective for the first time for the financial year beginning January 1, 2013 that have been adopted by the Fund:

• PFRS 13, Fair Value Measurement (effective January 1, 2013). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund’s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund.

New standard not yet adopted

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2013, and have not been early adopted by the fund and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Fund,

except as set out below:

• PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting.

PFRS 9 requires financial assets to be classified into

two measurement categories: those measured as at fair value and those measured at amortized cost.

The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued.

There are no other standards, amendments to standards and interpretations that are effective beginning January 1, 2013 and onwards that are expected to have a material impact on the Fund’s financial statements.

2.2 Cash and cash equivalents

Cash 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.

2.3 Financial assets

Classification

The 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 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 trading. The Fund’s loans and receivables include cash and cash equivalents and due from brokers and other receivables.

As at reporting date, the Fund has no financial assets under available-for-sale and held-to-maturity categories.

Recognition and derecognition

Regular-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 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.

Subsequent measurement

Financial 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 income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

Impairment

The 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 the financial asset is impaired. The amount of the provision 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 the 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 the loss has been determined. If in a subsequent period, the amount of the 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 losses for the year.

2.4 Financial liabilities

Classification and measurement

The 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 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.

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.

Financial liabilities at amortized cost are those not classified as at fair value through profit or loss and are measured at amortized cost. Financial liabilities measured at amortized cost include due to brokers, management fee payable and other liabilities.

Derecognition of financial liabilities

Financial 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.

2.5 Offsetting of financial instruments

Financial 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.

2.6 Fair value measurement

Fair 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.

Prior to January 1, 2013, the quoted market price used for financial assets held by the Fund was the current bid price. If the current bid is not available, the Fund uses the closing price. In the absence of done deals, benchmark or reference prices based on the weighted average of done or executed deals in the trading market are used for valuation. From January 1, 2013, the Fund adopted PFRS 13, Fair value measurement; and changed its fair valuation input to utilize 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 will determine 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 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 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.

2.7 Redeemable shares

The 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 premiums 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: 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.

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 11) 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.

2.8 Deposits for future subscriptions

Deposits 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.

The Fund classifies a deposit for future subscription as an equity instrument, if all of the following are present: • The unissued authorized capital stock of the Fund is insufficient to cover the amount of shares indicated in the contract; • There is Board of Directors’ approval on the proposed increase in authorized capital stock (for which a deposit was received by the Fund); • There is stockholders’ 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 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.

2.9 Revenue and expense recognition

Interest 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.

2.10 Functional and presentation currency

Subscriptions 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 Board of Directors 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 Fund’s functional and presentation currency.

2.11 Earnings per share

Basic 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.

There are no dilutive potential redeemable shares as at December 31, 2013 and 2012.

2.12 Income tax

Current income tax

The 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 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.

Deferred income tax

Deferred 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.

2.13 Related party relationships and transactions

Related 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 enterprises and their 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.

2.14 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.

Note 3 - Financial risk and capital management

3.1 Strategy in using financial instruments

The 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 these risks is carried out by the Fund Manager under policies approved by the Board of Directors (BOD). 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 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 outperform its composite benchmark, 50% of 91-day Philippine Treasury Bills and 50% HSBC Philippine local currency bond index, by investing in a diversified portfolio of Philippine Peso denominated high-grade fixed income investments.

3.2 Interest rate risk

The 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 risk.

The Fund’s financial assets at fair value through profit 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 issued by the Republic of the Philippines (ROP) 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.

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 11). 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, 2013, the Fund’s VAR with respect to market interest rate volatilities amounts to P1,828,588 (2012 - P594,308).

As at December 31, 2013 and 2012, the Fund’s financial assets as shown above are neither past due nor impaired.

There were no renegotiated financial assets as at December 31, 2013 and 2012.

The Fund invests primarily in high-grade investment instruments and securities. Details of ratings of the Fund’s investments at December 31, 2013 and 2012 based on external credit rating agencies:

Cash and cash equivalentsFinancial assets at fair value through profit or lossLoans and receivables

20134,879,242

51,523,65815,305,15471,708,054

20123,755,317

29,645,30813,133,28546,533,910

At December 31, 2013Moody’s Baa3Fitch BBBUnrated

495,884

28,973,12122,054,65351,523,658

-

-14,440,29914,440,299

Fair value through profit

or lossLoans and

receivables

At December 31, 2012Standard and Poor’s BBB- BB+Philippine Rating Services Corp. Aaa Unrated

-27,925,763

-1,719,545

29,645,308


or lossLoans and

receivables

595,000-

4,335,6107,611,916

12,542,526

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

The Fund’s cash in bank was deposited with Bank of the Philippine Islands, a local universal bank while its cash equivalents are composed of short-term time deposits with various universal and thrift banks with no history of default with the Fund (Note 5).

Collaterals held as security for loans and receivables consist of mortgage trust indentures, chattel and real estate mortgages. Aggregate fair value of these collaterals, pertaining to the full amount of the debt issuance in which the Fund is participating, is P1,438,984 (2012 - P813,157).

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.

3.4 Liquidity risk

Liquidity 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.

3.3 Credit risk

The 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.

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:

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 2013 and 2012.

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 their maturity date.

3.5 Capital risk management

The capital of the Fund is represented by total equity as shown in the statement of financial position. The Board of Directors and 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 objective when managing capital is 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, 2013 and 2012, the Fund is in compliance with the minimum required capital.

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

3.6 Fair value estimation

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

Recurring fair value measurements

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

49,362,004682,498234,300

1,244,85651,523,658

-----

Fair value2013 Level 1Level 2Level 3

-----

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

27,925,763979,609

70,899669,037

29,645,308

-----


-----

Assets and liabilities not carried at fair value but for which fair value is disclosed

-15,305,154

77,949

Financial assets Cash and cash equivalents Loans and receivablesFinancial liabilities Management fee payable

4,879,24215,305,154

77,949


Carrying amount

4,879,242-

-

--

-

-13,133,285

49,390


3,755,31713,133,285

49,390


Carrying amount

3,755,317-

-

--

-

The fair value of loans and receivables is based on expected cash flows discounted at current market rates. The carrying amount of the Fund’s other financial assets and liabilities at reporting period approximate their fair values considering that they have short-term maturities.

There were no transfers between the fair value hierarchy above.

Note 4 - Critical accounting judgment

Estimates, 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.

Impairment of loans and receivables

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, amounted to P5,880,807 and P11,882,526 as at December 31, 2013 and 2012, respectively. No impairment loss recognized for the years ended December 31, 2013, 2012 and 2011.

Note 5 - Cash and cash equivalents

The account at December 31 consists of:

Short-term time depositsRegular savings depositsSpecial savings deposits (BSP SDA)

20134,800,000

79,242

-4,879,242

20122,420,000

63,845

1,271,4723,755,317

Special savings deposits consist of Bangko Sentral ng Pilipinas (“BSP”) Special Deposit Accounts (“SDA”) bearing an interest rate of 4.0% in 2012. In 2013, the BSP limited access to its SDA facility to trust accounts and unit investment trust funds.

Short-term time deposits bear interest rates ranging from 0.38% to 1.75% (2012 - 2.00% to 4.00%).

Interest income earned from cash and cash equivalents amounts to P58,850 (2012 - P69,757; 2011 - 234,711).

Note 6 - Financial assets at fair value through profit or loss

The account at December 31 consists of held for trading investments:

49,362,004682,498234,300

1,244,85651,523,658

Government securitiesUnit investment trust funds Mutual fundsPreferred shares

Interest rate (%)Amount

2013

1.3 -14.6---

2012

AmountInterest rate (%)

2.8 -10.4- --

27,925,763979,609

70,899669,037

29,645,308

The maturity pattern of government securities follows:

Due in one year or lessDue after one year

2012156,015

27,769,74827,925,763

2013561,170

48,800,83449,362,004

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

Net realized gainsNet unrealized (losses) gains

20112,021,734

(540,074)1,481,660

20121,331,140

12,6431,343,783

20132,027,681

(509,825)1,517,856

Interest income earned from financial assets at fair value through profit or loss amounts to P1,668,310 (2012 - P1,130,367; 2011 - P679,845).

The maturity patterns of loans and receivables follow:

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

20131,150,000

14,155,15415,305,154

20122,981,762

10,151,52313,133,285

Term loans represent debts issued by certain Philippine corporations. The term loans carry interest rates ranging from 1.75% to 9.62% (2012 - 3.70% to 7.10%). The preferred shares bear annual cash dividend at rates ranging from 7.00% to 8.88% in 2012. Preferred dividends received included in interest income amount to P101,176 in 2012.

The preferred shares are non-voting, non-participating, non-convertible, cumulative and subject to mandatory redemption by the issuers at par value on various dates up to 2014. Other receivables mainly pertain to accrued interest and lease receivables assigned to the Fund by a branch of a foreign bank.

The classification of Loans and receivables as to security follows:

UnsecuredSecured

201313,866,170

1,438,98415,305,154

201212,620,797

512,48813,133,285

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

Interest income earned on loans and receivables amounts to P725,694 (2012 - P763,074; 2011 - P681,382).

Note 8 - Income taxes

Provision for income tax substantially represents tax withheld on income subject to final tax.

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:

20132012

1,098,242223,544

1,321,78630%

396,536

Year of Incurrence

Year of Expiration 20122013

20162015

-223,544223,544

30%67,063

Income tax rateUnrecognized deferred income tax assets

Note 9 - Other liabilities

The account at December 31, 2013 consists primarily of securities purchased payable and withholding taxes payable related to management fees. Details as at December 31 follow:

Securities purchased payableWithholding taxes payable

2012-

16,20316,203

2013162,652

30,121192,773

Note 10 - Redeemable shares

The details of the Fund’s authorized shares as at December 31 follow:

Number of sharesPar value per shareAmount

340 millionP100

P34 billion

The movement in the Fund’s redeemable shares in thousands for the years ended December 31 follows:

Issued and outstanding, January 1Issuance of sharesRedemption of shares

2011

113,73791,611

(88,821)116,527

2012

116,527132,579(96,529)152,577

2013

152,577182,668

(126,600)208,645

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

Issuances of sharesRedemptions of shares

2011

24,643,04923,916,975

2012

38,376,52427,913,230

2013

62,334,32844,639,038

Note 7 - Loans and receivables


Term loansRedeemable preferred sharesOther receivables

201314,440,299

-864,855

15,305,154

201211,882,526

660,000590,759

13,133,285

As at December 31, 2013, the Fund has 38,939 shareholders (2012 - 21,351).

Deposits for future subscriptions

On November 16, 2006, the Board of Directors approved an increase in the Fund’s authorized shares from 340 million to 1 billion with par value of P100 per share and to be implemented in tranches. Subject to the approval of the



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 accompanying financial statements of ALFM Dollar Bond Fund, Inc., which comprise the statements of financial position as at December 31, 2013 and 2012, 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, 2013, 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, 2013 and 2012, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2013 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.



SEC, the Fund applied for an increase in authorized shares from 340 million to 400 million with par value of P100 per share in 2013. The Fund received cash from various investors as deposits for future subscriptions amounting to P4,770,185. The deposit is presented as liability as the Fund has sufficient unissued redeemable shares to cover the amount of subscription. The Fund has yet to receive the approval from the SEC.

Earnings per share

Earnings per share is calculated by dividing net income by the weighted average number of outstanding redeemable shares as at year-end.

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

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

20112,366,483

115,13220.5545

20122,377,113

134,55217.6669

20132,503,540

213,13611.7462

Note 11 - Net Asset Value (NAV) for share subscriptions and redemptions

The 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 allowance for market risk follows:

At January 1Provisions for market risk during the year

2012760,487

134,829895,316

2013895,316

349,4381,244,754

The Fund has adopted PFRS 13 in 2013 and has changed its valuation inputs for listed financial assets to last traded market prices or weighted average of done deals in the trading market. In the prior year, the Fund used bid prices consistent with the requirements of PAS 39. The adoption eliminated the difference between the Fund’s valuation methodology and PFRS.

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

PFRS NAVAdjustments on market valuationAllowance for market riskDeposits for future stock subscriptionsTrading NAV

2012

46,468,317182,988

(895,316)-

45,755,989

2013

66,667,147-

(1,244,754)4,770,185

70,192,578

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

Trading NAV (In thousands)

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

201245,755,989

152,577

-152,577

299.89

201370,192,578

208,645

15,000223,645

313.86

Note

10

10

Note 12 - Related party transactions

BPI Investment and BPI - Asset Management Trust Group (BPI - AMTG) were designated as fund manager and investment advisor of the Fund, respectively.

As fund manager, BPI Investment 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 BPI Investment 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, BPI Investment, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, 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.

The table below summarizes the Company’s transactions and balances with its related parties (amounts in thousands):

December 31, 2013Management fees BPI Investment BPI - AMTG

Terms and conditions

The outstanding balance is unsecured, unguaranteed, non-interest bearing and payable in cash a month after the management fee is incurred.

Outstanding balances

38,97538,974

77,949

Transactions

503,897503,896

1,007,793





24,69524,695

49,390

Transactions

300,123300,123

600,246





18,26318,264

36,527

Transactions

237,271237,271

474,542

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, 2013, total remunerations paid to directors and officers charged in profit or loss amounted to 1,650 (2012 - P1,109; 2011 - P946). As at reporting dates, there were no outstanding balances related to these fees.

Note 13 - Custodian agreement

The 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, 2013, the market value of securities in custody of HSBC aggregates to P5,880,807 (2012 - P7,368,534).

Note 14 - Supplementary information required by Bureau of Internal Revenue

The following 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.

I. Supplementary information required by Revenue Regulations No. 15-2010

Below is the additional information required by RR No. 15-2010 that is relevant to the Fund.

Documentary stamp tax

The documentary stamp taxes paid on share subscriptions for the year ended December 31,2013 amounted to P99,070. There are no documentary stamp taxes accrued as at December 31, 2013.

Withholding taxes

Withholding taxes for the year ended December 31, 2013 amounted to P145,783, P30,121 of which is outstanding at December 31, 2013.

All other local and national taxes

All other local and national taxes paid for the years ended December 31, 2013 consist of:

Business permits and other related taxesFiling fees Community tax Others

Amount6,120

8901111

7,032

The above local and national taxes are lodged under the taxes and licenses account.

There are no other local and national taxes accrued as at December 31, 2013.

Tax cases and assessments As at December 31, 2013, open taxable years are 2012, 2011 and 2010. 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.

II. Supplementary information required by Revenue Regulations No. 19-2011

The Fund’s schedules for the year ended December 31, 2013 follow:

Income

Fund’s main income primarily pertains to interest income, dividend income and realized gain/loss on sale of marketable securities.

Interest income Subject to 30% Subject to 20% Subject to 0%

Net realized fair value gains or losses Subject to 0%

Taxable amount

29,1392,447,104

126,3772,602,620

2,027,6814,630,301

Cost of services

Management feesTaxes and licenses

Deductible amount1,007,794

106,1021,113,896

The above direct charges are subject to the regular tax rate of 30%.

Itemized deductions

Other professional feesMiscellaneous


13,485

The above itemized deductions are subject to the regular tax rate of 30%.

Taxes and licenses

Details of the Fund’s taxes and licenses are presented in Section I of this note.

Other information

All other information prescribed to be disclosed by the BIR has been included in this note.

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 trading 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. 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.


Statements Required by Rule 68, Part I, Section 4 Securities Regulation Code (SRC), as Amended on October 20, 2011


We have audited the financial statements of ALFM Dollar Bond Fund, Inc. as at and for the year ended December 31, 2013, on which we have rendered the attached report dated March 22, 2014. 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, 2013 as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components 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.






The supplementary information on taxes and licenses is presented in Note 15 to the financial statements

Isla Lipana & Co.



ALFM Dollar Bond Fund, Inc.


(All amounts in US Dollar)

ASSETS



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

LIABILITIES Management fee payable Withholding taxes payable Total liabilitiesEQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity

Notes

56789

14

11

12

27,312,795145,090,573

37,202,8645,754,7463,577,164

218,938,142

195,05068,002

263,052

109,153,322 61,292,97448,228,794

218,675,090218,938,142

2013

9,355,463166,453,489

44,330,771876,979

5,861,771226,878,473

197,56167,633

265,194

109,139,44758,517,00658,956,826

226,613,279226,878,473

2012


Statements of Changes in Equity For each of the three years in the period ended December 31, 2013

(All amounts in US dollar)

Balance at January 1, 2011Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2011Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2012Comprehensive income Loss for the year Other comprehensive income for the yearTotal comprehensive loss for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2013

Share

premium36,403,697

---

18,824,699(15,697,506)

3,127,19339,530,890

---

31,293,101(12,306,985)

18,986,11658,517,006

---

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

2,775,96861,292,974

Retained earnings

35,185,393

6,653,885-

6,653,885

---

41,839,278

17,995,290-

17,995,290

-(877,742)(877,742)

58,956,826

(8,844,095)-

(8,844,095)

-(1,883,937)(1,883,937)48,228,794

Total equity158,006,086

6,653,885-

6,653,885

41,999,570(34,981,170)

7,018,400171,678,371

17,995,290-

17,995,290

64,063,194(27,123,576)

36,939,618226,613,279

(8,844,095)-

(8,844,095)

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

905,906218,675,090

Redeemableshares

(Note 11)86,416,996

---

23,174,871(19,283,664)

3,891,20790,308,203

---

32,770,093(13,938,849)

18,831,244109,139,447

---

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

13,875109,153,322



Notes to FiNaNcial statemeNtsAs at December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013(All amounts are in US Dollar, unless otherwise stated)


ALFM 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 12).

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 11).

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 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. The area involving a higher degree of judgment or complexity is disclosed in Note 4. New standards, interpretations and amendments to published standards


The following PFRS or IFRIC interpretations effective for the first time for the financial year beginning January 1, 2013 have been adopted by the Fund:

• PFRS 13, Fair Value Measurement (effective January 1, 2013). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded

prices to be consistent with the inputs prescribed in the Fund’s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund.


A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2013, and have not been early adopted by the fund and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Fund, except as set out below:

• PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phase of PFRS 9 when issued. There are no other PFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Fund’s financial statements.



Cash 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. acquisition.


Classification



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 trading.

The Fund’s loans and receivables include cash and cash equivalents, loans and receivables and other receivables.

As at reporting date, the Fund has no financial assets under available-for-sale category.


Regular-way purchases and sales of financial assets are recognized on the trade date, the date on which the Fund commits to purchase or sell the asset. Financial assets at fair value through profit or loss are initially recognized at fair value. 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 not carried at fair value through profit or loss, which include loans and receivables and held-to-maturity securities are initially recognized at fair value plus transaction costs.

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 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.


Financial 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 profit or loss 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.

Impairment







6,599,283

13,257,056(1,240,929)18,615,410

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

905,906

19,521,316

9,355,463

(1,563,984)27,312,795

(45,784,588)9,568,919

(1,093,684)(37,309,353)

64,063,194(27,123,576)

36,939,618

(369,735)

8,690,513

1,034,6859,355,463

(16,200,351)7,942,510(227,658)

(8,485,499)

41,999,570(34,981,170)

7,018,400

(1,467,099)

10,194,451

(36,839)8,690,513

11

5


CASH FLOWS FROM OPERATING ACTIVITIES (Loss) profit before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income Unrealized foreign exchange losses (gains) Operating loss before changes in operating assets and liabilities Changes in operating assets and liabilities Decrease (increase) in: Financial assets at fair value through profit or loss Held-to-maturity securities Loans and receivables Other receivables (Decrease) increase in: Management fee payable Accrued expenses Cash generated from (used in) operations Interest received Income taxes paid Net cash generated from (used in) operating activitiesCASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemption of shares Net cash generated from financing activitiesNET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1 Effects of exchange rate changes on cash and cash equivalents December 31

(7,603,166)

12,427,534 (10,972,449)

1,563,984

(4,584,097)

8,935,3827,127,907

(4,877,767)-

(2,511)369

2012

19,088,974

(9,248,864)(10,219,048)

(1,034,685)

(1,413,623)

(42,511,925)124,600(55,811)

(1,989,516)

45,52416,163

2011

6,881,543

(255,380)(7,942,510)

36,839

(1,279,508)

(19,049,266)4,617,977

-(499,023)

14,017(4,548)

Notes

6

2013


Statements of Cash Flows For each of the three years in the period ended December 31, 2013

(All amounts in US dollar)



(All amounts in US Dollar)


INCOMEInterest incomeNet (losses) gains on financial assets at fair value through profit or lossForeign exchange gains, netOther income

EXPENSESManagement and other professional feesTaxes and licensesOthers

(LOSS) PROFIT BEFORE INCOME TAX

PROVISION FOR INCOME TAX(LOSS) PROFIT FOR THE YEAR

OTHER COMPREHENSIVE INCOME FOR THE YEARTOTAL COMPREHENSIVE (LOSS) INCOME FOR THE YEARBASIC AND DILUTED (LOSS) EARNINGS PER SHARE

Notes

6

13

10

11

2013

7,942,510

516,062670,684

43,6069,172,862

2,116,458151,297

23,5642,291,3196,881,543

227,6586,653,885

-6,653,885

14.7163

2011

10,219,048

9,887,1481,676,147

20,16521,802,508

2,444,819214,524

54,1912,713,534

19,088,974

1,093,68417,995,290

-17,995,290

35.2656

2012

10,972,449

(15,446,845)-

51,295(4,423,101)

2,880,468235,918

63,6793,180,065

(7,603,166)

1,240,929(8,844,095)

-(8,844,095)

(15.1763)













• 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.










The Fund classifies a deposit for future subscription as an equity instrument, if all of the following are present:• The unissued authorized capital stock of the Fund is insufficient to cover the amount of shares indicated in the contract;• There is Board of Directors’ approval on the proposed increase in authorized capital stock (for which a deposit was received by the Fund);• There is stockholders’ approval of said proposed increase; and• The application for the approval of the proposed increase has been filed with the SEC.







2.10 Foreign currency transactions and translation

Functional and presentation currency

Subscriptions 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, corporate notes & bonds and fixed-income funds. The performance of the Funds is measured and reported to the investors in Euro. The Board of Directors 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 Fund’s functional and presentation currency. The financial statements are presented in US Dollar, which is the Fund’s functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the 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’.

2.11 Earnings (loss) per share



2.12 Income tax

Current income tax



Deferred income tax







Related 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 enterprises and their 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.





The 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 very 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 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.





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 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 12). 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, 2013, the Fund’s VAR with respect to market interest rate volatilities amounts to US$5,879,670 (2012 - US$5,791,666).

3.3 Credit risk




Cash and cash equivalentsFinancial assets at fair value through profit or lossHeld-to-maturity securitiesLoans and receivablesOther receivables

27,312,795

145,090,57337,202,864

5,754,7463,577,164

218,938,142

9,355,463

166,453,48944,330,771

876,9795,861,771

226,878,473

2013 2012

As at December 31, 2013 and 2012, the Fund’s financial assets as shown in the table above are neither past due nor impaired.


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 vari-ous external credit rating agencies:

At December 31, 2013Standard and Poor’s BB - to BB + UnratedMoody’s / Philippine Ratings Aaa Aa3 to Aa1 A3 to A1 Baa3 to Baa1 Ba3 to Ba1 Unrated

4,826,375 38,670,457

5,257,956 14,207,032

7,677,285 62,841,001

6,191,125 5,419,342

145,090,573


or loss Held-to-maturityLoans and

receivables

2,390,902 -

-999,546 998,680

30,813,736 -

2,000,000 37,202,864

--

-----

5,754,7465,754,746

At December 31, 2012Standard and Poor’sAABB - to BB +Moody’s / Philippine RatingsAaaAa3 to Aa1A3 to A1Baa3 to Baa1Ba3 to Ba1B2Unrated

159,56093,223,465

12,302,94314,727,764

5,421,4937,612,0354,842,8931,093,370

27,069,966166,453,489


or loss Held-to-maturityLoans and

receivables

-41,334,950

--

998,874997,057

--

999,89044,330,771

--

------

876,979876,979


The total amount of loans and receivables and other receivables (mainly interest receivables) outstanding is unsecured.

The Fund’s cash in bank was deposited with Bank of the Philippine Islands, a local universal bank while its cash equivalents are composed of short-term time deposits with various universal banks with no history of default with the Fund (Note 5).

3.4 Liquidity risk


The Fund is exposed to daily cash redemptions of redeem-able 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 predomi-nantly 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 bor-rowings have arisen in 2013 and 2012.


3.5 Capital management












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

Fair value

48,976,11054,131,456

26,698,6592,386,0812,871,8753,385,000

166,2501,055,800

2,921,7282,497,614

145,090,573

--------

---

2013 Level 1 Level 3Level 2

--------

---



Financial assets Cash and cash equivalents Held-to-maturity securities Long-term negotiable certificate of deposits Philippine government bonds Philippine corporate bonds Asian government and corporate bonds Loans and receivables Other receivablesFinancial liabilities Management fee payable

Fair value

27,312,795

2,000,000

30,813,7362,390,902

1,998,2265,754,7463,577,164

195,050

-

2,000,000

--

1,998,2825,743,1903,577,164

195,050


-

-

--

---

-

Carrying amount

27,312,795

-

30,788,7102,390,164

---

-

Financial assets Cash and cash equivalents Held-to-maturity securities Long-term negotiable certificate of deposits Philippine government bonds Asian government and corporate bonds Loans and receivables Other receivablesFinancial liabilities Management fee payable

Fair value

9,355,463

3,378,769

38,956,072

1,995,930876,979

5,861,771

197,561

-

3,378,769

-

1,995,8901,235,5895,861,771

197,561


-

-

-

---

-

Carrying amount

27,312,795

-

38,931,159

---

-

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 amount of the Fund’s other financial assets and liabilities at reporting period approximate their fair values considering that they have short-term maturities.


Note 4 - Critical accounting estimate and judgment

Estimates, assumptions and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, includ-ing 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 significant 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.

Held-to-maturity securities as at December 31, 2013 is valued at P37,202,864 (2012 - 44,330,771).



Short-term time depositsRegular savings depositsSpecial savings deposits (BSP SDA)

26,375,000937,795

-27,312,795

7,145,000210,463

2,000,0009,355,463

2013 2012

Special savings deposits consist of Bangko Sentral ng Pilipinas (“BSP”) Special Deposit Accounts (“SDA”) bearing an interest rate of 4.0% in 2012. In 2013, the BSP limited ac-cess to its SDA facility to trust accounts and unit investment trust funds.

Short-term time deposits bear interest rates ranging from 1.00% to 2.00% (2012 - 1.50% to 2.00%) and have average maturities of 76 days in 2013 (2012 - 35 days).

Interest income earned from cash and cash equivalents amounts to P66,827 (2012 - P88,386; 2011 - P41,452).


The account at December 31 consists of held for trading investments in:

Debt securities Philippine corporate bonds Philippine government bonds Asian corporate and government bonds US corporate bonds US government bonds Supranational bonds European corporate bonds OthersInvestment funds Unit investment trust funds Mutual fund

Interest rates (%)

4.25 - 9.002.75 - 10.63

2.88 - 5.752.05 - 2.632.50 - 3.632.63 - 5.50

2.887.00

--

2013

Amount

2012

AmountInterest

rates (%)

54,131,45648,976,110

26,698,6593,385,0002,871,8752,386,081

166,2501,055,800

2,921,7282,497,614

145,090,573

4.25 - 8.382.75 - 9.501.60 - 5.25

--

2.632.88

4.88 - 7.00

--

34,165,61887,924,59625,033,519

1,521,075-

8,522,238161,008

7,701,507

455,834968,094

166,453,489

The maturity pattern of debt securities follows:


127,721,81111,949,420

139,671,231

11,645,818153,383,743165,029,561

2013 2012

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


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

(12,269,313)

(3,177,532)(15,446,845)

11,645,818

153,383,743165,029,561

2013 2012

9,248,864

638,2849,887,148

2011

Interest income earned from financial assets at fair value through profit or loss amounts to P7,086,132 (2012 - P5,855,438; 2011 - P4,089,571).

Note 7 - Held-to-maturity securities

The account at December 31 consists of investments in:

Philippine government bondsPhilippine corporate bondsLong-term negotiable certificate of depositsAsian government bondsAsian corporate bonds

Interest rates (%)

7.5 - 10.6258.375

3.75.1255.25

2013

Amount

2012

AmountInterest

rates (%)

30,813,7362,390,902

2,000,000999,546998,680

37,202,864

7.50 - 10.625-

8.0 - 8.3755.1255.25

38,956,072-

3,378,769998,874997,056

44,330,771

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

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

9,036,604

11,464,35923,829,80844,330,771

2013 20123,557,891

9,916,00223,728,97137,202,864

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

At January 1AdditionsMaturitiesAmortization of premiumAt December 31

44,455,371--

(124,600)44,330,771

2013 201244,330,771

2,000,000(9,030,000)

(97,907)37,202,864

Interest income earned from held-to-maturity securities amounts to P3,366,761 (2012 - P3,793,629; 2011 - P3,338,254).


The account as at December 31, 2013 consists of a term loan amounting to P5,754,746 (2012 - P876,979).

The total amount of loans and receivables outstanding is unsecured.

The term loan carry an interest rate of 7% (2012 - 6.86%).

Interest income earned on loans and receivables amounts to P452,729 (2012 - P481,595; 2011 - P473,233).

Note 9 - Other receivables

Other receivables consist of accrued interest mainly from loans and receivables, financial assets at fair value through profit or loss, and held-to-maturity securities.

Other receivables are considered current as at December 31, 2013 and 2012.


Provision for income tax represents tax withheld for income subject to final tax.

The Fund did not recognize deferred income tax asset 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:

20132012201120102009

USD

607,6671,570,2922,333,4722,048,251

-6,559,682

(2,048,251)4,511,431

30%

1,353,429

2013

PHP

2012

Expired NOLCO Income tax rate Unrecognized deferred income tax asset

26,988,98266,311,55798,539,73886,495,166

-278,335,443(86,495,166)191,840,277

30%

57,552,083

-1,570,2922,333,4722,048,2511,671,0207,623,035

(1,671,020)5,952,015

30%

1,785,605

20162015201420132012

Year ofIncurrence

Year of Expiration USD PHP

-66,311,55798,539,73886,495,16670,565,164

321,911,625(70,565,164)251,346,461

30%

75,403,938


The details of the Fund’s authorized shares at December 31 follow:


600,000P10,000

6,000,000,000

2013 2012679,000P10,000

6,790,000,000

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

Issued and outstanding, January 1Issuance of sharesRedemptions of shares

462,100167,682(71,324)558,458

2013 2012558,458126,394

(126,323)558,529

462,100167,682(71,324)558,458

2011



64,063,19427,123,576

2013 201249,897,93948,992,033

41,999,57034,981,170

2011


Earnings per share

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

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

Fair value

87,924,59634,165,618

25,033,5198,522,238

-1,521,075

161,0087,701,507

455,834968,094

166,453,489

--------

---


--------

---

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

17,995,290

510,279

35.2656

2013 2012(8,844,095)

582,757

(15.1763)

6,653,885

452,145

14.7163

2011


The 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 statements 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.


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

4,237,487

(26,944)4,210,543

2013 20124,210,543

(805,419)3,405,124

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

PFRS NAVAllowance for market riskTrading NAV

226,613,279(4,210,543)

222,402,736

2013 2012218,675,090

(3,405,125)215,269,965


Trading NAVTotal issued and outstanding sharesTrading NAV per share

222,402,736

558,458398.24

2013 2012215,269,965

558,529385.42

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 sharehold-ers’ investment are reflected in the increase or decrease in the Fund’s NAV.



BPI Investment and BPI - Asset Management Trust Group (BPI - AMTG) were designated as fund manager and invest-ment advisor of the Fund, respectively.

As fund manager, BPI Investment 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 BPI Investment 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 advise; the prepara-tion 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, BPI Investment, BPI Capital Corporation (BPI

Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connec-tion 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 contri-butions 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:


97,52597,525

195,050

Transactions Outstanding

balances

1,419,7851,419,785

2,839,570




98,78198,780

197,561


balances

1,206,4251,206,425

2,412,850




76,01976,018

152,037


balances

1,014,5671,014,566

2,029,133



The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of US$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 In-vestment Advisor. For the year ended December 31, 2013, total remunerations paid to directors and officers charged in profit or loss amounted to US$11,891 (2012 - US$10,325; 2011 - US$12,221). As at reporting dates, there were no outstanding balances related to these fees.

Note 14 - Custodianship agreement

The Fund has custodian agreements with Hongkong & Shanghai Banking Corporation Ltd. (“HSBC”) and Bank of New York for custodial services of the Fund’s proprietary assets and/or the assets owned in the Philippines. Under this agreement, the Fund pays HSBC a fixed monthly custodian fee of P4,900 or its US Dollar equivalent. As at December 31, 2013, the market value of securities held by the custodian aggregates to US$176,915,611 (2012 - US$827,181,409).


The following 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. Amounts are presented in US Dollar and in Philippine Peso.

I. Supplementary information required by Revenue Regulation No. 15-2010



Total documentary stamp taxes paid on share subscrip-tions for the year ended December 31, 2013 amounted to $149,415 (P6,224,008). There are no documentary stamp taxes accrued as at December 31, 2013.

Withholding taxes

Withholding taxes for the year ended December 31, 2013 amounted to $383,823 (P16,055,684), $68,002 (P2,767,674) of which is outstanding at December 31, 2013.All other local and national taxes


All other local and national taxes paid for the year ended December 31, 2013 consist of:

US DollarMunicipal and other related taxesCommunity tax Others

25,235

25961,00986,503

Amount

In Philippine Peso Municipal and other related taxes Community tax Others

1,120,792

11,4952,709,654 3,841,941

Amount

Tax cases and assessments

As at December 31, 2013, open taxable years are 2012, 2011 and 2010. The Fund has not received any Final Assess-ment Notice (FAN) from the BIR. The Fund is also not a party to any outstanding tax case with the BIR.



Income

The Fund’s main income primarily pertains to dividend income, interest income and realized gain/loss.

Cost of services

Interest income Subject to 30% Subject to 20% Subject to 7.5%

Net realized foreign exchange gains Subject to 30%

112,343,703 215,701,699159,656,383487,701,785

1,906,747 489,608,532

USD PHP

2,521,1034,856,6153,594,731

10,972,449

51,29511,023,743

Taxable amount


126,116,655 10,065,949

136,182,604

USD PHP

2,839,570235,918

3,075,488

Deductible amount




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 accompanying financial statements of ALFM Euro Bond Fund, Inc., which comprise the statements of financial position as at December 31, 2013 and 2012, 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, 2013, 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, 2013 and 2012, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2013 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.





We have audited the financial statements of ALFM Euro Bond Fund, Inc. as at and for the year ended December 31, 2013, on which we have rendered the attached report dated March 22, 2014. 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, 2013 as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components 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.







Isla Lipana & Co.




ALFM Euro Bond Fund, Inc.


(All amounts in Euro)

ASSETS



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

LIABILITIES Management fee payable Withholding taxes payable Total current liabilities EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity

Notes

56

7

11

9

10

2013

466,3387,628,383

753,472257,637

9,105,830

4,8891,695 6,584

6,621,360828,012

1,649,8749,099,2469,105,830

2012

585,5227,070,498

755,001233,047

8,644,068

4,5531,5616,114

6,296,117643,393

1,698,4448,637,9548,644,068




(The notes on pages 45 to 48 are an integral part of these financial statements.)

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

EXPENSES Management fees Taxes and licenses Professional fees Directors’ fees Others


PROVISION FOR INCOME TAXPROFIT FOR THE YEAR

OTHER COMPREHENSIVE INCOME FOR THE YEARTOTAL COMPREHENSIVE INCOME FOR THE YEARBASIC AND DILUTED EARNINGS PER SHARE

2013

344,201(171,120)

782173,863

67,33511,28610,544

1,8423,507

94,51479,349

58,38120,968

-20,9680.4581

2012

278,968392,577

148671,693

57,28410,225

8,5982,2632,329

80,699590,994

12,895578,099

-578,09913.9864

2011

285,287(91,529)

209193,967

59,4724,6468,0264,2893,444

79,877114,090

3,114110,976

-110,976

2.5436

Notes

6

11

1112

8

9






6,959,018

---

670,119(1,991,735)(1,321,616)

5,637,402

---

1,431,618(772,903)

658,7156,296,117

---

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

325,2436,621,360

732,668

---

153,196(462,070)(308,874)

423,794

---

430,413(210,814)

219,599643,393

---

568,738 (384,119)

184,619828,012

1,021,473

110,976-

110,976

---

1,132,449

578,099-

578,099

-(12,104)(12,104)

1,698,444

20,968-

20,968

-(69,538)(69,538)

1,649,874

Redeemableshares (Note 9) Share premium

Retained earningsTotal equity

8,713,159

110,976-

110,976

823,315(2,453,805)(1,630,490)7,193,645

578,099-

578,099

1,862,031(995,821)866,210

8,637,954

20,968-

20,968

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

440,3249,099,246





CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income Operating 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 Other receivable Held-to-maturity securities Increase (decrease) in: Management fee payable Accrued expenses Cash (used in) generated from operations Interest received Income taxes paid Net cash (used in) generated from operating activitiesCASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemption of shares Net cash generated from (used in) financing activitiesNET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31

6

9

5

79,349

171,120 (344,201)

(93,732)

(729,005)(76)

1,529

336 134

(820,814)319,687(58,381)

(559,508)

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

440,324 (119,184)

585,522 466,338

590,994

(392,160)(278,968)

(80,134)

(868,220)(31)

(1,444)

694149

(948,986)241,129(12,895)

(720,752)

1,862,031(995,821)866,210145,458

440,064585,522

Notes 2013 20112012

114,090

111,571(285,287)

(59,626)

987,84967

1,361

(813)(969)

927,869372,504

(3,114)1,297,259

823,315(2,453,805)(1,630,490)

(333,231)

773,295440,064




ALFM 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 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 May 30, 2007 (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.








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 area involving a higher degree of judgment or complexity is disclosed in Note 4.

New standards, interpretations and amendments to published standards



• PFRS 13, Fair Value Measurement (effective January 1, 2013). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread.

On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund’s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund.



• PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the = classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phase of PFRS 9 when issued.





Classification



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 trading. The Fund’s loans and receivables include cash and cash equivalents and other receivables.

As at reporting date, the Fund has no financial assets under available-for-sale category.


Regular-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 at fair value are initially recognized at fair value plus transaction costs. 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 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 profit or loss.


Financial 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 profit or loss 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.

Impairment








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.
















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.












2.10 Foreign currency transactions and translations

Functional and presentation currency

Subscriptions 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 Funds is measured and reported to the investors in Euro. The Board of Directors 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 Fund’s functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the 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’.




2.12 Income tax

Current income tax



Deferred income tax









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.



The Fund’s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund’s assets exposure to foreign exchange risk is very 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 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.





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 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, 2013, the Fund’s VAR with respect to market interest rate volatilities amounts to €109,970 (2012 - €59,647).

3.3 Credit risk


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 equivalentsFinancial assets at fair value through profit or lossHeld-to-maturity securitiesOther receivables

585,522

7,070,498755,001233,047

8,644,068

2013 2012466,338

7,628,383753,472257,637

9,105,830



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:

At December 31, 2013Moody’s/PRSC A1 A2 A3 Aa1 Aa3 Aaa Baa2 Baa3 Unrated

-------

753,472-

753,472

Fair value through profit or loss Held-to-maturity

200,943991,072219,575190,908248,031

1,649,664264,216

3,763,974100,000

7,628,383

At December 31, 2012Moody’s/PRSC Aaa Aa1 Aa2 A2 A3 Baa2 Ba1Unrated

------

755,001-

755,001

Fair value through profit or loss Held-to-maturity

1,238,374515,950159,499665,748226,638479,205

3,482,084303,000

7,070,498

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

The Fund’s cash in bank was deposited with Bank of the Philippine Islands, a local universal bank while its cash equivalents are composed of short-term time deposits with Bank of the Philippine Islands as well (Note 5).

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

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.

3.4 Liquidity risk


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.















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

3,656,735 719,563

1,121,010 651,838

1,025,952 453,285

7,628,383

-------


-------

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

3,785,0841,063,650

690,674665,748595,199270,143

7,070,498

-------


-------


Financial assets Cash and cash equivalents Held-to-maturity securities Philippine government bonds Other receivablesFinancial liabilities Management fee payable

466,338

770,361-

-

-

-257,637

4,889

Fair value

2013 Level 3Level 2Level 1

----

-

Carrying amount

466,338

753,472257,637

4,889

Financial assets Cash and cash equivalents Held-to-maturity securities Philippine government bonds Other receivablesFinancial liabilities Management fee payable

585,522

1,057,248-

-

-

-233,047

4,553

Fair value

2012 Level 3Level 2Level 1

----

-

Carrying amount

585,522

755,001233,047

4,553

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 carrying amount of the Fund’s other financial assets and liabilities at reporting period approximate their fair values considering that they have short-term maturities.




Held-to-maturity classification

Notwithstanding the open-ended nature of the Fund, a significant 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, 2013, the Fund’s held-to-maturity securities amounted to €753,472 (2012 - €755,001).



Regular savings depositsShort-term time deposits

5,522580,000585,522

2013 201216,338

450,000466,338

Short-term time deposits bear interest rates ranging from 0.25% to 0.625% (2012 - 0.625% to 1.00%) and have aver-age maturities of 35 days for 2013 and 2012. Interest income earned from cash and cash equivalents amounts to P108 (2012 - P160; 2011 - P164).



Philippine government bondsEuropean government bondsSupranational debtEuropean corporate bondsAsia pacific corporate bondsUS corporate bonds

Interest rates (%)3.3 - 6.251.75 - 5.03.5 - 3.883.5 - 4.88

2.38 - 4.752.0 - 4.0

2013

Amount

2012

AmountInterest

rates (%)3,656,735

719,563 1,121,010

651,838 1,025,952

453,2857,628,383

3.7 - 6.252.25 - 4.03.5 - 3.883.5 - 4.883.5 - 4.75

4.0

3,785,0841,063,650

690,674665,748595,199270,143

7,070,498

The maturity pattern of the debt securities follows:


718,9506,351,5487,070,498

2013 2012-

7,628,3837,628,383



417392,160392,577

2013 2012-

(171,120)(171,120)

20,042(111,571)

(91,529)

2011

Interest income earned from financial assets at fair value through profit or loss to P298,747 (2012 - P233,377; 2011 - P239,609).

Note 7 - Held-to-maturity securities

The account consists of investments in Philippine govern-ment bonds which carry interest rate of 6.25% as at December 31, 2013.

The held-to-maturities investments are classified as long-term in which maturity is more than one year from reporting date.

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

At January 1Amortization of premiumAt December 31

756,445(1,444)

755,001

2013 2012755,001

(1,529)753,472

Interest income earned from held-to-maturity securities to P45,346 (2012 - P45,431; 2011 - P45,514).


Provision for income tax substantially represents tax with-held for income subject to final tax.


20132012201120102009

EUR

79,72180,551 83,129 84,863

-328,264(84,863)243,401

30%

73,020

2013

PHP

2012


4,525,7424,374,549 4,514,578 4,608,714

-18,023,583(4,608,714)13,414,869

30%

4,024,461

-80,55183,12984,86362,920

311,463(62,920)248,543

30%

74,563

20162015201420132012

Year ofIncurrence

Year of Expiration EUR PHP

-4,374,5494,514,5784,608,7143,417,031

16,914,872(3,417,031)13,497,841

30%

4,049,352




80,000P10,000 (€144.36)

€11.5 million

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

Issued and outstanding, January 1Issuance of sharesRedemption of shares

39,0519,917

(5,354)43,614

2013 201243,61411,013(8,760)45,867

48,2064,642

(13,797)39,051

2011

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


1,862,031995,821

2013 20122,158,5751,718,251

823,3152,453,805

2011

As at December 31, 2013, the Fund has 495 shareholders (2012 - 426).

Earnings per share




578,099

41,33313.9864

2013 201220,968

45,7700.4581

110,976

43,6292.5436

2011


The 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.


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

127,465(2,375)

125,090

2013 2012125,090(44,405)

80,685



8,637,954(125,090)8,512,864

2013 20129,099,246

(80,685)9,018,561

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 includ-ing shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows:

Trading NAV Total issued and outstanding sharesTrading NAV per share

9,018,56145,867196.62

Note 2013

98,512,864

43,614195.19

2012





As fund manager, BPI Investment shall formulate and imple-ment the investment strategy, provide and render manage-ment, 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 BPI Investment 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 prepara-tion 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, BPI Investment, BPI Capital Corporation (BPI Capital), and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connec-tion 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.






2,4452,444

4,889

Transactions

33,66833,667

67,335





2,2772,276

4,553

Transactions

28,64228,642

57,284






1,9301,929

3,859

Transactions

29,73629,736

59,472

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 Invest-ment Advisor. For the year ended December 31, 2013, total remunerations paid to directors and officers charged in profit or loss amounted to €1,842 (2012 - €2,263; 2011 - €4,289). As at reporting dates, there were no outstanding balances related to these fees.

Note 12 - Others

Other expenses in 2013 consist mainly of administrative expenses amounting to €3,507 (2012 - €2,329).


The Fund has an existing custodian agreement with Hongkong & Shanghai Banking Corporation Ltd. (“HSBC”) and Bank of New York for custodial services of the Fund’s proprietary assets and/or the assets owned in the Philip-pines. Under this agreement, the Fund pays HSBC a fixed monthly custodian fee of P4,900 or its Euro equivalent. As at December 31, 2013, the market value of securities held by the custodian aggregates to €8,381,854 (2012 - €7,573,954).


The following 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. Amounts are presented in Euro and in Philippine Peso.

I. Supplemental information required by Revenue Regulations 15-2010



Total documentary stamp taxes paid on share subscrip-tions for the year ended December 31, 2013 amounted to €10,063 (P571,253). There are no documentary stamp taxes accrued as at December 31, 2013.

Withholding taxes

Withholding taxes for the year ended December 31, 2013 amounted to €10,273 (P583,174), €1,695 (P96,221) of which is outstanding at December 31, 2013.



In Euro Municipal and other related taxes Community tax Others

784117322

1,223

Amount

In Philippine Peso Municipal and other related taxes Community tax Others

44,506 6,642

18,279 69,427

Amount



As at December 31, 2013, open taxable years are 2012, 2011 and 2010. The Fund has not received any Final As-sessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR.



Income

Interest income Subject to 30% Subject to 20% Subject to 7.5%

Other income Subject to 30%

795,440 15,267,385

3,477,453 19,540,278

44,39419,584,672

EUR PHP

14,012 268,934

61,255 344,201

782344,983

Taxable amount

Cost of services


3,822,599 640,681

4,463,280

EUR PHP67,33511,28678,621

Deductible amount


Itemized deductions


598,566 303,730 902,296

EUR PHP10,544

5,350 15,894

Deductible amount


Taxes and licenses

Details of the Fund’s taxes & licenses are presented in Sec-tion I of this note.

Other information


Independent Auditor’s ReportTo the Board of Directors and Shareholders ofPhilippine Stock Index Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City


We have audited the accompanying financial statements of Philippine Stock Index Fund, Inc., which comprise the statements of financial position as at December 31, 2013 and 2012, 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, 2013, 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 Philippine Stock Index Fund, Inc. as at December 31, 2013 and 2012, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2013 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.

Imelda Dela Vega MangundayaPartnerCPA Cert. No. 90670PTR No. 0024586, issued on January 3, 2014, Makati CitySEC A.N. (individual) as general auditors 0668-AR-2, Category A; effective until March 3, 2017SEC A.N. (Firm) as general auditors 0009-FR-3; effective until August 15, 2015 TIN 152-015-124BIR A.N. 08-000745-47-2013, issued on April 4, 2013; effective until April 3, 2016BOA/PRC Reg. No. 142, effective until December 31, 2016




To the Board of Directors and Shareholders ofPhilippine Stock Index Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City

We have audited the financial statements of Philippine Stock Index Fund, Inc. as at and for the year ended December 31, 2013, on which we have rendered the attached report dated March 22, 2014. 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, 2013 as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components 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.




To the Board of Directors and Shareholders ofPhilippine Stock Index Fund, Inc.17th Floor, BPI BuildingAyala Avenue corner Paseo de RoxasMakati City



Isla Lipana & Co.



Philippine Stock Index Fund, Inc.



ASSETS



ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Due from brokers and other receivables Total assets

LIABILITIES Management fee payable Other liabilities Total liabilities EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity

Notes

456

117

9

10

2013

12,0358,085,394

74,4088,171,837

9,49286,29095,782

1,233,0714,889,0671,953,9178,076,0558,171,837

2012

15,0947,480,997

121,1097,617,200

7,786179,937187,723

1,136,8683,190,4933,102,1167,429,4777,617,200


Statements of Changes in EquityDecember 31, 2013 and 2012



Balance at January 1, 2011Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2011Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2012Comprehensive income Loss for the year Other comprehensive income for the yearTotal comprehensive loss for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2013

601,784

---

238,717 (324,466) (85,749) 516,035

---

914,814(293,981)

620,8331,136,868

---

830,327(734,124)

96,2031,233,071

1,964,657

142,143-

142,143

---

2,106,800

1,134,252-

1,134,252

-(138,936)(138,936)3,102,116

(47,119)-

(47,119)

-(1,101,080)(1,101,080)

1,953,917

2,915,599

142,143

142,143

1,082,941(1,501,764)

(418,823)2,638,919

1,134,252-

1,134,252

5,321,785(1,665,479)

3,656,3067,429,477

(47,119)-

(47,119)

5,971,966(5,278,269)

693,6978,076,055

Redeemableshares (Note 9) Total equity

Retained earnings

Share premium

349,158

---

844,224(1,177,298)

(333,074) 16,084

---

4,406,971(1,232,562)

3,174,4093,190,493

---

5,141,639(3,443,065)

1,698,5744,889,067




(All amounts in thousands of Philippine Peso except per share amounts)


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

EXPENSES Management fees Taxes and licenses Professional fees Other

(LOSS) PROFIT FOR THE YEAROTHER COMPREHENSIVE INCOME FOR THE YEARTOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEARBASIC AND DILUTED (LOSS) EARNINGS PER SHARE

2013

242,755135

(130,999)3,809

115,700

150,8158,4051,8781,721

162,819(47,119)

-(47,119)

(3.9763)

2012

89,93683

1,120,367617

1,211,003

61,9445,8331,7967,178

76,7511,134,252

-1,134,252

137.2355

2011

93,95045

94,662282

188,939

42,5991,922

7821,493

46,796142,143

-142,143

25.4326

Notes

54

5

11

12

9





CASH FLOWS FROM OPERATING ACTIVITIES (Loss) profit for the year 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 Loans and receivables Increase (decrease) in: Management fee payable Due to brokers Other liabilities Cash (used in) generated from operations Interest received Net cash (used in) generated from operating activitiesCASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemption of shares Net cash generated from (used in) financing activitiesNET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31

2013

(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

2012

1,134,252

(799,851)(83)

334,318

(4,033,978)(75,392)

5,124(50,721)176,773

(3,643,876)83

(3,643,793)

5,321,784(1,665,478)

3,656,30612,513

2,58115,094

2011

142,143

407,897(45)

549,995

(133,715) (34,298)

(300) 40,849 (1,796)

420,735 45

420,780

1,082,942(1,501,765)

(418,823) 1,957

624 2,581

Notes

5

9

4



Philippine Stock Index 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 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 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 July 12, 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, Philippines.








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.




• PFRS 13, Fair Value Measurement (effective January 1, 2013). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value and allows the use of mid- market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed

in the Fund’s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund.



• PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phase of PFRS 9 when issued.



Cash and cash equivalents includes 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.


Classification






Regular-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 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 income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

Impairment

The Fund assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of the financial assets at amortised cost such financial assets are tested for impairment both on an individual and collective basis. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the financial assets carried at amortised cost is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. When a receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against operating expenses in profit or loss.












Fair 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.






2.7 Due from and due to brokers

Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the reporting date, respectively.











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 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.


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




Subscriptions 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. The financial statements are presented in Peso, which is the Fund’s functional and presentation currency.




2.13 Income tax

Current income tax



Deferred income tax

Deferred 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.











The 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 Fund’s objective is to provide investment returns that track the performance of the PSEi through investing in equity securities comprising the PSEi.

3.2 Price risk

The net asset value 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.

The table below is a summary of the significant sector concentrations within the portfolio at December 31:

HoldingsBanksProperty Communications Power and energy FoodMining Others

39%15%14%10%

8%7%2%5%

100%

2013 201233%16%15%13%11%

5%2%5%

100%

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 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 is 1.03% and 1.5% as at December 31, 2013 and 2012, respectively.

If the PSEi has strengthened/weakened by 24.35% (2012 - 14.65%) 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 P3,077 million (2012 - P1,088 million) higher/lower mainly due to marked-to-market fluctuations of financial assets at fair value through profit or loss.

3.3 Credit risk




Cash and cash equivalentsDue from brokers and other receivables

12,03574,40886,443

2013 201215,094

121,109136,203


The Fund’s cash and cash equivalents as at December 31, 2013 and 2012 are 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.

3.4 Liquidity risk


The Fund is exposed to daily cash redemptions of redeem-able 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 predomi-nantly 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 liqui-dated 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 bor-rowings have arisen in 2012 and 2013.

The Fund’s financial liabilities pertain to management fee payable, due to brokers and other liabilities which are contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their contractual maturity date.



(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 develop ment of the investment activities of the Fund; and

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

As at December 31, 2013 and 2012, the Fund is in compli-ance with the minimum required capital.


(i) Monitor the level of daily subscriptions and redemp tions 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.




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

8,038,93946,455

8,085,394

---


---


7,306,932174,065

7,480,997

---


---


Financial assets Cash in bank Due from brokersFinancial liabilities Management fee payable Capital shares redeemed payable

12,035-

--

-65,856

9,492

83,360


--

-

-

Carrying amount

12,03565,856

9,492

83,360

Financial assets Cash in bank Due from brokersFinancial liabilities Management fee payable Capital shares redeemed payable

15,094-

-

-

-118,964

7,786

177,651


--

-

-

Carrying amount

15,094118,964

7,786

177,651

The carrying amounts of the Fund’s financial assets and financial liabilities at reporting period approximate their fair values considering that these have short-term maturities.



Cash in bank at December 31, 2013 amounts to P12,035 (2012 - P15,094) and earns interest at the prevailing bank deposit rates.

Interest income earned from bank deposits during the year amounted to P135 (2012 - P83; 2011 - P45).



Listed equity securitiesUnit investment trust fund

(751,293)620,294

(130,999)

2013 2012(407,897)

502,55994,662

799,851320,516

1,120,367

2011

Note 6 - Due from brokers/due to brokers

Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on reporting date, respectively. These accounts are required to be settled within three days from transaction date.

Note 7 - Other liabilities


Capital shares redeemed payableWithholding tax on management fees

83,3602,930

86,290

2013 2012177,651

2,286179,937

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.


The Fund did not recognize the related deferred income tax assets on 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:

2013201220112000

2013 2012

Expired NOLCO Income tax rate Unrecognized deferred income tax assets

158,98476,13546,796

-281,915(46,796)235,119

30%70,536

2016201520142013

Year of Incurrence Year of Expiration

-76,13546,79641,898

164,829(41,898)122,931

30%36,879


The details of the Fund’s authorized number of shares at December 31 follow:


20 millionP100

P2 billion

2013 201214.68 million

P100P1.468 billion



11,368,6838,303,273

(7,341,244)12,330,712

2013 20126,017,8472,387,175

(3,244,668)5,160,354

5,160,3549,148,140

(2,939,811)11,368,683

2011



5,971,9665,278,269

2013 20121,082,9421,501,765

5,321,7841,665,478

2011


On February 27, 2013, the Fund’s Board of Directors approved an increase in Fund’s authorized shares from 14.68 million to 20 million shares with par value of P100 per share. The SEC approved the application for increase in authorized capital stock on July 12, 2013.

Earnings per share is calculated by dividing the net income by 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:

(Loss) profit for the yearWeighted average number of shares outstanding during the yearBasic and diluted earnings per share

(47,119)

11,850(3.9763)

2013 2012 142,143

5,58925.4326

1,134,251

8,265137.2355

2011


The consideration received or paid for ordinary shares is-sued 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 Company’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 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 include: Fund Return - Net of Fees and Expenses, Fund Return - Gross of Fees and Expenses, PSEI Price Return and PSEI Total Return.

The movement in the allowance for market risk follow:

At January 1Distribution of provisions for market riskAt December 31

132,818(132,818)

-

2013 2012194,137(61,319)132,818



8,076,055-

8,076,055

2013 20127,429,477(132,818)7,296,659


Trading NAVTotal issued and outstanding shares (in thousands)Trading NAV per share

8,076,055

12,331654.94

2013 20127,296,659

11,369641.80

9

Note


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. Such retained earnings will effectively be converted into realized profits by the shareholders upon redemption from the Fund.




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





4,7464,746

9,492

Transactions

75,40875,407

150,815





3,8933,893

7,786

Transactions

30,97230,972

61,944





1,3311,331

2,662

Transactions

21,30021,299

42,599

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, 2013, total remunerations paid to directors and officers charged in profit or loss amounted to P240 (2012 - P154; 2011 - P258). As at reporting dates, there were no outstand-ing balances related to these fees.


The 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 2% of the average daily market value of the assets. As at December 31, 2013, the market value of securities in custody of HSBC aggregates to P8,038,939 (2012 - P7,426,859).



I. Supplementary information required by Revenue Regu-lations No. 15-2010



The documentary stamp taxes paid on share subscrip-tions for the year ended December 31, 2013 amounted to P4,062. There are no documentary stamp taxes accrued as at December 31, 2013.

Withholding taxes

Withholding taxes for the year ended December 31, 2013 amounted to P19,880, P2,930 of which is outstanding at December 31, 2013.



Municipal and other related taxesCommunity taxOthers

Amount4,330

11 2

4,343



As at December 31, 2013, open taxable years are 2012, 2011 and 201o. 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.



Income

Fund’s main income primarily pertains to dividend income, interest income and realized gain/loss on sale of listed securities.

Dividend incomeTotal realized gainInterest incomeOther income

--

135-

135

Final Tax Regular Rate---

3,8093,809

Exempt242,755620,294

--

863,049

Cost of services

Trust feeTaxes & licenses

Deductible amount150,815

8,405159,220


Itemized deductions


Deductible amount1,8781,6953,573


Taxes and licenses


Other information


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, 2013 and 2012, 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, 2013, 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, 2013 and 2012, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2013 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, 2013, on which we have rendered the attached report dated March 22, 2014. 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, 2013 as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components 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.




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



Isla Lipana & Co.



ALFM Growth Fund, Inc.


(All amounts in Philippine Peso)

ASSETS



ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Due from brokers and other receivables Total current assets

LIABILITIES Accrued expensesEQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity

Notes

4

56

7

9

10

2013

8,985,372

6,034,176,90736,339,747

6,079,502,026

63,560,550

2,765,195,6002,882,723,477

368,022,3996,015,941,4766,079,502,026

2012

12,033,575

4,785,599,72230,810,067

4,828,443,364

23,203,243

2,170,852,6001,731,219,502

903,168,0194,805,240,1214,828,443,364





Balance at January 1, 2011Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2011Comprehensive income Profit for the year Other comprehensive income for the yearTotal comprehensive income for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with ownersBalance at December 31, 2012Comprehensive income Loss for the year Other comprehensive income for the yearTotal comprehensive loss for the yearTransactions with owners Issuance of shares Redemption of sharesTotal transactions with owners Balance at December 31, 2013

1,196,564,500

---

1,102,731,900(1,105,230,300)

(2,498,400)1,194,066,100

---

1,851,116,200(874,329,700)

976,786,5002,170,852,600

---

1,489,022,400 (894,679,400)

594,343,000 2,765,195,600

546,528,791

10,677,838-

10,677,838

---

557,206,629

423,653,269-

423,653,269

-(77,691,879)(77,691,879)903,168,019

(249,996,154)-

(249,996,154)

-(285,149,466)(285,149,466)

368,022,399

2,230,062,318

10,677,838-

10,677,838

1,961,446,011 (1,993,058,018)

(31,612,007)2,209,128,149

423,653,269-

423,653,269

4,017,418,024(1,844,959,321)

2,172,458,7034,805,240,121

(249,996,154)-

(249,996,154)

3,646,907,318 (2,186,209,809)

1,460,697,509 6,015,941,476


Retained earnings

Share premium

486,969,027

---

858,714,111 (887,827,718)

(29,113,607)457,855,420

---

2,166,301,824(892,937,742)1,273,364,0821,731,219,502

---

2,157,884,918 (1,006,380,943)

1,151,503,975 2,882,723,477






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

EXPENSES Management fees Taxes and licenses Others

(LOSS) PROFIT BEFORE INCOME TAXPROVISION FOR INCOME TAX(LOSS) PROFIT FOR THE YEAROTHER COMPREHENSIVE INCOME FOR THE YEARTOTAL COMPREHENSIVE (LOSS) INCOME FOR THE YEARBASIC AND DILUTED (LOSS) EARNINGS PER SHARE

54, 5

5

11

9

50,316,4054,236,795

452,220,2941,767,122

508,540,616

71,364,25510,565,047

2,110,68784,039,989

424,500,627847,358

423,653,269-

423,653,269

25.1806

60,178,3091,059,863

5,739,1623,472,674

70,450,008

49,138,8219,501,383

919,99359,560,19710,889,811

211,97310,677,838

-

10,677,838

0.8933

Notes 201120122013

110,433,2326,064,153

(223,629,995)2,882,463

(104,250,147)

131,564,67710,238,409

2,730,090144,533,176

(248,783,323)1,212,831

(249,996,154)-

(249,996,154)

(9.0768)





CASH FLOWS FROM OPERATING ACTIVITIES (Loss) profit for the year Adjustment for: Unrealized fair value losses (gains), net 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 Due from brokers and other receivables Increase (decrease) in: Accrued expenses Net cash (used in) generated from operating activitiesCASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemption of shares Net cash generated from (used in) financing activitiesNET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1 December 31

2013

(249,996,154)

298,769,236

48,773,082

(1,547,346,421)(5,529,680)

40,357,307 (1,463,745,712)

3,646,907,318 (2,186,209,809)

1,460,697,509

(3,048,203)

12,033,575 8,985,372

2012

423,653,269

(193,067,015)

230,586,254

(2,579,707,501)27,280,497

(55,998,254)(2,377,839,004)

4,017,418,024(1,844,959,320)

2,172,458,704

(205,380,300)

217,413,87512,033,575

2011

10,677,837

47,016,322

57,694,159

176,354,47435,260,745

(21,077,015)

248,232,363

1,961,446,011(1,993,058,018)

(31,612,007)

216,620,356

793,519217,413,875

5

99

4

Notes



ALFM 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 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 February 25, 2013 (Note 9).









There are currently no areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Fund’s financial statements.




• PFRS 13, Fair Value Measurement (effective January 1, 2013). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid- ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund’s prospectus for the calculation of its per share trading value for subscriptions

and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund.



• PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recog- nition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting.

PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phase of PFRS 9 when issued.





Classification






Regular-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 at

fair value through profit or loss are initially recognized at fair value plus transaction costs. 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 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.

Impairment

The Fund assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of the financial assets at amortised cost such financial assets are tested for impairment both on an individual and collective basis. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the financial assets carried at amortised cost is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. When a receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against operating expenses in profit or loss.










Financial 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.







• 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.

2.7 Due from and due to brokers

Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the reporting date, respectively.




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 obli-gation 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.









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




Subscriptions 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. The Board of Directors considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial state-ments are presented in Peso, which is the Fund’s functional and presentation currency.




2.12 Income tax

Current income tax


The Fund primarily earns dividend income from its invest-ments 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.

Deferred income tax

Deferred 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 repor-ting 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 deduc-tible 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.





Related 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 ope-rating decisions. Such relationship also exists between andor among entities which are under common control with the reporting enterprise, or between, and/or among the repor-ting enterprises and their key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the subs-tance of the relationship, and not merely the legal form.





The Fund’s activities expose it to a variety of financial risks: 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 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 diversifica-tion of assets to the corporate goals and specify reporting requirements.

The Fund’s objective is to outperform its composite bench-mark, 75% of the Philippine Stock Exchange Index and 25% of 91-day Philippine Treasury Bills, by investing in a diversified portfolio of equity instruments.

3.2 Price risk

The 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 arising from adverse

movement in equity prices. All securities investments present a risk of loss of capital. The Fund Manager mode-rates this risk through a careful selection of securities andother financial instruments within specified limits. The maxi-mum 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 which the Fund is exposed. The table below is a summary of the significant sector concentrations within the portfolio.

PropertyHoldingsBanksFood, beverage and tobaccoElectricity, energy, power and waterTelecommunicationsTransportation servicesRetailTotal

25%20%16%14%

9%6%5%5%

100%

2013 201217%26%13%11%

5%17%

7%4%

100%

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 21.92% (2012 - 14.65%) 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 P2,275 million (2012 - P1,088 million) higher/lower mainly due to marked-to-market fluctuations of financial assets at fair value through profit or loss.

3.3 Credit risk


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 equiva-lent 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. External ratings are also used by the Fund for managing credit risk exposures.


Cash and cash equivalentsFair value through profit or loss government securitiesDue from brokers and other receivables

8,985,372-

36,339,74745,325,119

2013 201212,033,575

189,316,02530,810,067

232,159,667


The Fund’s cash and cash equivalents consist of regular savings deposit with a local universal bank (Note 4).

Investments in government securities classified as fair value through profit or loss pertain to investments in treasury notes that are guaranteed by the Philippine government.

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.

3.4 Liquidity risk


The Fund is exposed to daily cash redemptions of redee-mable 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.

The Fund also manages its liquidity by investing predo-minantly 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 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 accrued expenses which are contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their maturity date.




ii) Maintain a strong capital base to support the development of the investment activities of the Fund; 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. 3.6 Fair value estimation




5,161,767,639872,409,268

6,034,176,907

---


---

Financial assets at fair value through profit or loss Equity securities Unit investment trust funds Mutual funds Government securities

4,226,031,632155,867,655214,384,410189,316,025

4,785,599,722

---


---


Financial assets Cash in bank Due from brokersFinancial liabilities Due to brokers Management fee payable Capital shares redeemed payable

8,985,372-

--

-

-36,339,747

47,293,0998,970,671

4,572,236


--

--

-

Carrying amount

8,985,37236,339,747

47,293,0998,970,671

4,572,236

Financial assets Cash in bank Due from brokersFinancial liabilities Due to brokers Management fee payable Capital shares redeemed payable

12,033,575-

--

-

-30,810,067

1,300,7897,100,288

12,815,934


--

--

-

Carrying amount

12,033,57530,810,067

1,300,7897,100,288

12,815,934

The carrying amounts of the Fund’s financial assets and financial liabilities at reporting period approximate their fair values considering that these have short-term maturities.



Cash in bank at December 31, 2013 amounts to P8,985,372 (2012 - P12,033,575) and earns interest at the prevailing bank deposit rates.

Interest income earned from bank deposits during the year amounted to P606,144 (2012 - P952,290; 2011 - P1,059,862).



Listed equity securitiesUnit investment trust fundsMutual fundsGovernment securities

5,161,767,639872,409,268

--

6,034,176,907

2013 20124,226,031,632

155,867,655214,384,410189,316,025

4,785,599,722

Investments in equity securities are listed at the PSE. Investment in unit investment trust fund consists of placements in a fund with investments in short-term fixed income instruments. Investments in government securities pertain to treasury notes with maturity of more than one year as at December 31, 2012.

Interest income earned from financial assets at fair value through profit or loss during the year amounted to P5,458,009 (2012 - P3,284,505; 2011 - nil).

Dividend income arising from investments in listed equity securities recognized in profit or loss amounted to P110,433,232 (2012 - P50,316,405; 2011 - P60,178,309).

Net change in fair value of financial assets at fair value through profit or loss is summarized as follows:

Unrealized fair value (loss) gain, netRealized gain on sale

(298,769,236)75,139,241

(223,629,995)

2013 2012193,067,015259,153,279452,220,294

Note 6 - Due from brokers/Due to brokers

Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the statement of financial position date, respectively. These accounts are required to be settled within three days from transaction date.

Note 7 - Accrued expenses


Due to brokersManagement fee payableCapital shares redeemed payableWithholding tax payable

47,293,0998,970,6714,572,2362,724,544

63,560,550

2013 20127,100,2881,300,7891,986,232

12,815,93423,203,243

611

Notes

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.


The Fund did not recognize the related deferred income tax assets on NOLCO in view of the Fund’s limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund’s income is tax-exempt and subject to final tax. Details of unrecognized deferred income tax assets are as follows:

20132012201120102009

2013 2012


141,650,71482,272,86655,933,94628,105,639

-

307,963,165(28,105,639)279,857,526

30%83,957,258

20162015201420132012

Year of Incurrence Year of Expiration-

82,272,86655,933,94628,105,639

8,176,646

174,489,097(8,176,646)

166,312,45130%

49,893,735



Number of authorized sharesPar value per shareAmount

36 millionP100

P3.6 billion

2013 201230 million

P100P3 billion




21,708,52614,890,224(8,946,794)27,651,956

2013 201211,940,66118,511,162(8,743,297)21,708,526

11,965,64511,027,319

(11,052,303)11,940,661

2011



3,646,907,3182,186,209,809

2013 20124,017,418,0241,844,959,320

1,961,446,0111,993,058,018

2011


On July 19, 2012, the Fund’s Board of Directors approved an increase in Fund’s authorized shares from 30 million to 36 million shares with par value of P100 per share. The SEC approved the application for increase in authorized capital stock on February 25, 2013.

Earnings per share



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

(248,783,323)

27,408,665

(9.0768)

2013 2012423,653,269

16,824,594

25.1806

10,677,838

11,953,153

0.8933

2011


The 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 purposes of share issuances and redemptions (“trading NAV”).

There is no difference between PFRS NAV and trading NAV as at December 31, 2013 and 2012.


Trading NAV Total issued and outstanding shares (Note 9)Trading NAV per share

6,015,941,476

27,651,956217.56

2013 20124,805,240,121

21,708,526221.35

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.



BPI Investment and BPI - Asset Management Trust Group (BPI - AMTG) were designated as fund manager and investment advisor of the Fund, respectively.

As fund manager, BPI Investment 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 consi-deration for the above management, distribution and administration services, the Fund pays BPI Investment 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

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






4,485,3364,485,335

8,970,671

Transactions

65,782,33965,782,338

131,564,677





650,395650,394

1,300,789

Transactions

35,682,12835,682,127

71,364,255





1,735,8391,735,838

3,471,677

Transactions

24,569,41124,569,410

49,138,821

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, 2013, total remunerations paid to directors and officers charged in profit or loss amounted to P535,000 (2012 - P341,000; 2011 - P236,500). As at reporting dates, there were no outstanding balances related to these fees.


The 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, 2013, the market value of securities in custody of HSBC aggregates P5,161,767 (2012 - P4,246,454).



I. Supplementary information required by Revenue Regulations No. 15-2010



Total documentary stamp taxes paid on share subscriptions for the year ended December 31,2013 amounted to P7,434,115. There are no documentary stamp taxes accrued as at December 31, 2013.

Withholding taxes

Withholding taxes for the year ended December 31, 2013 amounted to P18,367,353, P2,724,544 of which is outstanding at December 31, 2013.



Filing feesMunicipal and other related taxesCommunity taxOthersTotal

Amount2,149,900

641,992 10,500

1,902 2,804,294


Tax cases and assessments As at December 31, 2013, open taxable years are 2012, 2011 and 2010. 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.



Income

Fund’s main income primarily pertains to dividend income, interest income and realized gain on sale of listed securities.

Dividend incomeTotal realized gainInterest incomeOther income

--

6,064,154-

6,064,154

Final Tax Regular Rate---

2,882,4642,882,464

110,433,23275,139,242

--

185,572,474

Cost of services



10,238,409141,803,086


Itemized deductions


Deductible amount1,606,2561,123,8362,730,092

The above itemized deductions are subject to the regular tax rate of 30%. Taxes and licenses


Other information


Exempt

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


We have audited the accompanying financial statements of ALFM Money Market Fund, Inc., which comprise the statements of financial position as at December 31, 2013 and 2012, 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, 2013, 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 Money Market Fund, Inc. as at December 31, 2013 and 2012, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2013 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.





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, 2013, on which we have rendered the attached report dated March 22, 2014. 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, 2013 as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components 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.




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



Isla Lipana & Co.



ALFM Money Market Fund, Inc.





27,166,490

---

23,028,030(19,850,750)

3,177,28030,343,770

---

143,774,730(78,319,020)

65,455,71095,799,480

--

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

102,575,740198,375,220

5,639,069

7,031,956-

7,031,956

---

12,671,025

19,399,815-

19,399,815

-(11,841,086)(11,841,086)

20,229,754

21,124,180-

21,124,180

---

41,353,934

279,873,286

7,031,956-

7,031,956

243,127,923(207,319,445)

35,808,478322,713,720

19,399,815-

19,399,815

1,550,045,560(840,626,034)

709,419,5261,051,533,061

21,124,180-

21,124,180

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

1,146,317,7222,218,974,963


Retained earnings

Share premium

247,067,727

---

220,099,893(187,468,695)

32,631,198279,698,925

---

1,406,270,830(750,465,928)

655,804,902935,503,827

--

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

1,043,741,9821,979,245,809




ASSETS



ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Loans and receivables Other receivables Total assets

LIABILITIES Accrued expenses Deposits for future subscriptions Total liabilities

EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity

Notes

567

810

10

11

2013

1,939,020,558560,638,187

59,077,49112,037,561

2,570,773,797

1,799,021349,999,813351,798,834

198,375,2201,979,245,809

41,353,9342,218,974,9632,570,773,797

2012

849,730,88788,792,218

109,680,4903,975,134

1,052,178,729

645,668-

645,668

95,799,480935,503,827

20,229,7541,051,533,0611,052,178,729






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

EXPENSES Management fees Professional fees Taxes and licenses Others


PROVISION FOR INCOME TAXPROFIT FOR THE YEAR

OTHER COMPREHENSIVE INCOME FOR THE YEARTOTAL COMPREHENSIVE INCOME FOR THE YEARBASIC AND DILUTED EARNINGS PER SHARE

5, 7

6

12

9

10

13,157,938

14,914,77042,315

28,115,023

4,369,5021,638,9211,465,612

110,5507,584,585

20,530,438

1,130,62319,399,815

-19,399,815

3.0758

7,884,736

2,949,5503,462

10,837,748

1,891,049489,379135,780626,635

3,142,8437,694,905

662,9497,031,956

-7,031,956

2.4455

Notes 201120122013

29,594,331

10,558,98967,611

40,220,931

10,339,511808,345

1,682,553166,645

12,997,05427,223,877

6,099,69721,124,180

-21,124,180

1.7014





CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income Operating (loss) 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 Loans and receivables Other receivables Increase in: Accrued expenses Cash (used in) generated from operations Interest received Income taxes paid Net cash (used in) generated from operating activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from deposits for future stock subscriptions Proceeds from issuance of shares Redemption of shares Net cash from financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31

2013

27,223,877

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

(706,411)

(473,510,012)50,602,999 (8,062,427)

1,153,353(430,522,498)

29,594,331(6,099,697)

(407,027,864)

349,999,8133,425,321,472

(2,279,003,750)1,496,317,5351,089,289,671

849,730,887 1,939,020,558

2012

20,530,438

(1,248,762)(13,157,938)

6,123,738

(36,228,674)(69,847,951)

(51,051)

446,768(99,557,170)

10,686,452(1,130,623)

(90,001,341)

-1,550,045,560(840,626,034)

709,419,526619,418,185

230,312,702849,730,887

2011

7,694,905

649,465(7,884,736)

459,634

54,231,66320,753,111

(8,050)

6,57275,442,930

9,682,246(662,949)

84,462,227

-243,127,923

(207,319,445)35,808,478

120,270,705

110,041,997230,312,702

6

10

5

Notes

Notes to FiNaNcial statemeNtsAs at December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013(All amounts are shown in Philippine Peso, unless otherwise stated)


ALFM 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.

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 November 12, 2012 (Note 10).







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 interpre-tations 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 area involving a higher degree of judgment or complexity is disclosed in Note 4.




• PFRS 13, Fair Value Measurement (effective January 1, 2013). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid- ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund’s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement.

The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund.



• PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting.

PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued.



Cash 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.


Classification




As at reporting date, the Fund has no financial assets under available-for-sale and held-to-maturity categories.Recognition and derecognition

Regular-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. Finan-cial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all 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.


Financial 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 income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

Impairment

The Fund assesses at each reporting date whether there is objective evidence that a financial asset or group of finan-cial assets is impaired. A financial asset or a group of finan-cial 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 recog-nition 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 indi-vidually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with simi-lar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually asse-ssed for impairment and for which an impairment loss is orcontinues 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 reorgani-zation and default or delinquency in payments are consi-dered indicators that the financial asset is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective inte-rest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount ofthe 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 the loss has been determined.If in a subsequent period, the amount of the 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 adjus-ting the allowance account. The amount of the reversal is recognized in profit or loss as a reduction of impairment losses for the year.




Financial liabilities at fair value through profit or loss comp-rises 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 toge-ther 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.




73annual RepoRt 2013





Prior to January 1, 2013, the quoted market price used for financial assets held by the Fund was the current bid price. If the current bid is not available, the Fund uses the closing price. In the absence of done deals, benchmark or reference prices based on the weighted average of done or executed deals in the trading market are used for valuation. From January 1, 2013, the Fund adopted PFRS 13, Fair value measurement; and changed its fair valuation input to utilize the last traded market price for financial assets where the last traded price falls within the bid-ask spread. In circum-stances where the last traded price is not within the bid-ask spread, management will determine the point within the bid-ask spread that is most representative of fair value.




• 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.


The shares issued by the Fund are redeemable at the holder’s holder’s option and are classified as equity and are recognized at par 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: the puttable instruments must entitle the holder to a pro-rata share ofnet assets; the puttable instruments must be the most subordinated class and the features of that class must beidentical; there must be no contractual obligations to deliver cash or another financial asset other than the obliga-tion 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.

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 theFund’s prospectus. Any excess of subscriptions over the 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.



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.









Subscriptions 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 port-folio of Peso denominated short-term fixed income andmoney market instruments. The Board of Directors consi-ders 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 Fund’s functional and presentation currency.




2.12 Income tax

Current income tax


The Fund primarily earns dividend income from its invest-ments 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.Deferred income tax

Deferred 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 notaccounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combina-tion, 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 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.


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 finan-cial 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.








The 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 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.


The 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.



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 finan-

72 AlFM MutuAl FunDS

cial 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 (see Note 11). To estimate its exposure to market risk, the Fund Manager computes the statistical“value at risk” (VAR) of its investments. The VAR measure-ment 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 compu-tation of VAR. As such, there remains 1% statistical proba-bility that the portfolios’ actual loss could be greater than the VAR estimate.

As at December 31, 2013, the Fund’s VAR with respect to market interest rate volatilities amounts to P812,252 (2012 - P60,921).

3.3 Credit risk


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 equiva-lent 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.



The Fund’s cash in bank was deposited with Bank of the Philippine Islands, a local universal bank while its cash equivalents are composed of short-term time deposits with various universal and thrift banks with no history of default with the Fund (Note 5).

The total amount of loans and receivables outstanding is unsecured.

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.

3.4 Liquidity risk


The Fund is exposed to daily cash redemptions of redee-mable shares. In accordance with the Fund’s policy, the Fund Manager monitors the Fund’s liquidity position on adaily 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 predomi-nantly 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.




The capital of the Fund is represented by total equity as shown in the statement of financial position. The Board of Directors and 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 objective when managing capital is 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









The fair value of loans and receivables is reported based on expected cash flows discounted at current market rates. The carrying amount of the Fund’s other financial assets and liabilities at reporting period approximate their fair values considering that they have short-term maturities.




Impairment of loans and receivables

The Fund reviews its loans and receivables at each report-ing date to assess whether an allowance for impairment should be recorded in the statement of total comprehen-sive income. In particular, judgment by management is required in the estimation of the amount and timing of fu-ture cash flows when determining the level of allowance re-quired. The level of this allowance is evaluated by manage-ment 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 receiv-ables, amounted to P59,007,491 and P109,680,490 as at December 31, 2013 and 2012, respectively. No impairment loss recognized for the years ended December 31, 2013, 2012 and 2011.Note 5 - Cash and cash equivalents


Cash and cash equivalentsFinancial assets at fair value through profit or lossLoans and receivablesOther receivables

1,939,020,558560,638,187

59,077,49112,037,561

2,570,773,797

2013 2012849,730,887

88,792,218109,680,490

3,975,1341,052,178,729

As at December 31, 2013 and 2012, the Fund’s financial assets as shown above are neither past due nor impaired.


The Fund invests primarily in high-grade investment instruments and securities. Details of ratings of the Fund’s investments at December 31, 2013 and 2012 based on external credit rating agencies follow:

Short-term time depositsSpecial savings deposits (BSP SDA)Regular savings deposits

1,930,004,120-

9,016,4381,939,020,558

2013 2012161,000,000671,000,000

17,730,887849,730,887

Special savings deposits consist of Bangko Sentral ng Pilipinas (“BSP”) Special Deposit Accounts (“SDA”) bearing an interest rate of 4.0% in 2012. In 2013, the BSP limited access to its SDA facility to trust accounts and unit invest-ment trust funds.

Short-term time deposits bear interest rates ranging from 0.38% to 1.50% (2012 - 3.70% to 4.13%).

Interest income earned from cash and cash equivalents amounts to P11,529,321 (2012 - P2,067,435; 2011 - P1,418,373).



At December 31, 2013Standard and Poor’s BB+Philippine Rating Services Corp. AaaUnrated

-

-59,077,49159,077,491

Fair value through profit or loss

Loans and receivables

-

560,638,187-

560,638,187

At December 31, 2012Standard and Poor’s BB+Philippine Rating Services Corp. AaaUnrated

-

-109,680,490109,680,490

Fair value through profit or loss

Loans and receivables

69,458,090

19,334,128-

88,792,218

Financial assets at fair value through profit or loss Corporate bonds 560,638,187

560,638,187--


--

Financial assets at fair value through profit or loss Government securities Corporate bonds

69,458,09019,334,12888,792,218

--


--



1,939,020,558-

-

-59,077,491

1,340,014


--

-

Carrying amount

1,939,020,55859,077,491

1,340,014


849,730,887-

-

-109,680,490

486,163


--

-

Carrying amount

849,730,887109,680,490

486,163

Government securitiesCorporate bonds

Interest rates (%)

-2.0 - 3.1

2013

Amount

2012

AmountInterest

rates (%)-

560,638,187560,638,187

9.56.9

69,458,09019,334,12888,792,218

The Fund generated interest income mainly from its invest-ments in government securities and loan instruments and gains resulting from disposals and movements in the market value of its financial assets at fair value through profit or loss.

The maturity pattern of government securities follows:


560,638,187-

560,638,187

2013 201219,334,12869,458,09088,792,218



12,223,032(1,664,043)10,558,989

2013 20113,599,015(649,465)2,949,550

201213,666,008

1,248,76214,914,770

Interest income earned from financial assets at fair value through profit or loss amounts to P10,837,909 (2012 - 5,056,535; 2011 - 2,518,154).


The account as at December 31, 2013 consists of unsecured term loans amounting to P59,007,491(2012 - P109,680,490).

Term loans represent debts issued by certain Philippine counterparty. The term loans carry interest rates ranging from 8.66% to 11.76% (2012 - 4.38% to 8.67%).

The maturity pattern of loans and receivables follows:


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

-59,077,49159,077,491

2013 201250,000,00059,680,490

109,680,490

Interest income earned from loans and receivables amounts to P7,227,100 (2012 - P6,033,968; 2011 - P3,948,209).

Note 8 - Accrued expenses

The account at December 31 consists of the following:

Management fee payableWithholding tax on management fees

12Note 2012

486,163159,505645,668

20131,340,014

459,0071,799,021


Provision for income tax substantially represents tax with-held for income subject to final tax.


201320122009

2013 2012

Income tax rateUnrecognized deferred income tax assets

12,929,4421,305,667

-14,235,109

30%4,270,533

201620152012

Year of Incurrence Year of Expiration

-1,305,667

109,5761,415,243

30%424,573


21,124,180

12,416,0251.7014

2013 20117,031,956

2,875,5132.4455

201219,399,815

6,307,1633.0758


The 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 statements 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

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

1,096,776(506,090)

590,686

2013 2012400,229696,547

1,096,776


PFRS NAVAllowance for market riskDeposits for future stock subscriptionsTrading NAV

2,218,974,963(590,686)

349,999,8132,568,384,090

2013 20121,051,533,061

(1,096,776)-

1,050,436,285


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

10

10

Note 20121,050,436,285

9,579,948

-9,579,948

109.65

20132,568,384,090

19,837,522

3,135,03722,972,559

111.80


20 millionP10

P200 million





9,579,94827,645,301

(17,387,727)19,837,522

2013 20112,716,6492,302,803

(1,985,075)3,034,377

20123,034,377

14,377,473(7,831,902)

9,579,948



3,425,321,4722,279,003,750

2013 2011243,127,923207,319,445

20121,550,045,560

840,626,034

As at December 31, 2013, the Fund has 2,232 shareholders (2012 - 958).

The Fund’s Board of Directors approved another increase in Fund’s authorized shares from 10 million to 20 million shares with par value of P10 per share on April 20, 2012 which was approved by SEC on November 12, 2012.

Deposits for future subscriptions

Subject to the approval of the SEC, the Fund’s Board of Directors approved an increase in the Fund’s authorized shares from 20 million to 50 million with par value of P100 per share. The Fund received cash from various inves-tors as deposits for future subscriptions amounting to P349,999,813. The deposit is presented as liability as the Fund has sufficient unissued redeemable shares to cover the amount of subscription. The Fund has yet to receive the approval from the SEC.

Earnings per share






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


The Fund has distribution agreements with subsidiaries of BPI, namely, BPI Investment, BPI Capital Corporation (BPI Capital), and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as co-distributors to perform principally all related daily functions in connec-tion 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 outstanding balanceis unsecured, unguaran-teed, non-interest bearing and payable in cash a month after the management fee is incurred.


670,007670,007

1,340,014

Transactions

5,169,7565,169,755

10,339,511





75,90075,899

151,799

Transactions

945,525945,524

1,891,049

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, 2013, total re-munerations paid to directors and officers charged in profit or loss amounted to P120,000 (2012 - P141,250; 2011 - P236,500). As at reporting dates, there were no outstanding balances related to these fees.



I. Supplementary information required by Revenue Regu-lations No. 15-2010


Documentary stamp taxes

Total documentary stamp taxes paid on share subscrip-tions for the year ended December 31, 2013 amounted to P1,551,645. There are no documentary stamp taxes accrued as at December 31, 2013.

Withholding taxes

Withholding taxes for the year ended December 31, 2013 amounted to P1,413,709, P459,007 of which is outstanding at December 31, 2013.



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 outstanding balance is unsecured, unguaran-teed, non-interest bearing and payable in cash a month after the manage-ment fee is incurred.


243,082243,081

486,163

Transactions

2,184,7512,184,751

4,369,502

Municipal and other related taxesCommunity taxOthersTotal

Amount64,31110,50056,097

130,908


Tax assessments and cases

As at December 31, 2013, open taxable years are 2012, 2011 and 2010. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case.



Income

Fund’s main income primarily pertains to interest income, dividend income and realized gain/loss on sale of marketable securities.

Interest income Subject to 20%Net realized fair value gains/(losses) Subject to 0%Other income Subject to 30%

Taxable amount

29,594,331

10,558,989

67,61140,220,931

Cost of services



1,682,55312,022,064


Itemized deductions


Deductible amount808,345166,645974,990

The above itemized deductions are subject to the regular tax rate of 30%. Taxes and licenses


Other information


74 AlFM MutuAl FunDS

Board of Directors

Romeo l. BernardoCHAIRMAn

Sherisa p. nuesapReSIDent

Maria theresa Marcial-Javier DIReCtoR

John philip S. orbeta DIReCtoR

Mario t. MirandaDIReCtoR


officers

(L-R) Mario T. Miranda, Director; Maria Theresa Marcial-Javier, Vice Chairman; Fernando J. Sison III, Treasurer; Romeo L. Bernardo, Chairman; Elvie Y. Reyes, Compliance Officer; Sherisa P. Nuesa, Director; Atty. Sabino B. Padilla IV, Corporate Secretary; and John Philip S. Orbeta, Director

Investment Advisor

“Best Fund House in the Philippines”

(awarded for the third year) Asia Asset Management

Best of the Best Awards 2013

“Best Asset Management Company in the Philippines”(awarded for the third year)

The Asset Triple A Investment Awards 2013

“Trusted Brand for 2013 Investment Fund Category”

(awarded for the seventh year) Reader’s Digest

(02) 816 9323 www.bpiassetmanagement.com

Distributors

(02) 845-5033 to 35 and 845-5424

BPI Capital Corporation

BPI Securities Corporation Citicorp Financial Services & Insurance Brokerage Philippines, Inc.*

(02) 995-5985 and 423-6725

*For ALFM Growth Fund and Philippine Stock Index Fund

(02) 845-5696 and 845-5708

(02) 816-9190 or 9192

17th Floor BPI BuildingAyala Avenue corner Paseo de RoxasMakati City, 1226 Philippines Tel.: (63 2) 845-5033 • 845-5034 • 845-5035 • 845-9971 • 816-9038 • 816-9037Email: [email protected]: www.alfmmutualfunds.com

facebook.com/ALFMMutualFunds @ALFMMutualFunds or twitter.com/ALFMMutualFunds youtube.com/ALFMMutualFunds

annual report 2013 - alfm · php7.43 billion. on the aggregate, the six funds comprising the alfm...

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