I've been hard at work at
Delaware Investments. Anyway, I just completed a special project for my supervisor. I think it's mostly a training exercise to get me more familiar with the annual reports for our mutual funds. Essentially, we were told to pick one of our funds and to summarize it. I thought that I should post my summary here, just so you can get an idea of the draft that I'm submitting. This is all public information available on our website, so you do not need to worry that any of this is inside information. Below here is my summary of the Delaware Investments Trend Fund Annual Report dated June 30, 2008.
Downtime Project:
What is in the Annual Report of the Trend Fund?
by Trevor StasikCover Page & Table Of ContentsThis is the first introduction to the materials contained within. The cover page includes the name of the company “Delaware Investments” along with the company slogan “Powered by research”. The name of the fund is also clearly shown on the document. In this case, the fund is the Delaware Trend Fund. The date of the report is also shown, and this is important as it lets the reader know how current the information is.
The table of contents is a list of all of the different parts contained within the annual report. The areas included are Portfolio management review, Performance summary, Disclosure of Fund expenses, Sector allocation and top 10 holdings, Statement of net assets, Financial highlights, Notes to financial statements, Report of independent registered public accounting firm, Other fund information, Board of trustees/directors and officers addendum, and About this organization. Finally at the end of the page is the warning that funds are not FDIC insured, funds are not guaranteed, and this document retains a copyright.
Portfolio Management Review: Pages 1-4The Portfolio management review begins by discussing the financial environment faced by the fund during the past year. The environment has been more challenging than the optimistic year the fund had expected. The macroeconomic environment deteriorated and the number of attractive sectors available for investment declined. Many areas of the economic crisis touched the fund including declining available credit and reduced housing prices. The review then briefly discusses how the crisis spread from Bear Stearn bailout to the rest of Wall Street and then to Main Street. According to the document, employment and wages have “held up fairly well”.
The report expands then to describe how the fund performed during this period. The Trend Fund fell 12.76% at NAV for the A class share. The fund blamed poor stock selection decisions for the fund’s underperformance. Despite that, the fund did not change its time-tested, bottom-up approach in which the fund looked to invest in small companies with strong growth rates in growth industries, using price-to-earnings ratios, estimated growth rates, market caps, and cash flows in determining the selections.
During the last year the fund was underexposed to energy and basic industry, which meant that it was unable to participate in the outperformance of these sectors. The punishment of the financial sector affected the portfolio to a greater degree than the fund’s exposure to the financial sector as this affected and was affected by subprime losses and the credit crunch. The fund believe that bottom was in, and while things would continue to be challenging, that the market situation couldn’t go any lower.
Examining the individual securities which contributed to the performance of the Trend fund, one notable security is that of United Therapeutics, which had several positive data releases for the drug Remodulin. Other companies of note include Bucyrus International and Waddell & Reed Financial, both of which were positive contributors to the fund.
Several securities did not meet the fund’s performance expectations. Of these, retailer Coach was a detractor, with rising energy costs and falling housing prices negatively affecting the consumer. Other firms that detracted from the Trend fund’s performance were Acadia Pharmaceuticals and also Under Armour.
The final page of the Portfolio management review features a snapshot of the fund, providing the fund objective, total fund net assets, and more. The fund objective is that the fund seeks capital appreciation by investing primarily in securities of emerging or other growth oriented companies.
Performance Summary: Pages 5-7The next part of the annual report is the Performance summary. This part of the document summarizes performance. The first thing covered in this section is the warning that past performance does not guarantee results and that performance can be different than what is quoted. The warning goes further in telling the reader to consider their own situation before investing.
The performance table that follows shows performance over a 1 year, 5 year, 10 year and lifetime timeframe for A, B, and C class shares. Following this table is a description of what is shown in the chart, including descriptions of sales charges, expense limitations, purchase restrictions and fees. Another table appears, providing expense information for A, B, C, R and Institutional class shares. Finally, there is a graph that provides an example of how a $10,000 investment in the Trend fund would have performed over a 10 year period against the Russell 2000 Growth Index. The Russell 2000 Growth Index had a starting value of $10,000 and an ending value of $13,181 over that 10 year period. The Trend fund A class share had a starting value of $9,425 after sales c
Disclosure Of Fund Expenses: Pages 8-9This section tries to provide transparency to the shareholder of any expenses faced by the fund. There is a description of two kinds of costs: Transaction costs and Ongoing costs. Transaction costs are the costs expended in facilitating transactions. Ongoing costs are costs to the fund for management and sales. There are actual expenses that are discussed in the report, (see page 9 of this section) which are reported as expense ratios that can be used by the shareholder to estimate the expenses you paid on your account during that period.
This Disclosure section also discusses a hypothetical 5% return as a point of comparison with other funds, which also present a hypothetical 5% return in this portion of the annual report.
What follows this section is a table that explores the expense analysis of $1000, looking at the actual fund return for A, B, C, R, and Institution class shares. This shows the beginning account value, ending account value, annualized expense ration, and the expenses that would have been paid by a person during the six month time-frame from 1/1/08 to 6/30/08. Also, as part of the table, there is the hypothetical 5% return for A, B, C, R and Institutional Class shares.
Sector Allocation and Top 10 Holdings: Page 10This section of the annual report breaks the fund down into its sector and looks at some of it’s larger holdings. The largest sector that the Trend fund was invested in during 2008 was Healthcare at 22.35% of the portfolio, followed by Technology which represented 20.96% of the portfolio. The top 3 holdings during this period were United Therapeutics, OSI Pharmaceuticals and Data Domain.
Statement of Net Assets: Page 11-15This is a very in-depth list of all of the assets that made up the Trend Fund as of June 30, 2008. Each sector here is broken down into the securities making up the sector, the number of shares held of each security, and the total value held in that sector. Taking a look at each of these sectors, it can be seen what the highest valued security is. The Basic Industry and Capital Goods sector had Bucyrus International Class A shares at $11,785,428. The Business Services sector had Concur Technologies securities at $12,916,501. The Consumer Non-Durables sector had Lululemon Athletica at $9,932,708. Consumer Services had Cenveo at $6,719,806. Energy had Core Laboratories at $12,896,910. Financials had Waddell & Reed Financial Class A shares at $13,429,836. Health Care had United Therapeutics at $21,505,000. Technology had Data Domain at $14,063,324. Transportation only had Hunt Transport Services at $10,905,856. The total common stock held by the Delaware Investments Trend Fund on June 30, 2008 was $538,702,202.
Continuing on through the statement of net assets, we find a Discount Note issued by Federal Home Loan Bank for $19,753,115. Discount notes are short term loans issued at a discount to par. Next we find the Securities Lending Collateral at $149,511,280. Securities Lending Collateral is cash that is held as collateral on securities lending transactions. This brings the total value of securities, including loans, to $707,966,597.
Moving further down along the Statement of net assets, we can find that the total net assets that are applicable to the 37,730,647 outstanding shares is $559,405,020. The last items on the document are a breakdown of the net assets per share per class and a comparison of NAV to the offer price per share.
Statement Of Operations: Pages 16-17This part of the Annual Report offers a snapshot of expenses, gains, and losses experienced by the Trend fund. This statement shows that investment income from dividends, securities lending income and interest equated to $4,746,640. The next area are the expenses. The expenses include management fees, distribution expenses, reports to shareholders, accounting expenses, administration expenses, and much more. The income less the expenses equated to the net investment loss of $6, 862,410. This is followed on the statement of operations by the net realized gain on investments of$123,572,071 and the unrealized depreciation of investments of $214,176,750. The net realized and unrealized loss for the year ended June 30, 2008 was $90,604,679. Putting it all together, we find that the net decrease in net assets resulting from operations was $97,467,089.
Statements of Changes In Net Assets: Pages 18-19This portion of the Annual Report offers investors the opportunity to see changes year to year. This report for the Trend fund examines the years ended on 6/30/07 and 6/30/08. The statement looks at the increase or decrease in net assets from operations, dividends and distributions to shareholders, capital share transactions (proceeds from shares sold), and NAV of shares issued upon reinvestment of dividends and distributions. It may be of interest that for 2008, the total dividends and distributions paid out to shareholders was $198,272,697. The final calculation in this statement resulted in the net assets at the end of the year of $559,405,020.
Financial Highlights: Pages 20-30This is a deep and complex part of the Annual Report, with many layers representing different share classes. Each class of share is presented in a fairly similar manner. As such, only the A class share will be presented as a representation of the financial highlights of all share classes. This data looks at a per share basis.
The financial highlights show financial data over a five year period, with data from 6/30/04 to 6/30/08. The first line in the financial highlights begins with the Net asset value at the beginning of the period. For the A class share during that 5 year period, the values were as follows: $16.220, $19.940, $20.180, $22.430, $22.320. The net asset value at the beginning of the period is an important value to use as a useful reference point when compare against the value at the end of the period. The second line is whether there was any income or loss from investment operations. As part of this section, there are lines on net investment lost, net realized and unrealized gain or loss on investments and the total from investment operations. The realized gain or loss are those gains and losses that have been actualized by the actions of selling. The unrealized gains or losses are those that have not been actualized by selling the security. In other words, the security has had an increase in value that has not been collected by selling the security. For the five year period, the totals from investment operations were as follows: $3.720, $0.240, $2.250, $3.217, and a loss of $2.340.
The next line in the financial highlights section of the annual report is the deduction of dividends and distributions from the net realized gain on investments. These dividends and distributions are important to account for as they are, unless reinvested, no longer a part of the funds net asset values. Therefore, they can directly affect the per share price of the fund. For the Trend fund for the five year period, the total dividends and distributions were zero for 2004, 2005 and 2006. For 2007, the dividends and distributions were -$3.327 and for 2008, the dividends and distributions were -$4.720. The net asset value at the beginning of the period minus the loss from investment operations minus the dividends and distributions, equals the next line in the financial highlights, the Net Asset Value at the end of the period. For the five year period, the net asset value at the end of the period is as follows: $19.94 , $20.180, $22.430, $22.320, $15.260.
The Financial highlights section of the annual report next features the total investment return, with is based on the change in NAV with the assumption that all dividends and distributions are reinvested at NAV. The total return varied quite significantly from period to period. It ranged from a low in 2008 of 13.76% to a high return of 17.15% in 2007. The total return was also affected by a waiver by the fund manager, but no further information about that is shown. The last section of the financial highlights is that of the Ratios and Supplemental Data. In this part there is a list of financial data that an investor might find useful when determining which fund is right for them. The net assets of the Trend fund appear again here. This is followed by the ratio of expenses to average net assets, which is a good ratio for seeing the trend of how much the fund is spending over time. From 2005 to 2008, the Trend fund expenses have remained in a tight range from 1.40% to 1.43%. Prior to that, in 2004, the fund had a ratio of expenses to average net assets of 1.50%. The next line in the financial highlights is the Ratio of expenses to average net assets prior to fees waived and expenses paid indirectly.
The next line in the ratios area of the financial highlights is the Ratio of net investment loss to average net assets. This is a useful ratio in that it provides visibility on the losses of the fund when compared to the average assets held on a per share basis. This ratio was the same as for the expenses for the period covered. From 2005 to 2008, the Trend fund ratio regarding investment losses has remained in a tight range from 1.40% to 1.43%. Prior to that, in 2004, the fund had a ratio of 1.50%. That line is followed by a line which details the ratio of net investment loss to average net assets prior to fees waived and expenses paid indirectly. The final line in the financial highlights section is the portfolio turnover. The portfolio turnover can be important to an investor because the more a fund turns over, the more likely it is to generate expenses. For the Trend fund for the five year period, the portfolio turnover at the end of the period is as follows: 59%, 44%, 71%, 58%, and 74%.
Notes To Financial Statements: Page 30-38This part of the Annual Report offers a variety of messages that may relate to the financial statements. The first part is a list of the equity funds that Delaware Investments offers, how each of the share classes is organized, and the sales charges assessed on each class of share.
The first major part of this section of the annual report discusses significant accounting policies and includes the note that Delaware’s policies are in accordance with GAAP. The next part described is an expansion on how securities are valued. Equity securities are traded on the NYSE and NASDAQ, and the closing price is the price used in valuation. Also, in the event that a security does not trade on a given day, then the price used is the average of the ask and bid prices. Short term debt securities with a maturity less than 60 days are priced at an amortized cost, which is considered an approximation of market value. There is a further discussion about valuation of other securities including Securities Lending Collateral and foreign securities.
Other concerns in regards to the significant accounting policies of the fund include that expenses that are used exclusively for the fund are charged directly to the fund. In the event that an expense is common to all of Delaware’s funds, than that expense is charged based on funds’ average net assets. Other fees and charges discussed in this section include management fees, rebates, brokerage commissions, and various other administration fees.
The next section of the notes to financial statements is the Investment management, administration agreements and other transactions with affiliates. This section includes notes ranging from fee calculations, expense limitations, federal income tax interpretation, class accounting, repurchase agreements, and the use of investments. This is a very detailed section. One of the important things to note from this section are that the fund no longer has an expense limitation and does not require a waiver to spend more than 1.11% of average daily net assets on expenses. Another important note is that the fund has adopted a new FASB Interpretation “Accounting for Uncertainty in Income Taxes” which will require that the fund determine whether its positions are likely to have a tax benefit or loss and record it as such. Next, the fund does use some estimates and assumptions in producing financial statements, which can cause actual results to differ from estimates. Finally, the fund employs the Delaware Service Company to provide fund accounting and administration oversight services to the fund. Some of the fees for that service are described in this section.
The second major part of the Notes to financial statements is the Investment management, administration agreements. In this section, there is discussion of commissions paid on selling the fund to DDLP, a distributor and affiliate of the Delaware Service Company. There were $26,029 spent for commissions on sales of the fund’s A Class shares, and the combined CDSC for the A, B, and C class shares was $56,830.
Due to the length of the notes, the remaining parts of the notes to financial statements will not be reviewed in any detail. To find out more about these notes, please refer to the Trend fund’s annual report from June 30, 2008. The titles of the other parts are as follows: Investment Management, Administration Agreements and Other Transactions with Affiliates, Investments, Dividend and Distribution Information, Components of Net Assets on a Tax Basis, Line of Credit, Securities Lending, Capital Shares, Tax Information, Credit and Market Risk, Contractual Obligations, and In-Kind Redemptions.
Report of Independent Registered Public Accounting Firm: Page 39This part of the annual report is a letter to the shareholders and to the board of trustees signed by Ernst & Young LLP on August 15th, 2008. This is a letter from the accounting firm stating that they have audited our firm for the period ended on June 30, 2008. This audit including examining and testing the documents, assessing accounting principles and estimates and evaluating the statement presentation. In this letter, Ernst & Young states that they believe that all financial information presented in the document is accurate and conforms with the U.S. generally accepted accounting principles.
Other Fund Information: Pages 40-45This is a part of the annual report that looks into areas that were not previously looked at. The first part is the board of trustees consideration of the Delaware Trend Fund investment advisory agreement. This agreement was approved after consideration was taken of the advice of independent trustees and independent counsel. This was merely a renewal of the previous agreement which details and reviews all things relating to the Delaware Management Company and Delaware Investments. The annual report then reveals the nature, extent and the quality of service that Delaware offers its customers. The board reviewed Delaware’s compliance with policies, strategies, and restrictions of the fund. The board also examined services offered, compensations, philosophies and a whole host of other categories.
The annual report then continued by going into further depth about the nature, extent and quality of service for the shareholders of the Trend fund. The board considered the reflection of Delaware’s services through the prism of the Code of Ethics and adherence to the budget. Some consideration was given to maintaining and also increasing resources to the services area of operations. One of the most interesting parts of the entire annual report is that the board notes that the commitment that the service center has to a high level of service and their satisfaction with the nature, extent and quality of the overall services provided by Delaware Investments.
The board also considered the Trend fund’s performance. The board complimented the fund for being above the median of peer funds in it’s Lipper group. The annual report goes into detail about how the quartiles of the Lipper peers are determined. It also described how the fund performed among its peers over time. The Trend fund performed in the 2nd quartile for the one and ten year periods, but it performed in the 3rd quartile for the three year period and in the 4th quartile among peers during the 5 year period. Then the board noted the recent changes in the fund’s management as a new head of the equity department had been settling in since 2007.
The report then went into detail about how the expenses compared to other peers as selected by Lipper. When compared amongst its peers in the expense group for A class sales charges, 12b-1 service fees, and non-12b-1 service fees, the Trend fund was placed in the 2nd highest quartile for total expenses. The board noted that while they were please that the management fees for the Trend fund placed in the 2nd lowest quartile, the higher total expenses did not meet the board’s objectives. However, the board was satisfied with the Management’s efforts to bring expenses back in line.
The next part of the section on other fund information then considered management profitability. The board performed an overall examination of the profitability of funds across the entire Delaware Investments Family Of Funds. The board judged how they could derive additional benefits from the funds and how to drive additional business. This led into the next section of the report, which was economies of scale. The economies of scale is an important concept about how costs can be minimized by increasing the numbers that are service. With the use of breakpoints in conjunction with lower advisory fees, the board considered how economies of scale could be realized while sharing the lower costs with the fund and shareholders.
The final portion of this section are the short biographies of the fund managers. The Chief Investment Officer for the Emerging Growth team, which includes the team managing the Trend Fund portfolio, is Marshall T. Bassett. Mr. Basset graduated from Duke University and also received his MBA from The Fuqua School of Business at Duke. Mr Bassett has worked in a community bank and also for Morgan Stanley’s Asset Management Group. Other members of the management team include Barry Gladstein, Christopher Holland, Steven Lampe, Rudy Torrijos, Michael Tung, and Lori Wachs.
Board Of Trustees/Directors and Officers Addendum: Pages 46-53This part of the annual report is simply a list of all of the trustees and some information about each of them. This information includes the trustee’s name, address, birthdate, position, length of time served, principal occupation, number of portfolios overseen, and a list of other directorships held by the trustee. Trustees and officers listed include Patrick Coyne, Thomas Bennett, John Fry, Anthony Knerr, Lucinda Landreth, Ann Leven, Thomas Madison, Janet Yeomans, J. Richard Zecher, David Conner, Daniel Geatens, David O’ Connor, and Richard Salus.
About The Organization: Page 54-55This part of the annual report is a reflection on what the annual report is. This part of the report reiterates that investors should read the prospectus before investing and that past results are not indicative of future results. There is another listing of the trustees and officers indicated previously in the report. Finally, there is small print listing contact information including the phone numbers and the website, and also how proxy voting can be completed.
You can find out more literature about the Trend Fund
HERE.
Annual Report, Mutual Fund, Trend, Portfolio, Financial, Net Assets, NAV, Trevor Stasik
An important tool in the financial industry, especially for the transfer agents, is the Medallion Signature Guarantee stamp. The picture above is a generic example of one I found online. You can get the stamp at most banks or financial institutions. These stamps are typically a light yellow/green stamp that is put onto forms and documents verifying that the person signing the document is the person that they say they are. This signature stamp verifies that the signature is authentic and legally binding.
I was practicing with Excel this evening and thought that I would do a short post on it. Excel is a useful spreadsheet tool in finance and it has many different functions. One function that I've been practicing tonight is the Drop-Down list. This a like a multiple choice test where you get to choose the answer you want to fill in the blank. 
Have you signed up for a Twitter account yet? I just activated my account, check it out HERE. This could be a way to connect with others in your industry. Twitter can act to give potential contacts a glimpse into your way of thinking. It can also help you raise your visibility on the web promoting your "brand". If you want to start your own Twitter account, you can do it HERE. Finally, there is a useful tool that I found can help you with searching the twitterscape HERE. Okay, best of luck to those of you that decide to try opening accounts.
State registration laws, also known as "Blue Sky" laws, are enacted by each state in order to protect their citizenry from fraud. These laws, many of which predate the Federal Securities Acts in 1933 and 1934, require brokers, brokerage firms, investment advisers, and securities offerings be registered in the state in which they operate.
I realized the impact of the credit crunch today when I started looking into student loan consolidation. When I went looking for one, I found very few banks that were willing to offer those loans. I went to a loan comparison site, and they said that none of the providers that they tracked offered loans anymore. I found Wells Fargo actually still offers it, but it's at higher rates than my current rates. I'm not sure that consolidation is the right choice for me now. At least the loans were available while I was in school. I've heard that loans have gotten much more difficult for students this semester. Here's one example.
The primary advantage to having municipal bonds is their tax status. Interest income earned on these bonds are generally tax free at the federal level. For investors that live within the state or municipality issuing the bond, the interest income is also potentially tax free at the local level. This is partially because municipalities would like to give an incentive to the citizens to support local government construction and infrastructure efforts. These tax advantages can be especially interesting for those in a high tax bracket because the earnings generated may be tax free.
