ANNUAL REPORT 2012 - ALFM€¦ · ALFM Peso Bond Fund ALFM Dollar Bond Fund ALFM Euro Bond Fund...

ANNUAL REPORT 2012

Message to Shareholders

ALFM Mutual Funds

Reviews of Funds Performance

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

CONTENTS

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1ALFM MUTUAL FUNDS 2012 ANNUAL REPORT

Message to Shareholders

In 2012, the Philippine economy grew by an average of 6.6%, higher than the government’s target of 5-6% for the year and the second-highest in Asia behind China.

Growth was driven by both private and public infrastructure spending, which grew 32.4% and 8.6%, respectively year-on-year. Government spending was also a significant contributor, rising 9.1% year-on-year. Benign inflation, which averaged at 3.12% for the period despite robust economic growth, was well-within the Bangko Sentral ng Pilipinas’ (BSP) target range of 3.0%-5.0%. This allowed the BSP to retain its loose monetary policy stance and slash rates by a cumulative total of 100 basis points through the year, bringing the overnight borrowing rate to a record low of 3.5%.

Philippine markets proved to be resilient despite the volatile investment environment of 2012. Following a modest performance in the previous year, the Philippine Stock Exchange Index soared to record highs in 2012, closing at 5,812.73 for an impressive 33.0% full-year gain. Share prices were boosted by foreign buying, which grew 64% year-on-year for 2012 to US$2.18 billion. Global players appeared to be convinced by the country’s improving macroeconomic backdrop evidenced by above-trend economic growth and benign inflation expectations.

Philippine fixed income assets likewise posted another strong year in 2012. Yields of local government securities declined by an average of 74 basis points during the year, with the 7- and 10-year tenor buckets seeing yields drop by as much as 113 basis points. The local fixed income space continued to be supported by solid macroeconomic fundamentals, prudent fiscal management, abundant liquidity in the system and sustained investor interest. The Philippine peso ended 2012 stronger at Php41.05 to a dollar amid robust demand for the country’s assets, appreciating by 6.8% in 2012.

Needless to say, the country’s macroeconomic fundamentals will remain on solid ground. Inflation is expected to stay benign, despite pressures from rising food and oil prices, and the economy is receptive to further growth. The Philippine peso is well-supported against shocks given record-high international reserves, ending the year at US$84.2 billion, or equivalent to 12 months’ worth of import goods. Finally, the government’s prudent fiscal measures were well-taken by the international community given the series of credit rating upgrades the Philippines received in 2012. These conditions have allowed the Philippines to achieve two investment-grade status upgrades within the first half of 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.

“

”2 ALFM MUTUAL FUNDS 2012 ANNUAL REPORT

minimum. Rest assured that your Board of Directors shall be looking after the funds with professionalism, dedication, and prudence. We thank you for your trust in making ALFM the most dominant mutual fund group in the country.

We continued to position each of your ALFM Mutual Funds to take advantage of these positive trends in the Philippine financial markets. The ALFM Peso Bond Fund, the country’s largest mutual fund, registered a 5.86% return on investment (net) in 2012, higher by 187 basis points than its benchmark, 50% 91-day Treasury bill and 50% HSBC Local Bond Index. ALFM Peso’s net asset value increased by 38.6%, from PhP 33.01 Billion at the end of 2011 to PhP 45.74 Billion at the end of 2012. The ALFM Dollar Bond Fund, the country’s largest US$-denominated mutual fund, achieved a 9.80% net return in 2012, surpassing by 271 basis points its benchmark, 50% 3-month U.S. Treasury Bills and 50% JACI Philippines Index. ALFM Dollar’s net asset value increased by 32.7%, from US$ 167.60 million to US$222.33 million at the end of 2012. The ALFM Euro Bond Fund continued to dominate competition with its 97.8% market share of its segment. Its net asset value increased by 21.6%, from €7.00 million to €8.51 million at year-end 2012. The Fund achieved a net return of 9.00% in 2012, surpassing by 898 basis points its benchmark, the 3-month German Treasury bill rate. The ALFM Growth Fund, a mutual fund invested primarily in equities listed at the Philippine Stock Exchange, registered a net return of 19.2% in 2012. This was driven by the strong appetite for equities as investors positioned ahead of a boom in corporate earnings stemming from a low interest rate environment.

ALFM returns were reversed from 2012’s negative returns but remained lower than its benchmark computed at 75% PSEi and 25% 91-day T-bill rate.

Its net asset value, however, more than doubled to PhP 4.81 billion from PhP 2.22 billion at the end of 2012. The ALFM Money Market Fund achieved the highest yield in its segment, a 3.0% (net) return on investment in 2012, exceeding by 87 basis points its benchmark, the HSBC Money Market Index. Its net asset value more than tripled, to PhP 1,050.19 million from PhP 322.98 million at the end of 2012.

The Philippine Stock Index Fund, an index tracker fund which invests in the same issues comprising the Philippine Stock Exchange Index (PSEi), registered a 34.7% (net) return on investment in 2012. PSIF’s net asset value almost tripled in size, to PhP 7.30 billion from PhP 2.46 billion at the end of 2012. The six funds comprising the ALFM Mutual Funds grew by 49.7% in combined net asset value, to PhP 68.50 billion at the end of 2012 from PhP 45.75 billion as of end-2011.

The growth was made possible by superior investment returns achieved by our fund managers, coupled with new accounts and additional subscriptions from you, our dear shareholders. We acknowledge as well the distributors, sales agents and investment counselors, and receiving banks who 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 2013, we shall constantly be attuned to the best investment opportunities that the markets offer in order to maximize gains for your ALFM Mutual Funds while keeping investment risks to the

Romeo L. BernardoChairman

Maria Theresa Marcial-Javier Vice Chairman

Sherisa P. NuesaDirector

John Philip S. OrbetaDirector

The Board of Directors of ALFM Mutual Funds


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 professional 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 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 NAME FUND TYPE MINIMUM INVESTMENT AMOUNT

PESO-DENOMINATED FUNDS

FOREIGN CURRENCY-DENOMINATED FUNDS

ALFM Peso Bond Fund Bond Fund PhP 10,000Philippine Stock Index Fund Equity Fund PhP 10,000ALFM Growth Fund Balanced Fund PhP 10,000ALFM Money Market Fund Money Market PhP 10,000

ALFM Dollar Bond Fund Bond Fund US$ 500ALFM Euro Bond Fund Bond Fund €UR 500

About the ALFM Mutual Funds

4 ALFM MUTUAL FUNDS 2012 ANNUAL REPORT

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.

As of December 31, 2012, the Fund further increased its market share of the Peso mutual bond fund segment to 75.2%, from 71.7% as of December 31, 2011. It is the only mutual fund in the country that provides free life insurance coverage to its eligible investors. The coverage is a fixed amount of PhP 200,000 for each eligible investor maintaining at least a PhP 100,000 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 PhP 200 million, consisting of 200,000,000 common shares with a par value of PhP 1.00 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 PhP 1.0 billion, consisting of 10,000,000 shares and the new par value of PhP 100.00 per share. Due to the continuous strong demand for the Fund’s shares, the Fund has had ten increases in its authorized capital stock (see table below).

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 GLANCEPhilippine Peso

PhP 10,000.00

PhP 1,000.00

1.5% p.a.

180 days

1.0% flat

HSBC

INCREASES IN AUTHORIZED CAPITAL STOCKIncrease # 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

On November 16, 2006, the Fund’s Board of Directors approved an increase in the Fund’s authorized capital stock from PhP 34.0 billion (consisting of 340,000,000 common shares of PhP 100.00 par value) to PhP 100.0 billion (consisting of 1,000,000,000 common shares of PhP 100.00 par value) and to be implemented in tranches. The Fund’s shareholders approved and ratified the increase during a special meeting on November 16, 2006 where shareholders also 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 PhP 34.0 billion, consisting of 340,000,000 shares with a par value of PhP 100.00 per share.


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 (BPI), 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 Bank of the Philippine Islands - Asset Management and Trust Group (BPI Asset Management).

Financial Environment 2012 will be remembered as the year of unconventional actions from central banks across the world.

NET ASSET VALUE In billion 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

32.7 33.630.0 29.2

21.6 22.6 22.3

25.0

30.2 31.5 33.0

39.6

45.7

Concerns over the health of the US and European economies prompted action from both the Federal Reserve (FED) and the European Central Bank, instating mechanisms that increased liquidity in financial markets across the globe and decreased fears over economic turmoil. The US FED instituted ‘Operation Twist’ and a third round of Quantitative Easing (QE3), promising to support growth until unemployment is deemed manageable and inflation increases.

The Investors’ No. 1 ChoiceThe high domestic liquidity helped boost growth in the mutual fund industry, which grew by PhP 42.6 billion or 41.1% in 2012. The Peso bond fund segment grew by PhP 14.8 billion or by 32.2% over the previous year’s level, with the aggregate fund value reaching PhP 60.9 billion by year-end. The ALFM Peso Bond Fund grew by PhP 12.8 billion , or 38.8%, higher than the industry growth rate.

Profitable operationsThe Fund’s total income for the year was significantly higher at PhP 3.30 billion compared to PhP 3.07 billion

in 2011. The Fund registered gains on financial assets at fair value through profit or loss of PhP 1.34 billion in 2012. The large improvement came primarily from the increase of fair value gains on current holdings due to the sharp decline in interest rates in 2012. Total expenses stood at PhP 689.7 million, 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 PhP 548.4 million in 2011.

Solid Fund performance The strong Philippine financial markets performance in 2012 was driven by the monetary policy actions, with the central bank reducing policy rates by 100 bps from 4.50% to a record low of 3.5%. The reduction in policy rates were implemented as a means to support economic growth and to stave off speculation on the appreciation of the Philippine Peso.

In local debt markets, interest rates were significantly lower given the benign inflation, strong fiscal performance, and improvements in credit ratings.

MATURITY PROFILEAs of 31 December 2012

26%1-5 years

58%More than 5 years

16%Less than 1 year


Despite initial fears of rising crude oil prices, inflation was at the low end of government targets averaging 3.1% versus the 3.0 to 5.0 target. Fiscal consolidation continued with an increase in revenues of 12.7%, allowing the budget deficit to register below the government’s target of PhP 279 billion. With the support of monetary policy and government spending, the Philippine economy registered a growth of 6.6%. These strong economic fundamentals garnered for the Philippines one notch credit upgrades from, not only Standard and Poor’s (S&P), but also Moody’s Investor Service.

Yield compression continued in 2012 with the long-end of the yield curve declining by 86 basis points. The first quarter of the year global concerns and a rise in crude oil prices lessened appetite for government securities. Though the second half saw credit ratings upgrades and further cuts in policy rates renew the strong interest in the bond market.

In terms of investment performance, the Fund posted a return on investment (ROI) for full-year 2012 of 5.86%, net of fees and taxes, 187 basis

ALFM PESO BOND FUND VERSUS BENCHMARK Net Asset Value Per Share

points higher than its benchmark return of 3.99%. The Fund’s NAVPS appreciated by PhP 16.55, increasing from PhP 283.25 per share at the end of 2011 to PhP 299.8 by year-end 2012. The Fund’s NAVPS experienced volatility of less than 1.2%, significantly lower than the peso bond index volatility of 5%.

Portfolio mixThe Fund continued to remain well diversified in 2012 with 60.2% of the Fund’s portfolio invested in government securities, 25.5% in corporate loans and receivables, 2.9% in preferred shares, 0.9% in an index bond fund, and 10.5% in cash and money market instruments. Corporate loans and receivables increased to 13.1 billion from 10.5 billion as the Fund continued to participate in corporate issuances given the prospect of yield enhancement and diversification.

The Fund continues to maintain portfolio quality through active duration management, yield curve positioning, and yield-enhancing credit investments. As of year-end 2012, portfolio duration of the fund was 5.56.

Outlook for 2013 We expect the Bangko Sentral ng Pilipinas to retain its accommodative monetary policy stance as inflationary pressures remain manageable and concerns over global economic growth linger. Inflation will likely rise in 2013, though it will likely fall comfortably within the target of 3-5 %.

Global growth concerns may continue to require central bank stimulus as Europe continues to be in a recession and more of the periphery require aid. The US is likely to post low growth and face fiscal constraints. Given the likelihood of a benign inflationary environment, accommodative monetary stance, and continued fiscal discipline, Philippine peso-denominated bonds may continue to be well supported.

Fund Benchmark

Dec-07 Mar-09

240

215

290

265

315

Jun-10 Sep-11 Dec-12

PORTFOLIO COMPOSITIONAs of 31 December 2012

48%Government Securities - Long-term

12%Government Securities - Medium-term

3%Preferred Shares

1%Index Bond Fund

10%Cash and Receivables

17%Corporate Notes

9%Corporate Bonds


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, 2012, its share of the US$-denominated bond fund segment grew further to 54.2% from 48.3% the previous year. It is the largest fund in its segment. Its fund value continued to record all-time highs, settling at US$ 222.4 million as of December 31, 2012.

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 PhP 200.0 million (from 200,000,000 common shares of PhP 1.00 par value) into an equivalent 2,000,000 common shares of PhP 100.00 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.

On January 21, 2004, the SEC approved the increase in the Fund’s authorized capital stock from PhP 200.0 million (consisting of 2,000,000 common shares of PhP 100.00 par value) to PhP 5.4 billion (consisting of 540,000 common shares of PhP 10,000.00 par value).

Base Currency





EarlyRedemption Fee

Custodian Bank

THE FUND AT A GLANCEUS Dollar

USD 500.00

USD 100.00

1.25% p.a.

180 days

1.0% flat

HSBC


1 540,000 shares January 21, 20042 600,000 shares February 27, 2006

54.2% Market share of ALFM Dollar Bond Fund in the US dollar-denominated bond fund segment


On this date, the SEC also approved the change in the Fund’s name from Far East Dollar Bond Fund, Inc. to ALFM Dollar Bond Fund, Inc. The Fund has had two increases in authorized capital stock (shown in the table).

Currently, the Fund has an authorized capital stock of PhP 6.0 billion consisting of 600,000 common shares of PhP 10,000.00 par value.

On March 21, 2011, the Fund’s Board of Directors approved an increase in the Fund’s authorized capital stock from PhP 6.0 Bn. consisting of 600,000 common shares of PhP 10,000.00 par value to PhP 50.0 billion consisting of 5,000,000 common shares of PhP 10,000.00 par value, and to be implemented in tranches. The Fund’s shareholders approved and ratified such increase during the Annual General Meeting held on May 11, 2011.

Fund ManagerBPI 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) increased by 32% to USD 226.6 million as of December 31, 2012, higher than the growth rate of 8.76% recorded the previous year. The Fund solidified its No. 1 ranking in the USD-denominated bond fund segment with a 54.2% market share.

Consistent outperformanceALFM Dollar Bond Fund sustained its outperformance versus its benchmark. The Fund gave a full-year return of 9.83% which is 271 basis points higher than its blended benchmark of 50% 3-month U.S. Treasury bill and 50% JACI Philippines Index return of 7.12%.

The superior performance is attributable to the active management of the duration of the Fund and the diversification of the Fund’s portfolio which made it less vulnerable to price volatilities and market uncertainties brought about by the sovereign debt crisis in the European region.

Prices of U.S. dollar-denominated sovereign (Republic of the Philippines) bonds increased by 2.4% for the year, which was reflective of the willingness of investors to take on risk. The investors’ search for yields over U.S. Treasuries was bolstered by the U.S. Federal Reserve’s decision to keep their key policy rate at a steady 0 to 0.25% for the entire year. Positive Philippine economic fundamentals remained supportive of ROP bond prices despite the uncertainties in other global markets.

Operating performanceSubscriptions to ALFM Dollar, along with the Fund’s interest income, were invested primarily in U.S. dollar-denominated securities issued by the Philippine government, Philippine corporate and short-term money market placements, amidst market cautiousness brought about by the global financial crisis.



97.8

113.0123.3

136.0

107.0 107.4115.5

128.7

154.1

164.2167.6

191.4

222.3

32.7% Increase in Net Asset Value (NAV) during fiscal year 2012



19%Cash and less than 1 year

32%More than 10 years

9%Between 5-7 years

By the end of 2012, the ROP portion of the Fund had gone down from 50% to 47%. This was followed by Philippine corporate bonds which comprised 21% 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-sovereigns.

The Fund increased its duration in order to take advantage of the run-up in bond prices. Duration stood at 5.83 by the end of 2012, as compared to 4.67 at the end of the previous year. This strategy enabled the Fund to continuously outperform its benchmark. The NAVPS also increased by USD 35.41, or by 9.83%, to USD 398.11 at the end of 2012 from USD 362.70 at the end of 2011.

Market outlook The year was marked by record low interest rates kept steady by the U.S. Federal Reserve. As a result of the low yields from U.S. Treasuries and from European government bonds, investors sought for higher yields elsewhere. Hence, there was a healthy risk appetite for Asian U.S. dollar-denominated debt instruments, including those issued by the Philippines. The buying support was evidenced by the strong performance of the JPMorgan Asia Credit Total Return Index which had a 15.7% return in 2012.

Moving forward in 2013, ALFM Mutual Fund is bullish on the Philippine economy and plans to lengthen the maturity profile of the Fund by purchasing longer-dated ROP bonds. This bullish view was validated by the sovereign credit upgrade given by Fitch Ratings Agency to the country, bestowing the Philippines its first investment grade rating. Volatility in the bond markets remains but ALFM sees a continued increase in investors’ risk appetite for higher yielding assets. Investors of the Fund should be ready to withstand volatility and pursue a medium- to long-term investment perspective.

ALFM DOLLAR BOND FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund Benchmark

Dec-07 Mar-09

320

305

350

335

365



47%Philippine Sovereign Bonds

21%Philippine Corporate Bonds

1%Latin American Sovereign Bonds

3%Supranational Bonds

8%Asia-Pacific Corporate Bonds

5%Asia-Pacific Sovereign Bonds

1%US Corporate Bonds

380

395

410

290

6%US Sovereign Bonds

2%Bond Bonds

6%Deposits and other receivables

10%Between 1-3 years




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, 2012, its market share of the Euro-denominated bond fund segment increased to 97.8% from 96.7% 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 PhP 200.0 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. On February 8, 2006, the Fund’s Board of Directors approved an increase in the Fund’s authorized capital stock from PhP 200.0 million (consisting of 20,000 common shares of PhP 10,000.00 par value) to PhP 60.0 billion (consisting of 6,000,000 common shares of PhP 10,000.00 par value), and to be implemented in tranches. The Fund’s shareholders approved and ratified such increase during a Special Meeting held on February 8, 2006. The Fund has had two increases in its authorized capital stock (shown in the table).

The Fund’s authorized capital stock currently stands at PhP 800.0 million consisting of 80,000 common shares at PhP 10,000.00 par value.

Base Currency





EarlyRedemption Fee

Custodian Bank

THE FUND AT A GLANCEEuro

€ 500.00

€ 100.00

0.75% p.a.

180 days

1.0% flat

HSBC


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

97.8% Market share of ALFM Euro Bond Fund in the Euro-denominated bond fund segment


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 20% in 2012, coming from a contraction of 18.8% in 2011. As of December 31, 2012, its NAV stood at € 8.64 million, cornering 97.8% of the Euro-denominated bond fund segment while its lone competitor took up the remaining 2.2%.

Fund PerformanceThe Fund increased its holdings of the ROP-Euro bond due in 2016 from 46% in 2011 to 50% in 2012. The Fund returned 9.02% in 2012, higher than the 0.09% benchmark 3-month German Treasury Bill as of year-end.



5.265.88

7.39 7.53

5.775.89

6.18

7.64

8.62

8.00

7.00

7.54

8.51

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 2012, Philippine Euro denominated bonds comprised 53% of the Fund’s investments while 12% of the Fund was invested in European sovereign bonds. The remaining 35% was invested in Asian, U.S. and European corporate bonds, and short-term money market placements, given our defensive strategy.

The Fund decreased its duration in order to reduce the volatility of the portfolio. Duration stood at 3.08 by the end of 2012 compared to 3.89 at the end of 2011.

Market Outlook Moving to 2013, a low interest rate environment is expected to remain as global economic growth is likely to be slow but positive. Parts of Europe may be just starting to recover from a recession while the U.S. may begin a slow improvement in growth. Asia, particularly China, may be the lone bright spot in terms of fairly high growth.

Volatility in the bond markets will remain but we see increased investor risk appetite for higher yielding assets as financial markets anticipate the recovery. While we maintain a bullish outlook on interest rates, we continue to be watchful of the developments occurring in the European region, such as the financial bailout for Cyprus and their possible effect on the domestic economy. Investors in the Fund should be prepared to withstand volatility in the future and are advised to have a medium- to long-term investment horizon.

0.75

3.18

Dec-05 Jun-06



ALFM EURO BOND FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund Benchmark

Dec-07 Mar-09

165

155

185

175

195



53%Philippine Sovereign Bonds

7%Asia-Pacific Corporate Bonds

8%Supranational Bonds

8%European Corporate Bonds

12%European Sovereign Bonds

9%Deposits and Other Receivables





3%US Corporate Bonds

3%Between 5-7 years

18%Cash and less than 1 year


Philippine Stock Index Fund A Mirror of the Philippine Stock Exchange Index

The Philippine Stock Index Fund is an open-end investment company (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 the only index tracker fund in the country that fully replicates the PSEi. As of December 31, 2012, its Net Asset Value (NAV) reached a new high of PhP 7.30 billion, representing a growth rate of 196.7% over PhP 2.46 billion the previous year. 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 PhP 200.0 million consisting of 2,000,000 common shares with a par value of PhP 100.00 each. As an open-end investment company established under the Investment Company Act of 1960 (Republic Act 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.

On February 20, 2006, the Fund’s Board of Directors approved an increase in the Fund’s authorized capital stock from PhP 500.0 million (consisting of 5,000,000 common shares of PhP 100.00 par value) to PhP 50.0 billion (consisting of 500,000,000 common shares of PhP 100.00 par value), and to be implemented in tranches. The Fund’s shareholders approved and ratified such increase during a Special Meeting held on February 20, 2006. The Fund has undergone three increases in its authorized capital stock (shown in the table below).

Currently, the Fund’s authorized capital stock stands at PhP 1.468 billion consisting of 14,680,000 common shares with a par value of PhP 100.00 each.

Base Currency





EarlyRedemption Fee

Custodian Bank


PhP 10,000.00

PhP 1,000.00

1.5% p.a.

180 days

1.0% flat

HSBC


1 5,000,000 shares February 15, 20032 6,800,000 shares September 5, 20063 14,680,000 shares September 13, 2007

PhP1.5BCurrent authorized capital stock of the Philippine Stock Index Fund



PSEi – A Top Performer in the RegionPSIF’s net asset value (NAV) amounted to PhP 7.43 billion as of end-2012. The NAV increased dramatically by 182% from PhP 2.64 billion as of end-2011. The upbeat investor sentiment and changing investor risk profiles from conservative to moderately aggressive contributed to the Fund’s growth in terms of new subscriptions. The PSEi grew by 33% in 2012.

Consistent Performance The PSIF’s gains in 2012 rose in tandem with the PSEi, sustaining its parallel performance with the Philippine stock market benchmark since inception.

Major indices of the Financial (+58%), Property (+56%), and Holdings (+47%) sectors outperformed the PSEi in 2012 as interest rates continued to decline amidst the strong market liquidity. Only the Mining and Oil sectors declined as volatile global commodity

prices, coupled by the closure of the Philippines’ most profitable mine in September, dragged market sentiment.

Operating performanceAs of end December 2012, PSIF’s trading NAV per share stood at PhP 641.90, up 34.7% increase from 2011’s PhP 476.36. The Fund outperformed the movement of the PSEi which registered a return of 32.95% for the full-year 2012.

The PSEi was among the best equity performers globally, rising nearly 40% in dollar terms mainly driven by the sustained decline in interest rates and above average Philippine GDP growth and corporate earnings results last year. Net foreign inflows worth more than USD 2 billion also supported sentiment, bringing the average daily turnover at US$164 million.

Total current assets of the Fund amounted to PhP 7.617 billion, an increase of 182% from PhP 2.70 billion in assets reported in 2011.

Subtracting liabilities of PhP 187.7 million, net assets amounted to PhP 7.43 billion, showing a 182% increase from PhP 2.64 billion in 2011.

The growth in net assets was primarily a result of the share price appreciation of the Fund’s underlying investments in index stocks plus new subscriptions to the fund in 2012. Revenues totaled PhP 1.211 billion in 2012 or a 541% increase from PhP 188.94 million in 2011 due to higher gains on financial assets at fair value.

Net gain on financial assets at fair value through profit or loss increased to PhP 1.12 billion, up PhP 1.026 billion from PhP 94.66 million posted in 2011.

Management fees rose to PhP 61.9 million from PhP 42.60 million, making up bulk of the expenses in 2012. Total expenses for 2012 stood at PhP 76.75 million, 64% higher than the PhP 46.80 million registered the previous year. This resulted in a net income of PhP 1.134 billion in 2012 or 699% higher than the PhP 142.14 million registered in 2011.

NET ASSET VALUE In PhP


2,3342,455

3,224

1,935

1,426

2,5182,5312,310

2,7592,933

2,458

3,738

7,298

182% Increase in Net Asset Value (NAV) during fiscal year 2012


Market Outlook 2012 was truly an eventful year for financial markets both domestically and abroad as we witnessed the modest recovery in the US even as the Eurozone economy struggled. Not surprisingly, we also saw the continued resilience of key emerging markets in Asia fueled by their robust domestic economies.

The financial and debt crisis in the Eurozone reignited debates about the need to revisit the current structure of the European Union as GDP growth was once again negative in 2012.

In the US, positive economic indicators showed a modestly recovering economy, particularly in the areas of employment and housing as the Fed continued to pursue extraordinary stimulus measures.

In Asia, China’s growth was subdued at only 7.8% for 2012, as export receipts receded meaningfully in

line with contracting global trade. India likewise slowed down to 4.1% (9M2012) while Indonesia and the Philippines’ GDP growth came out at 6.3% (9M2012) and 6.5% (9M2012), respectively.

Looking ahead to 2013, we see positive but moderate global growth, confirming a slow recovery for the global economy with the IMF forecasting a 3.6% expansion for the year, a modest improvement from the 3.3% growth estimated for 2012.

The Philippine market’s rally will continue in 2013. The PSEi is likely to hit 6,300- 6,700 – an 8%-13% gain from 2012’s close (5,812) driven by the expected improvement in corporate earnings. Our projected upside is based on a 17x-18x P/E multiple based on our earnings estimates for the year which will grow at 13% for 2013.

We believe Philippine core earnings growth will be sustained at 12% to 15%

for 2013 stemming from consumer spending growth, stable margins (improving top line growth), stable commodity prices (oil in particular), and investments in key industries (infrastructure, power, gaming, tourism, real estate, mining).

These growth expectations will allow the market to trade at 17x to 18x PER moving forward especially after the Philippines attains investment grade status in the next 18 months.

Sector preferences include: banks (Philippine loan growth of 16% higher than ASEAN average of 12%), property (sustained sales from declining interest rates and higher recurring income contributions), conglomerates (NAV re-rating from new business investments), and consumer (driven May elections and long term remittance story).

Least preferred sectors are telecoms, gaming, and commodities.


11%Power/Energy

14%Communications

15%Property

2%Mining

16%Banks

34%Holdings

PHILIPPINE STOCK INDEx FUND VERSUS BENCHMARK Net Asset Value Per Share

PSIF PSEi

Dec-07 Mar-09

450

350

650

550

750


3%Transportation

5%Foods


ALFM Growth FundA Mutual Fund Primed for Growth

ALFM Growth Fund is an open-end investment company (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 PhP 4.81 billion as of December 31, 2012, growing by 116.7% from PhP 2.22 billion as of December 31, 2011.

History ALFM Growth Fund, Inc. was incorporated on November 26, 2007 with an authorized capital stock of PhP 400.0 million consisting of 4,000,000 common shares with a par value of PhP 100.00.

As an investment company established under the Investment Company Act of 1960 (Republic Act 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.

On September 8, 2009, the Fund’s Board of Directors approved an increase in the Fund’s authorized capital stock from PhP 400.0 million (consisting of 4,000,000 common shares of PhP 100.00 par value) to PhP 50.0 billion (consisting of 500,000,000 common shares of PhP 100.00 par value), and to be implemented in tranches. The Fund’s shareholders approved and ratified such increase during a Special Meeting held on September 8, 2009.

The Fund’s history of increases in its authorized capital stock is shown below:

Base Currency





EarlyRedemption Fee

Custodian Bank


PhP 10,000.00

PhP 1,000.00

2.0% p.a.

180 days

1.0% flat

HSBC


1 10,000,000 shares February 15, 20102 20,000,000 shares January 19, 20113 30,000,000 shares December 21, 2011


PhP 3BCurrent authorized capital stock of ALFM Growth Fund



15%Financials

12%Industrials

29%Holding firms

1%Foods

4%Transportation

6%Construction

8%Telecommunications

The Fund’s authorized capital stock currently stands at PhP 3.0 billion consisting of 30,000,000 common shares with a par value of PhP 100.00 per share.


Sophisticated Market SegmentALFM Growth Fund’s NAV has grown steadily to PhP 4.81 billion as of December 31, 2012 from PhP 110 million as of December 31, 2007. 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, as shown in the chart below.

Operating performanceAs of end-December 2012, ALFM Growth’s trading net asset value (NAV) per share stood at PhP221.35, up 19.17% compared to the end-December 2011 level of PhP185.74.

The increase in NAV per share can be attributed to the Fund’s overweight position in some equities that outperformed for the year. Positive gains were contributed by the fund’s exposure in Ayala Corporation, Ayala Land, Inc. and Bank of the Philippine Islands.

Total assets of the Fund amounted to PhP4.828 billion as of end-2012, an increase of 100.11% compared to the PhP2.288 billion as of end-2011. Net assets amounted to PhP4.805 billion, up from PhP2.209 billion in 2011.

Revenues totaled PhP 508.54 million in 2012, up by PhP4 38.09 million from PhP 70.450 million in 2011. Net gain on financial assets at fair value through profit or loss increased to PhP 452.22 million in 2012 from a net gain of

PhP 5.74 million in 2011 due to increase in both realized and unrealized gains from equity investments during the year.

The funds equity investments returned 16% in 2012, much better than the previous year, as market conditions turned bullish ahead of strong corporate and economic prospects. Equities, which accounted for an average of 84% of net assets in 2012, improved from the previous year’s negative 1% yield, driven by the strong performance of Philippine stocks.

Total expenses amounted to PhP 84.89 million in 2012, compared to PhP 59.77 million the previous year. Management fees of PhP 71.36 million and other expenses of PhP 13.52 million representing payment for documentary stamps and audit fees made up the bulk of the expenses.in 2012. These resulted to an operating income of PhP 423.65 million in 2012 compared to PhP 10.68 million in 2011.

NET ASSET VALUE In million PhP

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

110

85

75 154655

953

2,246

2,6142,218

3,616

4,806 20%Property

5%Mining


Market Outlook 2012 was truly an eventful year for markets both domestically and abroad as we witnessed the modest recovery in the US even as the Eurozone economy struggled. Not surprisingly, we also saw the continued resilience of key emerging markets in Asia, fueled by their robust domestic economies.

The financial and debt crisis in the euro-zone reignited debates about the need to revisit the current structure of the European Union, as GDP growth for the zone was once again negative in 2012. In the US, positive economic indicators have shown a modestly recovering economy particularly in the areas of employment and housing, as the Fed continued to pursue extraordinary stimulus measures.

In Asia, China’s growth was subdued at only 7.8% for 2012, as export receipts receded meaningfully in

line with contracting global trade. India likewise slowed down to 4.1% (9M2012) while Indonesia and the Philippines’ GDP growth came out at 6.3% (9M2012) and 6.5% (9M2012), respectively.

Looking ahead to 2013, we see positive but moderate global growth, confirming a slow recovery for the global economy with the IMF forecasting a 3.6% expansion for the year, a modest improvement from the 3.3% growth estimated for 2012.

The Philippine market’s rally will continue in 2013. The PSEi is likely to hit 6,300- 6,700; an 8% to 13% gain from the end-2012 close (5,812) driven by the expected improvement in corporate earnings. Our projected upside is based on a 17x-18x P/E multiple, based on our earnings estimates for the year which will grow at 13% for 2013.

We believe Philippine core earnings growth will be sustained at 12% to 15% for 2013, stemming from consumer spending growth, stable margins (improving top-line growth), stable commodity prices (oil, in particular), and investments in key industries (infrastructure, power, gaming, tourism, real estate, and mining).

These growth expectations will allow the market to trade at 17x to 18x PER moving forward, especially after the Philippines attains investment grade status in the next 18 months.

Sector preferences include banks (Philippine loan growth of 16% higher than ASEAN average of 12%), property (sustained sales from declining interest rates and higher recurring income contributions), conglomerates (NAV re-rating from new business investments), and consumer (driven May elections and long term remittance story). Least preferred sectors are telecoms, gaming, and commodities.

ALFM EURO BOND FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund Benchmark

Dec-09 Sep-10

150

130

200

170

230

Jun-11 Mar-12 Dec-12

250


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 66.2% as of December 31, 2012, growing from 27.4% market share in the previous year. 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 year.

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 PhP 20.0 million consisting of 2,000,000 common shares with a par value PhP 10.00 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.

On November 24, 2010, the Fund’s Board of Directors approved an increase in the Fund’s authorized capital stock to PhP 5.0 billion (consisting of 500,000,000 common shares of PhP 10.00 par value) from PhP 50.0 million (consisting of 5,000,000 common shares of PhP 10.00 par value), and to be implemented in tranches. The Fund’s shareholders approved and ratified such increase during a Special Meeting held on November 24, 2010.

The Fund has had three increases in its authorized capital stock (shown in the table below).

Base Currency





EarlyRedemption Fee

Custodian Bank


PhP 10,000.00

PhP 1,000.00

0.75% p.a.

30 days

1.0% flat

HSBC


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

PhP 5BCurrent authorized capital stock of the ALFM Money Market Fund


The Fund’s authorized capital stock currently stands at PhP 200.0 million consisting of 20,000,000 shares with a par value of PhP 10.00 per share.Currently, the Fund’s authorized capital stock stands at PhP 1.468 billion consisting of 14,680,000 common shares with a par value of PhP 100.00 each.


Attracting New Investors The ALFM Money Market Fund’s Net Asset Value (NAV) as of December 31, 2012 breached the PhP 1.0 billion mark for the first time as it settled at PhP 1.05 billion. This represents a spectacular growth of 225% from the PhP 323.0 million level as of the previous year. It is now the largest fund in the money market fund segment. Investors who have shorter investment horizons have been shifting their investments to the Fund.

Market Review Global concerns centering on the Eurozone and the United States continued to be in the limelight, as unconventional central bank action was necessitated to support economic growth and the continued smooth operation of financial markets.

The Philippines was not immune, as the Monetary Board deemed it fit to reduce policy rates to a new record low of 3.5% from 4.5%. Policymakers likewise implemented a ban on non-resident investors in the BSP Special Deposit Account (SDA) facility and an incremental decrease in SDA yields. These actions brought down yields across the curve, but more significantly, short-term yields decreased by an average of 111 basis points for the year.

Despite initial fears of rising crude oil prices, inflation was at the low end of government targets averaging 3.1% versus the 3.0 to 5.0 target. Fiscal consolidation continued with an increase in revenues of 12.7%, allowing the budget deficit to register below the government’s target of

PhP 279 billion. With the support of monetary policy and government spending, the Philippine economy registered a GDP growth of 6.6%. These strong economic fundamentals garnered for the Philippines one-notch credit upgrades from Standard and Poor’s and Moody’s Investor Service.

Fund PerformanceThe Fund’s total assets grew to PhP 1.052 billion from PhP 323 million in 2011. Correspondingly, total income increased to PhP 28.11 million from PhP 10.83 million. The main driver was higher net gain on financial assets at fair value at PhP 14.9 million from 2011’s PhP 2.9 million. The Fund incurred expenses of PhP 7.5 million, higher than PhP 3.1 million the previous year.

In terms of return on investment, the Fund had a full-year return of 3.01%, outperforming its benchmark by 0.87%. The Fund’s two-year cumulative return of 6.42% outperformed its benchmark by 2.68%.

NET ASSET VALUE In million PhP

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

49.8

203.0279.9

232.7

323.0

538.0

1,050.2

225% Increase in Net Asset Value (NAV) during fiscal year 2012


Asset AllocationThe fund was invested mostly in deposit instruments (81%), corporate notes and bonds (12%), and government securities (7%). The fund’s duration was actively managed ending the year at 0.45.

Market OutlookWe expect the Bangko Sentral ng Pilipinas to retain its accommodative monetary policy stance as inflationary pressures remain manageable and concerns over global economic growth linger.

Inflation will likely rise in 2013, though it will likely fall comfortably within the target of 3-5 %. Global growth concerns may continue to require central bank stimulus as Europe continues to be in a recession and more of the periphery require aid.

The US is likely to post low growth and face fiscal constraints. Given the likelihood of a benign inflationary environment, accommodative monetary stance and continued fiscal discipline, Philippine peso-denominated bonds may continue to be well supported.

ALFM MONEY MARKET FUND VERSUS BENCHMARK Net Asset Value Per Share

Fund Benchmark

Dec-09 Sep-10

104

102

108

106

110

Jun-11 Mar-12 Dec-12

112


81%Cash and Deposit Instruments

12%Corporate Notes and Bonds

7%Government Securities - Medium-Term

0.45 Duration of the Philippine Stock Index Fund by end of 2012


AUDITED FINANCIAL

STATEMENTS



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, 2012 and 2011, 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, 2012, 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, 2012 and 2011, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards.

Report on Bureau of Internal Revenue Requirements

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

Isla Lipana & Co.

(original signed) Blesilda A. PestañoPartnerCPA Cert. No. 40446P.T.R. No. 0007713, January 2, 2013, Makati CitySEC A.N. (individual) as general auditor 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. 08-000745-7-2010, issued on May 31, 2010; effective until May 30, 2013BOA/PRC Reg. No. 0142, effective until December 31, 2013

Makati CityApril 11, 2013


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, 2012, on which we have rendered the attached report dated April 11, 2013. 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, 2012 as required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A and H as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, are presented for purposes of filing with the Securities and Exchange Commission and are not required parts of the basic financial statements. Such supplementary information are the responsibility of management and have been subjected to the auditing procedures applied in the audits of the basic financial statements. In our opinion, the supplementary information have been prepared in accordance with Rule 68 of the Securities Regulation Code.

The other schedules required by Part II, Section 6 of Rule 68 of the Securities Regulation Code are not presented as they are deemed not relevant by management.

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 15 to the financial statements.

Isla Lipana & Co.




ASSETSCash and cash equivalentsFinancial assets at fair value through profit or lossLoans and 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

567

139

10

11

2012

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

49,39016,20365,593

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

2011

7,872,99215,258,99010,543,81133,675,793

36,25711,62647,883

11,652,7203,892,074

18,083,11633,627,91033,675,793

ALFM Peso Bond Fund, Inc.

Statements of Total Comprehensive IncomeFor each of the three years in the period ended December 31, 2012

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

(The notes on pages 28 to 31 are an integral part of these financial statements.)

INCOMEInterest incomeNet gains on financial assets at fair value through

profit or loss

EXPENSESManagement and other professional feesTaxes and licensesOthers

PROFIT BEFORE INCOME TAXPROVISION FOR INCOME TAXPROFIT FOR THE YEAROTHER COMPREHENSIVE INCOME FOR THE YEARTOTAL COMPREHENSIVE INCOME FOR THE YEARBASIC AND DILUTED EARNINGS PER SHARE

2012

1,963,198

1,343,7833,306,981

603,02573,21313,482

689,7202,617,261

240,1482,377,113

-2,377,113

17.6669

2011

1,595,938

1,481,6603,077,598

481,57449,18217,690

548,4462,529,152

162,6692,366,483

-2,366,483

20.5545

2010

1,664,740

991,6452,656,385

402,59857,82515,319

475,7422,180,643

184,9881,995,655

-1,995,655

19.4421

Notes12

13

8

10


Statements of Financial PositionDecember 31, 2012 and 2011

(All amounts in thousands of Philippine Peso)

ASSETS

LIABILITIES AND EQUITY




Statements of Changes in EquityFor each of the three years in the period ended December 31, 2012


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, 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, 2012

Share

premium-

- -

-

17,065,091(13,620,055)

3,445,0363,445,036

---

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

447,0383,892,074

---

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

7,751,35411,643,428

Retained earnings

13,720,978

1,995,655 -

1,995,655

---

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

Total equity22,876,479

1,995,655-

1,995,655

28,163,609(22,500,390)

5,663,21930,535,353

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

Redeemableshares

(Note 10)9,155,501

- -

-

11,098,518(8,880,335)2,218,183

11,373,684

---

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

279,03611,652,720

---

13,257,890(9,652,915)3,604,975

15,257,695



Statements of Cash FlowsFor each of the three years in the period ended December 31, 2012


CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Unrealized fair value (gains) losses Interest income Operating income (loss) before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Loans and receivables (Decrease) increase in: Other liabilities Management fee payable (Forward)

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

2010

2,180,643

(793,133)(1,664,740)

(277,230)

(401,082)(2,045,665)

(293,875)3,179

Notes

6





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

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

2010

(3,014,673)1,678,557

(184,988)(1,521,104)

28,163,609(22,500,390)

5,663,219

4,142,115

2,345,3956,487,510

Notes

10

5


Notes to FiNaNcial statemeNtsAs at December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012(In the notes, all amounts are in thousands of Philippine Peso unless otherwise stated)

Note 1 - General informationALFM Peso Bond Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to establish and carry on the business of an open-end investment company. It was registered on July 18, 1997 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 or Republic Act No. 2629 and The Revised Securities Act or Batas Pambansa Blg. 178.

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 (see 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 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”) (see Note 13).

The financial statements have been approved and authorized for issue by the Fund’s Board of Directors (BOD) on March 21, 2013. There were no material events that occurred subsequent to March 21, 2013 until April 11, 2013.

Note 2 - Summary of significant accounting policiesThe principal accounting policies applied in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The financial statements of the Company 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 critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.

New standards, interpretations and amendments to published standards

(a) New and amended standards adopted by the Fund

There are no PFRS or IFRIC interpretations that are effective for the first time for the financial year beginning January 1, 2012 that have a material impact on the Fund.

(b) New standards, amendments and interpretations not yet adopted

A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after January 1, 2012, 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 the following as set out below:

• PFRS 9, Financial Instruments (effective January 1, 2015). This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39 that relate to the classification and measurement of financial instruments. 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. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 beginning January 1, 2015. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued.

• PFRS 13, Fair Value Measurement (effective January 1, 2013). This new standard aims to improve consistency and reduce complexity by providing a clarified definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRS. The requirements, which are largely aligned with IFRS and US GAAP, 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 or US GAAP. The Fund will adopt PFRS 13 effective January 1, 2013 but is yet to assess the full impact of the new standard.

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.

2.2 Cash and cash equivalents

Cash and cash equivalents include deposits held at call with bank and short-term highly liquid investments with original maturities of three months or less.

2.3 Financial assets

(a) Classification

The Fund classifies its investments as financial assets 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. As at December 31, 2012 and 2011, the Fund has no financial assets under available-for-sale and held-to-maturity categories.

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 (Note 5) and loans and receivables (Note 7).

(b) 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 at fair value through profit or loss are initially recognized at fair value. Financial assets not carried 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 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 gain (loss) on financial assets at fair value through profit or loss in profit or loss.

(c) 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 profit or loss in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

The fair value determination of the Fund’s financial assets at fair value through profit or loss is based on the following hierarchy:

i) Current bid price ii) Closing price, if bid price is not available

(d) Impairment

The Fund assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired.

The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate (recoverable amount). Impairment loss is recognized in profit or loss and the carrying amount of the asset is reduced through the use of an allowance. An impairment charge is reversed


subsequently by adjusting the allowance account if the decrease in impairment loss can be related objectively to an event occurring after the impairment loss is recognized. The amount of reversal is recognized in profit or loss.

2.4 Financial liabilities

(a) 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. Gains and losses arising from changes in fair value of financial liabilities classified held for trading are included in profit or loss. The Fund has no financial liabilities that are designated at fair value through profit loss.

Financial liabilities that are not classified as at fair value through profit or loss are initially measured at fair value plus transaction costs and are subsequently measured at amortized cost using the effective interest method. The Fund’s financial liabilities measured at amortized cost include management fee payable and other liabilities.

(b) Derecognition

Financial liabilities are derecognized when they have been redeemed or otherwise extinguished (i.e., when the obligation is discharged or cancelled or has expired). 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 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 regulations. 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.

2.7 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.

2.8 Functional and presentation currency

Subscriptions and redemptions of the Fund’s redeemable shares are denominated in Philippine Peso (“Peso”). The performance of the Fund is measured and reported to the investors in Peso. The BOD considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

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

2.9 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 shares outstanding redeemable shares are adjusted for the effects of all dilutive potential common shares.

There are no dilutive potential redeemable shares as at December 31, 2012 and 2011.

2.10 Income tax

(a) Current income tax

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

The Fund has interest income from government securities and time deposits, certain corporate bonds and long-term certificates of deposits which are subject to final withholding tax. Such income is presented at gross amount and the related final tax is presented as Provision for income tax (Note 8) in profit or loss. Realized gain on sale of financial assets at fair value through profit or loss is tax-exempt.

(b) 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 or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax or MCIT) 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.

(c) Recent tax laws and regulations

On December 28, 2010, Revenue Regulations (RR) No. 15-2010 became effective and amended certain provisions of RR No. 21-2001 prescribing the manner of compliance with any documentary and/or procedural requirements in connection with the preparation and submission of financial statements, income tax returns and information on taxes, duties and license fees paid or accrued during the year.

Revenue Regulations No. 19-2011, issued on December 9, 2011, prescribed the New Income Tax Form No. 1702. This regulation further requires the inclusion of supplementary schedules of sales/receipts/fees, costs of sales/services, non-operating and taxable other income, itemized deduction (if the taxpayer did not avail of OSD), taxes and licenses, and other information in the notes to the financial statements.

2.11 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.

2.12 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 management3.1 Strategy in using financial instruments

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 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 shall be 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 has established risk management functions with clear terms of reference and with the responsibility for developing policies on market and liquidity 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.

3.2 Price 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 the statement of total comprehensive income. Trading positions are subject to various risk factors, which include primarily exposures to interest rates.

The Fund’s price 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 market price 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, 2012, the Fund’s VAR with respect to market interest rate volatilities amounts to P594,308 (2011 - P830,113). 3.3 Interest rate risk

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 on both its fair value and cash flow risks.

The Fund’s financial assets at fair value through profit and loans and receivables are mostly non-repricing and hence exposed to fair value interest rate risk. The Fund Manager monitors this risk through the VAR calculation (Note 3.2). The Fund’s financial liabilities are all non-interest bearing.

3.4 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 invests primarily in high-grade investment instruments and securities. Details of ratings of the Fund’s investments at December 31, 2012 and 2011 based on external credit rating agencies:

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

20123,755,317

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

20117,872,992

15,258,99010,543,81133,675,793


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 BSP special deposit accounts and short-term time deposits (Note 5).

There were no renegotiated financial assets as at December 31, 2012 and 2011.

There are no financial assets that are either past due or impaired as at December 31, 2012 and 2011.

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 P813,157 (2011 – P12,368,478).

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 by assessing the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty.

3.5 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.

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 2012 and 2011.

The Fund’s financial liabilities pertain to management fee payable and other liabilities which are contractually due in less than 1 month.

3.6 Capital risk management

The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity. The capital of the Fund is represented by net asset value or total equity as shown in the statement of financial position. 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.

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.

3.7 Fair value of financial instruments

PFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Fund’s market assumptions.

These two types of inputs have created the following fair value hierarchy:

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

At December 31, 2011Standard and Poor’s BB+Philippine Rating Services Corp. Aaa Aa+Unrated

Fair value through profit or loss

-27,925,763

-1,719,545

29,645,308

13,671,547

--

1,587,44315,258,990

• 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). This level includes the majority of the OTC derivative contracts. 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.

Following the fair value hierarchy definition above, the Fund’s financial assets at fair value through profit or loss are classified under level 1 as at December 31, 2012 and 2011. The Fund has no financial instruments that fall under the level 2 and 3 categories.

The fair values of loans and receivables which represent the discounted amount of estimated future cash flows expected to be received amount to P7,725,065 as at December 31, 2012 (2011 - P11,098,958). Expected cash flows are discounted at current market rates to determine fair value. The carrying amounts of the Fund’s other financial assets and financial liabilities at reporting period approximate their fair values considering that these have short-term maturities.

Note 4 - Critical accounting judgmentEstimates, assumptions and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The judgment that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year is discussed below.

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 P11,882,526 and P9,216,031 as at December 31, 2012 and 2011, respectively. No impairment loss recognized for the years ended December 31, 2012, 2011 and 2010.

Note 5 - Cash and cash equivalents The account at December 31 consists of:

Short-term time depositsSpecial savings depositsRegular savings deposits

20122,420,0001,271,472

63,8453,755,317

20115,190,0002,008,110

674,8827,872,992

Note 7 - Loans and receivables

The account at December 31 consists of:

Term loans represent debts issued by certain Philippine corporations. The term loans carry effective interest at rates ranging from 3.70% to 7.10% (2011 - 1.55% to 11.74%). The preferred shares bear annual cash dividend at rates ranging from 7.00% to 8.88% (2011 – 1.95% to 9.46%). Preferred dividends received included in interest income amount to P101,176 (2011 - P113,763).

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 2013. 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:

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

The maturity patterns of loans and receivables follow:

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:

Note 9 - Other liabilities

The account at December 31, 2012 consists primarily of withholding taxes payable related to management fees amounting to P16,203 (2011 - P11,626) which were subsequently settled in the succeeding year.

Note 10 - Redeemable shares

The details of the Fund’s authorized shares as at December 31, 2012 and 2011 follow:

The movements in the Fund’s redeemable shares in thousands follow:

Details of issuances and redemptions of the Fund’s redeemable shares follow:

As at December 31, 2012, the Fund has 21,351 shareholders (2011 - 13,780).

Subject to the approval by the SEC, the Fund’s Board of Directors approved an increase in Fund’s authorized shares from 340 million to 400 million shares with par value of P100 per share on March 21, 2013.

Term loansRedeemable preferred sharesOther receivables

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

Loans and receivables

595,000-

4,335,6107,611,916

12,542,526

330,000-

2,573,7652,247,0175,009,649

10,160,431

Special savings deposits consist of BSP Special Deposit Accounts bearing effective interest ranging from 4.63% to 4.69% (2011 - 4.63% to 4.69%). Short-term time deposits bear interest rates ranging from 2.00% to 4.00% (2011 - 1.13% to 4.19%) with maturity dates within January 31, 2013 (2011 - January 31, 2012).

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

The account at December 31 which consists of investments designated as held for trading follows:

The maturity patterns of government securities follow:

The movements in financial assets at fair value through profit or loss are summarized as follows:

Government securitiesUnit investment trust funds Investment in mutual fundsPreferred shares

2012Interestrate (%)2.8-10.4

---

Amount27,925,763

979,60970,899

669,03729,645,308

2011Interestrate (%)4.2-9.0

---

Amount13,671,5471,110,816

23,927452,700

15,258,990


2012156,015

27,769,74827,925,763

2011-

13,671,54713,671,547

At January 1AdditionsDisposalsUnrealized fair value gains (losses), netAmortization of premiumAt December 31

201215,258,99061,063,846

(46,527,532)12,643

(162,639)29,645,308

201113,111,59547,113,810

(44,396,422)(540,074)(29,919)

15,258,990

201211,882,526

660,000590,759

13,133,285

20119,216,031

860,000467,780

10,543,811

UnsecuredSecured

201212,620,797

512,48813,133,285

20119,227,2191,316,592

10,543,811

20122,981,762

10,151,52313,133,285

20111,512,5479,031,264

10,543,811

Year of Incurrence201220082007

Applied NOLCOExpired NOLCO

Income tax rate

Year of Expiration201520112010

Unrecognized deferred income tax assets

2012223,544

--

223,544--

223,54430%

67,063

2011-

31,204-

31,204(24,740)(6,464)

-30%

-

2010-

58,21948,026

106,245(75,041)

-31,204

30% 9,361

Issued, January 1Issuance of sharesRedemption of sharesIssued, December 31

2012

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

2011113,73791,611

(88,821)116,527

201091,555

110,985(88,803)113,737

Number of sharesPar value per shareAmount

2012340 million

P100P34 billion

2011340 million

P100P34 billion

Issuances of sharesRedemptions of shares

201238,376,52427,913,230

201124,643,04923,916,975

201028,163,60922,500,390



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:

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 movements in allowance for market risk follow:

Furthermore, in determining the trading NAV per share, financial assets at fair value through profit or loss are valued based on the last traded market prices. As described in Note 2 and consistent with the requirements of PAS 39, the quoted market price used for financial assets at fair value through profit or loss is the closing bid price in determining the PFRS NAV.

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

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

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

Note 12 - Income

The Fund generated interest income mainly from its investments 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.

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

Note 13 - Related party transactions

In 2010, 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 exercise full control, direction and management of the Fund in accordance with the investment policies and limitations set by the Fund’s BOD, 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.

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

20122,377,112

134,55217.6669

20112,366,483

115,13220.5545

20101,995,655

102,64619.4421

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

2012760,487134,829895,316

2011447,069313,418760,487

PFRS NAVAdjustments on market valuationAllowance for market riskOthersTrading NAV

201246,468,317

182,988(895,316)

-45,755,989

201133,627,910

141,151(760,487)

(1,870)33,006,704

Trading NAV (In thousands)Total number of shares issued (Note 10)Trading NAV per share

201245,755,989

152,577299.89

201133,006,704

116,527283.25

Net realized gainsNet unrealized gains (losses)

20112,021,734(540,074)

1,481,660

2010198,512793,133991,645

20121,331,140

12,6431,343,783

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):

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, 2012, total remunerations paid to directors and officers charged in profit or loss amounted to P1,109 (2011 - P946; 2010 - P1,099). As at reporting dates, there were no outstanding balances related to these fees.

Note 14 - Custodian agreement

The Fund has an existing custodian agreement with Hong Kong and 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, 2012, the market value of securities in custody of HSBC aggregates P7,368,534 (2011 – P11,013,359).

Note 15 - Supplementary information required by Bureau of Internal Revenue

The following information is presented for purposes of filing with the BIR and is not a required part of the basic financial statements.

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

On December 28, 2010, Revenue Regulation (RR) No. 15-2010 became effective and amended certain provisions of RR No. 21-2002 prescribing the manner of compliance with any documentary and/or procedural requirements in connection with the preparation and submission of financial statements and income tax returns. Section 2 of RR No. 21-2002 was further amended to include in the notes to financial statements information on taxes, duties and license fees paid or accrued during the year in addition to what is mandated by PFRS.

December 31, 2012Management Fees BPI Investment BPI - AMTG

Transactions

300,123300,123

600,246

Outstanding balances

24,69524,695

49,390

Terms and condi-tions

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


Transactions

237,271237,271

474,542


18,26318,264

36,527




Transactions

190,811190,811

381,622


15,96915,968

31,937



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

a) Documentary stamp tax (DST)

Total documentary stamp taxes paid on share subscriptions for the year ended December 31, 2012 amounted to P66,288. There are no documentary stamp taxes accrued as at December 31, 2012 and 2011. These amounts are lodged under the taxes and licenses account in the statements of comprehensive income.

b) Withholding taxes

Withholding taxes paid/accrued and/or withheld for the years ended December 31, 2012 and December 31, 2011 consist of:

Total creditable withholding taxes on interest received for the year ended December 31, 2012 amounted to P3,004,960. Accrued creditable witholding taxes is presented under Other liabilities in the Fund’s statement of financial position.

c) All other local and national taxes

All other local and national taxes paid for the years ended December 31, 2012 consist of:

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, 2012.

d) Tax cases and assessments As at December 31, 2012, open taxable years are 2011, 2010 and 2009. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case.

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

RR No. 19-2011 prescribes the new BIR forms that should be used for income tax filing covering and starting with the calendar year 2012 and modifies Revenue Memorandum Circular No. 57-2011. In the Guidelines and Instructions Section of the new BIR Form 1702 (version November 2011), a required attachment to the income tax return is an Account Information Form and/or Financial Statements that include in the Notes to Financial Statements schedules of sales/receipts/fees, cost of sales/services, non-operating and taxable other income, itemized deductions (if the taxpayer did not avail of the Optional Standard Deduction or OSD), taxes and licenses and other information prescribed to be disclosed in the Notes to the Financial Statements.

The Fund’s schedules for the year ended December 31, 2012 follow:

a) Income

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

b) Cost of services

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

c) Itemized deductions

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

Creditable income taxes withheld (expanded)

Paid

83,606

Accrued

7,817

Total

91,423

Municipal and other related taxesMayor’s permitOthersTotal

Amount6,911

111

6,923

Total income for the yearInterest income Subject to 30% Subject to 20% Subject to 0%

Net realized fair value gains or losses Subject to 0%

Taxable amount

466,1771,444,003

53,0181,963,198

1,331,1403,294,338

Direct chargesTrust feeTaxes & licenses

Deductible amount600,246

73,213673,459

Nature of expenseOther professional feesMiscellaneous


13,48216,262



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, 2012 and 2011, 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, 2012, and a summary of significant accounting policies and other explanatory information.





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 Dollar Bond Fund, Inc. as at December 31, 2012 and 2011, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards.



Isla Lipana & Co.







We have audited the financial statements of ALFM Dollar Bond Fund, Inc. as at and for the year ended December 31, 2012, on which we have rendered the attached report dated April 11, 2013. 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, 2012 as required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A and H as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, are presented for purposes of filing with the Securities and Exchange Commission and are not required parts of the basic financial statements. Such supplementary information are the responsibility of management and have been subjected to the auditing procedures applied in the audits of the basic financial statements. In our opinion, the supplementary information have been prepared in accordance with Rule 68 of the Securities Regulation Code.


Isla Lipana & Co.







Isla Lipana & Co.





ALFM Dollar Bond Fund, Inc.


(All amounts in US Dollar)


INCOMEInterest incomeNet gains on financial assets at fair value through profit or lossForeign exchange gains, net

EXPENSESManagement and other professional feesTaxes and licensesOthers


2012

10,239,213

9,887,1481,676,147

21,802,508

2,444,819214,52454,191

2,713,53419,088,9741,093,684

17,995,290-

17,995,29035.2656

2011

7,986,116

516,062670,684

9,172,862

2,116,458151,29723,564

2,291,3196,881,543

227,6586,653,885

-6,653,885

14.7163

2010

6,680,961

2,518,899295,359

9,495,219

1,656,937262,32753,710

1,972,9747,522,245

107,7847,414,461

- 7,414,461

18.6820

Notes12

13

9

10




ASSETS



ASSETSCash and cash equivalentsFinancial assets at fair value through profit or loss Held-to-maturity securities Loans and receivablesOther 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

56788

13

10

11

2012

9,355,463166,453,48944,330,771

876,9795,861,771

226,878,473

197,56167,633

265,194

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

226,613,279226,878,473

2011

8,690,513114,692,70044,455,371

821,1683,222,126

171,881,878

152,03751,470

203,507

90,308,20339,530,89041,839,278

171,678,371171,881,878




Statements of Changes in Equity For each of the three years in the period ended December 31, 2012

(All amounts in US dollar)


Share

premium23,085,919

---

33,380,082(20,062,304)13,317,77836,403,697

---

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

3,127,19339,530,890

---

31,293,101(12,306,985)18,986,11658,517,006

Retained earnings

27,770,932

7,414,461-

7,414,461

---

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


7,414,461-

7,414,461

77,303,561(46,274,938)31,028,623

158,006,086

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)36,939,618

226,613,279

Redeemableshares

(Note 10)68,706,151

---

43,923,479(26,212,634)17,710,84586,416,996

---

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

3,891,20790,308,203

---

32,770,093(13,938,849)18,831,244

109,139,447




(All amounts in US dollar)

CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Unrealized fair value gains, net Interest income Unrealized foreign exchange (gains) losses Operating income (loss) before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Held-to-maturity securities Loans and receivables Other receivables (Forward)

2012

19,088,974

(9,248,864)(9,643,995)(1,034,685)

(838,570)

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

(1,989,516)

2011

6,881,543

(255,380)(7,986,116)

36,839

(1,323,114)

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

-(499,023)

2010

7,522,245

(289,622)(6,680,961)

(295,359)

256,303

(41,833,017)2,096,702(821,168)(23,128)

Notes

12






Increase (decrease) in: Management fee payable Accrued expenses Cash used in operations Interest received Income taxes paid Net cash used in operating activitiesCASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemption of shares Net cash from financing activitiesEFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTSNET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS January 1 December 31

2012

45,52416,163

(45,209,535)8,993,866

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

64,063,194(27,123,576)36,939,618

1,034,685

664,950

8,690,5139,355,463

2011

14,017(4,548)

(16,243,957)7,986,116(227,658)

(8,485,499)

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

7,018,400

(36,839)

(1,503,938)

10,194,4518,690,513

2010

16,03849,451

(40,258,819)6,432,422(107,784)

(33,934,181)

77,303,561(46,274,938)31,028,623

295,359

(2,610,199)

12,804,65010,194,451

Notes

10

5


Notes to FiNaNcial statemeNtsAs at December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012(All amounts are in US Dollar unless otherwise stated)

Note 1 - General informationALFM Dollar Bond Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to subscribe, invest and reinvest, sell, transfer or otherwise dispose of securities of all kinds and generally to 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 or Republic Act No. 2629 and The Revised Securities Act or Batas Pambansa Blg. 178.

The Fund aims to provide its shareholders with the best return possible, consistent with prudent credit standards, 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 (see Note 11).

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 27, 2006.

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 Fund has no employees. The principal management, administration and other functions of the Fund are outsourced to BPI Investment Management, Inc. (BPI Investment) (the “Fund Manager”) (Note 13).


Note 2 - Summary of significant accounting policiesThe principal accounting policies applied in the preparation of the Company’s financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.


TThe financial statements of the Company 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 critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. New standards, interpretations and amendments to published standards





• PFRS 9, Financial Instruments (effective January 1, 2015). This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39 that relate to the classification and measurement of financial instruments. 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. The Fund is yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 beginning January 1, 2015. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued.




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.


(a) Classification

The Fund classifies its investments as financial assets 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. As at December 31, 2012 and 2011, the Fund has no financial assets under available-for-sale.


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.


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 gain (loss) 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.

The fair value determination of the Fund’s financial assets at fair value through profit or loss under level 1 (Note 3.7) is based on the following hierarchy:


Loans and receivables and held-to-maturity securities are subsequently carried at amortized cost using the effective interest method.

(d) Impairment


Loans and receivables and held-to-maturity securities are tested for impairment if there are indicators of impairment. The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate (recoverable amount). Impairment loss is recognized in profit or loss and the carrying amount of the asset is reduced through the use of an allowance. An impairment charge is reversed subsequently by adjusting the allowance account if the decrease in impairment loss can be related objectively to an event occurring after the impairment loss is recognized. The amount of reversal is recognized in profit or loss.



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 that are not classified as at fair value through profit or loss fall into the other liabilities are initially measured at fair value plus transaction costs. Financial liabilities measured at amortized cost include management fee payable and accrued expenses.

(b) Derecognition

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.











2.8 Foreign currency transactions and translation

(a) Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary economic environment in which the Fund operates (“the functional currency”). The financial statements are presented in US Dollar (US$), which is the Fund’s functional and presentation currency.

(b) 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.

2.9 Earnings (loss) 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 common shares. There are no dilutive potential redeemable shares as at December 31, 2012, 2011 and 2010.

2.10 Income tax



The Fund primarily earns interest income from US Dollar-denominated investment securities issued by the Republic of the Philippines and foreign governments. The interest income and realized gains from disposal of these investments are generally tax-exempt. Interest income from time deposits is subject to final withholding tax. Such income is presented at gross amount and the related final tax is presented as Provision for income tax (Note 9) in profit or loss.



Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax or MCIT) 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 recognized in full for all taxable temporary differences. 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 on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.


On December 28, 2010, Revenue Regulations No. 15-2010 became effective and amended certain provisions of RR No. 21-2001 prescribing the manner of compliance with any documentary and/or procedural requirements in connection with the preparation and submission of financial statements, income tax returns and information on taxes, duties and license fees paid or accrued during the year.

Revenue Regulations No. 19-2011, issued on December 9, 2011, prescribed the New Income Tax Form No. 1702. This regulation further requires the inclusion of supplementary schedules of sales/receipts/fees, costs of sales/services, non-operating and taxable other income, itemized deduction (if the taxpayer did not avail of OSD), taxes and licenses, and other information in the notes to the financial statements. The Fund did not avail of the OSD for purposes of income tax calculation in 2012 and 2011.


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 enterprise and its key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.




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 virtually denominated in its functional currency; thus, its 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 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.


3.2 Price 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 the statements of total comprehensive income. Trading positions are subject to various risk factors, which include exposures to interest rates and foreign exchange rates.

The Fund’s price 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 market price 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. Investments in bonds issued by the Republic of the Philippines (ROP), US government, European government and other Asian companies comprise mainly the Fund’s investments at December 31, 2012 and 2011. 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



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 - for example selling an insignificant amount close to maturity - it will be required to measure the investments at fair value and not at amortized cost.

Note 5 - Cash and cash equivalentsThe account at December 31 consists of:

Special savings deposits consist of BSP Special Deposit Accounts bearing an effective interest of 4.0%. Time deposits bear interest at effective rates ranging from 1.50% to 2.0% (2011 - 0.46% to 7.50%) and have average maturities of 35 days both in 2012 and 2011.

Note 6 - Financial assets at fair value through profit or lossThe account at December 31 consists of held-for-trading investments in the following:

Note 7 - Held-to-maturity securitiesThe account at December 31 consists of investments in the following:

The maturity patterns of held-to-maturity securities follow:

The movements in held-to-maturity securities are summarized as follows:

Note 8 - Loans and receivables; Other receivablesLoans and receivables consist of unsecured term loan maturing July 13, 2015 which carry an effective interest rate of 6.8615%.

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.

fluctuations (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 portfolio’s actual loss could be greater than the VAR estimate.

As at December 31, 2012, the Fund’s VAR with respect to market interest rate volatilities amounts to US$5,791,666 (2011 - US$3,933,412). 3.3 Interest rate risk


The Fund’s financial assets at fair value through profit are mostly non-repricing and hence not exposed to fair value interest rate risk. The Fund Manager monitors this risk through the VAR calculation (Note 3.2). The Fund’s financial liabilities are all non-interest bearing.

3.4 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 total amount of loans and receivables and other receivables (mainly interest receivables) outstanding is unsecured. Pursuant to the guidelines issued by the SEC, the Fund is allowed to invest in debt instruments registered and traded in an organized market in another country which are rated at least “BBB” by a reputable credit rating agency. For unrated securities, a rating is assigned using an approach that is consistent with that used by rating agencies.

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

3.5 Liquidity risk





The Fund’s financial liabilities pertain to management fee payable and accrued expenses which are contractually due in less than 1 month. The Fund expects to settle its financial liabilities in accordance with the contractual maturity dates.

3.6 Capital management

The capital of the Fund is represented by total equity as shown in the statement of financial position. 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:







The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity.

3.7 Fair value estimation

PFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Fund’s market assumptions. These two types of inputs have created the following fair value hierarchy:

• Level 1 - Unadjusted quoted prices (current bid price or closing price) 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.).




The fair value of held-to-maturity securities is P44,339,430 as at December 31, 2012 (2011 - P44,455,683). As at December 31, 2012 and 2011, the carrying amounts of the Fund’s other financial assets and liabilities approximate their fair values.

Note 4 - Critical accounting estimate and judgmentThe Fund makes judgment that affects the reported amounts of assets and liabilities. The Fund’s judgment is continually evaluated and is 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 asset and liabilities within the next financial year is discussed below. There are no significant estimates made by management that affects that affects the reported amounts of assets and liabilities.

At December 31, 2012Standard and Poor’s AA BB - to BB +Moody’s / Philippine Ratings

AaaAa3 to Aa1A3 to A1Baa3 to Baa1Ba3 to Ba1B2Unrated

At December 31, 2011Standard and Poor’s

AAAAAA - to A +BBB- to BBB+BB - to BB +B- to B+Unrated


159,56093,223,465

12,302,94314,727,7645,421,4937,612,0354,842,8931,093,370

27,069,966166,453,489

7,396,0006,411,647

15,479,7826,088,070

36,961,0663,709,740

38,646,395114,692,700

Held to maturity

-41,334,950

--

998,874997,057

--

999,89044,330,771

998,235-

995,518-

39,126,3902,334,7681,000,460

44,455,371

Cash in banksSpecial savings depositsTime deposits

2012210,463

2,000,0007,145,0009,355,463

201190,513

-8,600,0008,690,513

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

20129,355,463

166,453,48944,330,771

876,9795,861,771

226,878,473

20118,690,513

114,692,70044,455,371

821,1683,222,126

171,881,878

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.

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 BSP special deposit accounts and short-term time deposits (Note 5).

Debt securities Philippine government bonds Philippine corporate bonds Asian corporate bonds Asian government bonds Supranational bonds US government bonds US corporate bonds European corporate bonds OthersInvestment funds Unit Investment Trust Funds (UITF) Mutual fund

2012

Interest rates (%)

2.75 - 9.50

4.25 - 8.38

3.50 - 5.25

1.60 - 5.132.63

--

2.884.88 - 7.00

--

Amount

87,924,596

34,165,618

14,007,589

11,025,9308,522,238

-1,521,075

161,0087,701,507

455,834968,094

166,453,489

2011

Interest rates (%)

2.30 -10.63

5.50 - 9.00

3.50 - 7.75

4.88 - 5.132.63 - 5.50

2.00 - 3.132.5

-4.88 - 7.00

--

Amount

47,422,434

23,421,057

17,401,139

6,516,8305,751,866

3,029,6751,498,290

-6,810,527

1,973,273867,609

114,692,700

Philippine government bondsPhilippine corporate bondsAsian government bondsAsian corporate bonds

2012Interestrate (%)

7.50 - 10.625

8.0 - 8.375

5.125

5.25

Amount

38,956,072

3,378,769

998,874

997,05644,330,771

2011Interestrate (%)

7.50 - 10.625

8.0 - 8.375

5.125

5.25

Amount

39,126,390

3,335,228

998,235

995,51844,455,371

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

20129,036,604

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

2011-

20,533,11423,922,25744,455,371

At January 1MaturitiesAmortization of premiumAt December 31

20129,036,604

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

201149,073,348(3,858,632)

(759,345)44,455,371



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

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

Note 12 - IncomeThe Fund generated interest income mainly from its investments 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.

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

Details of net unrealized and realized foreign exchange gains follow:

Note 13 - Related party transactionsIn 2010, 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 exercise full control, direction and management of the Fund in accordance with the investment policies and limitations set by the Fund’s BOD, 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 preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPI-AMTG a fee of not more than 0.625% p.a. of the Fund’s average trading NAV.

The Fund has distribution agreements with subsidiaries of BPI, namely, 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. 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:

Other receivables are considered current while loans and receivables are considered non-current as at December 31, 2012 and 2011.

Note 9 - Income taxesProvision 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:

Note 10 - Redeemable sharesThe details of the Fund’s authorized shares at December 31, 2012 and 2011 follow:

The movements in the number of issued redeemable shares at December 31 follow:



Subject to the approval by the SEC, the Fund’s Board of Directors approved an increase in Fund’s authorized shares from 600 thousand to 679 thousand shares with par value of US$195.43 per share on October 12, 2012.

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


Note 11 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for redeemable shares issued or re-purchased respectively is based on the value of the Fund’s NAV per share at the date of the transaction. The total equity as shown in the 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 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.

The movements in allowance for market risk follows:

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


600 thousandUS$195.43

117,258,496


201217,995,290

510,27935.2656

20116,653,885

452,14514.7163

20107,414,461

396,87718.6820


20124,237,487

(26,944)4,210,543

20113,891,532

345,9554,237,487

Net unrealized fair value gainsNet realized fair value gains

2011255,380260,683516,062

2010289,622

2,229,2772,518,899

20129,248,864

638,2849,887,148

Year of Incurrence

20122011201020092008

Expired NOLCO

Income tax rate

Year of Expiration

20122014201320122011

USD1,570,2922,333,4722,048,2511,671,020

-7,623,035(1,671,020)5,952,015

30%

1,785,605Unrecognized deferred income tax asset

2012 2011

PHP66,311,55798,539,73886,495,16670,565,164

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

30%

75,403,938

USD-

2,275,0561,996,9751,629,1881,978,4517,879,670

(1,978,451)5,901,219

30%

1,770,366

PHP-

98,539,73886,495,16670,565,16485,692,829

341,292,897(85,692,829)255,600,068

30%

76,680,020

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

2012462,100167,682(71,324)

558,458

2011442,189118,584(98,673)

462,100

2010351,564224,753(134,128)442,189


201264,063,19427,123,576

201141,999,57034,981,170

201077,303,56146,274,938

PFRS NAVAdjustments on market valuationAllowance for market riskTrading NAV

2012226,613,279

-(4,210,543)

222,402,736

2011171,678,371

160,980(4,237,487)

167,601,864

Net unrealized foreign exchange gains (losses)Net realized foreign exchange gains

2011

(36,839)

707,523670,684

2010

295,359

-295,359

2012

1,034,685

641,4621,676,147


Transactions

1,206,4251,206,425

2,412,850


98,78198,780

197,561

Terms and conditions

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


Transactions

1,014,5671,014,566

2,029,133


76,01976,018

152,037




TransactionsOutstanding

balances

69,01069,010

138,020



824,749824,748

1,649,497

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 Investment Advisor. For the year ended December 31, 2012, total remunerations paid to directors and officers charged in profit or loss amounted to US$10,325 (2011 - US$12,221; 2010 - US$12,135). As at reporting dates, there were no outstanding balances related to these fees.

Note 14 - Custodianship agreementThe Fund has custodian agreements with Hong Kong 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, 2012, the market value of securities held by the custodian aggregates to US$827,181,409 (2011 - US$159,148,291)

Note 15 - Supplementary information required by the Bureau of Internal RevenueI. Supplementary information required by Revenue Regulation No. 15-2010



a) Documentary stamp tax

Total documentary stamp taxes paid on share subscriptions for the year ended December 31, 2012 amounted to $197,926 (P8,384,100). There are no documentary stamp taxes accrued as at December 31, 2012.


Withholding taxes paid/accrued and/or withheld for the year ended December 31, 2012 consist of:

Accrued creditable withholding taxes are presented under accrued expenses in the statement of financial position.


All other local and national taxes paid for the year ended December 31, 2012 consist of:

d) Tax cases and assessments

As at December 31, 2012, open taxable years are 2011, 2010 and 2009. The Fund has not received any Final Assessment Notice (FAN) from the BIR. The Fund is also not a party to any outstanding tax case.


RR No. 19-2011 prescribes the new BIR forms that should be used for income tax filing covering and starting with the calendar year 2011 and modifies Revenue Memorandum Circular No. 57-2011. In the Guidelines and Instructions Section of the new BIR Form 1702 (version November 2011), a required attachment to the income tax return is an Account Information Form and/or Financial Statements that include in the Notes to Financial Statements schedules of sales/receipts/fees, cost of sales/services, non-operating and taxable other income, itemized deductions (if the taxpayer did not avail of the Optional Standard Deduction or OSD), taxes and licenses and other information prescribed to be disclosed in the Notes to the Financial Statements.

In US Dollar Creditable income taxes withheld (expanded)In Philippine Peso Creditable income taxes withheld (expanded)

Accrued

33,284

1,354,655

Total

383,823

16,055,684

Paid

350,539

14,701,029

In US Dollar Municipal and other related taxes Mayor’s permit Community tax Others

Amount

16,32012

24125

16,598

In Philippine Peso Municipal and other related taxes Mayor’s permit Community tax Others

Amount

709,926500

10,5001,400

722,326


Trading NAV (In thousands)Total number of shares issuedTrading NAV per share

2012222,402,736

558,458398.24

2011167,601,864

462,100362.70




d) Details of the Fund’s taxes & licenses are presented in section I of this note.

e) Other information

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

Other income is composed mainly of interest income derived from investments classified under loans and receivables.

b) Cost of services


Direct charges

Trust feesTaxes and licensesTotal cost of services

USD2,412,850

214,5242,627,374

Deductible amount PHP

101,891,7609,059,091

110,950,851

Nature of expense

Other professional feesMiscellaneousCustodianship feeTotal

USD31,96954,146

4586,160


1,350,0132,286,521

1,9003,638,434

Interest incomeSubject to 30%Subject to 20%Subject to 7.5%

Net realized foreign exchange gainsSubject to 30%

Net realized fair value gainsSubject to 0%

Total

USD

501,7802,907,0136,830,420

10,239,213

641,462

638,28411,518,959

Taxable amount PHP

21,189,567122,759,671288,440,440432,389,678

27,088,170

26,953,967486,431,815


a) Income

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



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 statement of financial position as at December 31, 2012 and 2011, 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, 2012, and a summary of significant accounting policies and other explanatory information.





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 Euro Bond Fund, Inc. as at December 31, 2012 and 2011, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2012 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, 2011, on which we have rendered the attached report dated April 11, 2013. 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, 2011 as required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A and H as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, are presented for purposes of filing with the Securities and Exchange Commission and are not required parts of the basic financial statements. Such supplementary information are the responsibility of management and have been subjected to the auditing procedures applied in the audits of the basic financial statements. In our opinion, the supplementary information have 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)


INCOMEInterest incomeOther incomeNet gain (loss) on financial assets at fair value through profit or loss

EXPENSESManagement feesTaxes and licensesProfessional feesDirectors’ feesOthers

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

2012

278,968148

392,577671,693

57,28410,2258,5982,2632,329

80,699590,99412,895

578,099-

578,09913.9864

2011

285,287209

(91,529)193,967

59,4724,6468,0264,2893,444

79,877114,090

3,114110,976

-110,976

2.5437

2010

243,458929

168,330412,717

41,74021,020

7,0974,6114,162

78,630334,087

306333,781

-333,7817.9059

Notes12

11

1113

8

9




ASSETS



ASSETSCash and cash equivalentsFinancial assets at fair value through profit or lossOther receivablesHeld-to-maturity securities

Total assets

LIABILITIES Management fee payable Accrued expenses Total current liabilities EQUITYRedeemable sharesShare premiumRetained earnings

Total equity Total liabilities and equity

Notes

56

7

11

9

10

2012

585,5227,070,498

233,047755,001

8,644,068

4,5531,5616,114

6,296,117643,393

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

2011

440,0645,807,229

195,178756,445

7,198,916

3,8591,4125,271

5,637,402423,794

1,132,4497,193,6457,198,916







Share

premium357,088

---

769,257(393,677)375,580732,668

---

153,196(462,070)(308,874)423,794

---

430,413(210,814)219,599643,393

Retained earnings

687,692

333,781-

333,781

---

1,021,473

110,976-

110,976

---

1,132,449

578,099-

578,099

-(12,104)(12,104)

1,698,444


333,781-

333,781

4,210,656(2,106,508)2,104,1488,713,159

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

Redeemableshares

(Note 9)5,230,450

---

3,441,399(1,712,831)1,728,5686,959,018

---

670,119(1,991,735)(1,321,616)5,637,402

---

1,431,618(772,903)658,715

6,296,117





CASH FLOWS FROM OPERATING ACTIVITIESProfit before income taxAdjustments for:

Unrealized fair value (gains) losses, netInterest income

Operating income 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 Other receivable Held-to-maturity securities Increase (decrease) in: Management fee payable Accrued expenses

(Forward)

2012

590,994

(392,160)(288,356)

(89,522)

(868,220)(31)

(1,444)

694149

2011

114,090

111,571(285,287)

(59,626)

987,84967

1,361

(813)(969)

2010

334,087

(107,803)(243,458)

(17,174)

(2,266,566)(794)

282,098

2,0791,667

Notes

12






Cash from (used in) operationsInterest receivedIncome taxes paidNet cash (used in) generated from operating activities

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Redemption of shares Net cash generated from (used in) financing activitiesNET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31

2012(958,374)250,517(12,895)

(720,752)

1,862,031(995,821)866,209

145,458

440,064585,522

2011927,869372,504

(3,114)1,297,259

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

(333,231)

773,295440,064

2010(1,998,690)

160,005(306)

(1,838,991)

4,210,656(2,106,508)2,104,148

265,157

508,138773,295

Notes

9

5


Notes to FiNaNcial statemeNtsAs at December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012(In the notes, all amounts are in Euro unless otherwise stated)

Note 1 - General informationALFM Euro Bond Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to subscribe, invest and reinvest, sell, transfer or otherwise dispose of securities of all kinds and generally to 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 or Republic Act No. 2629 and Securities Regulation Code of 2000 or Republic Act 8799.

The Fund aims to provide its shareholders a steady stream of fixed income by investing in foreign currency denominated instruments and 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 (see 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.

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




The financial statements of the Company 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 critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s

accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. New standards, interpretations and amendments to published standards





• PFRS 9, Financial Instruments (effective January 1, 2015). This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39 that relate to the classification and measurement of financial instruments. 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. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 beginning January 1, 2015. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued.




Cash and cash equivalents include deposits held at call with

bank and short-term highly liquid investments with original maturities of three months or less.


(a) Classification

The Fund classifies its investments as financial assets 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. As at December 31, 2012 and 2011, the Fund has no financial assets under available-for-sale.


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.


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 gain (loss) 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 gain (loss) on financial assets at fair value through profit or loss in profit or loss in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.





(d) Impairment

The Fund assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired.

Loans and receivables are tested for impairment if there are indicators of impairment. The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate (recoverable amount). Impairment loss is recognized in the statement of total comprehensive income and the carrying amount of the asset is reduced through the use of an allowance. An impairment charge is reversed subsequently by adjusting the allowance account if the decrease in impairment loss can be related objectively to an event occurring after the impairment loss is recognized. The amount of reversal is recognized in the statement of total comprehensive income.






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

(b) 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.





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






Expenses are recognized when incurred. 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.

2.8 Foreign currency transactions and translations

(a) Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary economic environment in which the Fund operates (“the functional currency”). The financial statements are presented in Euro (€), which is the Fund’s functional and presentation currency.

(b) 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.


Basic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares during. 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 common shares.


2.10 Income tax



The Fund primarily earns interest income from Euro-denominated investment securities issued by the Republic of the Philippines and foreign governments. Such income is presented at gross amount and the related final tax is presented as Provision for income tax (Note 8) in profit or loss. Realized gain on sale of financial assets at fair value through profit or loss is tax-exempt.




The Fund reassesses at each statement of financial position date the need to recognize a previously unrecognized deferred income tax asset.



Revenue Regulation No. 19-2011, issued on December 9, 2011, prescribed the New Income Tax Form No.1702. This regulation further requires the inclusion of supplementary schedules of sales/receipts/fees, costs of sales/services, non-operating and taxable other income, itemized deduction (if the taxpayer did not avail of OSD), taxes and licenses, and other information in the notes to the financial statements.


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: market risk (primarily price risk and interest rate risk), credit risk and liquidity risk. All of the Fund’s assets and liabilities are virtually denominated in its functional currency; thus, its 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 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 shall be 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.


3.2 Price 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 the statement of total comprehensive income. Trading positions are subject to various risk factors, which include exposures to interest rates and foreign exchange rates.

The Fund’s price 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 market price 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. Investment in bonds issued by the Republic of the Philippines (ROP) and various European governments comprise mainly the Fund’s investments at December 31, 2012 and 2011.

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, 2012, the Fund’s VAR with respect to market interest rate volatilities amounts to €59,647 (2011 - €182,222).

3.3 Interest rate 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 Manager monitors this risk through the VAR calculation (Note 3.2). The Fund’s financial liabilities are all non-interest bearing.

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

As at December 31, 2012 and 2011, 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 various rating agencies follow:

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 (Note 5).


3.5 Liquidity risk





The Fund’s financial liabilities pertain to management fee payable and accrued expenses which are contractually due in less than 1 month.


The capital of the Fund is represented by total equity as shown in the statement of financial position. 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:




Cash and cash equivalentsFinancial assets at fair value through profit or lossOther receivablesHeld-to-maturity securities

2012585,522

7,070,498233,047755,001

8,644,068

2011440,064

5,807,229195,178756,445

7,198,916

At December 31, 2012Moody’s/PRSC

AaaAa1Aa2A2A3Baa2Ba1Unrated


AAAA+AA-AA-BBBBB-Unrated


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

3,482,084303,000

7,070,498

1,063,240408,674101,844454,764204,968

3,083,113187,626303,000

5,807,229

Held to maturity

------

755,001-

755,001

-----

756,445--

756,445






PFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Fund’s market assumptions. These two types of inputs have created the following fair value hierarchy:





The fair value of held-to-maturity securities is P755,006 as at December 31, 2012. 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 judgmentThe Fund makes judgment that affects the reported amounts of assets and liabilities. The Fund’s judgment is continually evaluated and is 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 asset 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 - for example 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, 2012, the Fund’s held-to-maturity securities amounted to €755,001 (2011 - €756,445).


Time deposits bear interest at effective rates ranging from 0.625% to 1.00% (2011 - 0.4625% to 1.00%) and have average maturities of 35 days.

Note 6 - Financial assets at fair value through profit or lossThe account at December 31 consists of investments in the following:

Cash in banksTime deposits

20125,522

580,000585,522

201110,064

430,000440,064

The above investments are held for trading. As at December 31, 2012, financial assets at fair value through profit or loss maturing in more than one year from statement of financial position date amount to €7,070,498 (2011 - €5,807,229).

The movements in financial assets at fair value through profit or loss are summarized as follow:

Note 7 - Held-to-maturity securities The account consists of investments in Philippine government bonds which carry effective interest at 6.25% at December 31, 2012 and 2011.

The held-to-maturities investments are classified as long-term in which maturity is more than five years from balance sheet date.

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

Note 8 - Income taxesProvision for income tax substantially represents tax withheld for income subject to final tax.


Note 9 - Redeemable sharesDetails of the Fund’s authorized shares at December 31, 2012 and 2011 is as follows:

The movements in the number of redeemable shares follow:


As at December 31, 2012, the Fund has 426 shareholders (2011 - 346).



At January 1AdditionsDisposalsFair value (loss) gainAmortization of (premium) discountAt December 31

20125,807,2298,469,421(7,590,795)

452,539(67,896)

7,070,498

20116,906,649

11,536,526(12,460,368)

(111,571)(64,007)

5,807,229

At January 1Amortization of premiumAt December 31

2012756,445

(1,444)755,001

2011757,806

(1,361)756,445

Year of Incurrence

20122011201020092008

Expired NOLCO

Income tax rate

Year of Expiration

20152014201320122011

EUR80,55183,12984,86362,920

-311,463(62,920)

248,54330%

74,563Unrecognized deferred income tax asset

2012 2011

PHP4,374,5494,514,5784,608,7143,417,031

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

30%

4,049,352

EUR-

74,89576,45656,68767,646

275,684(67,646)208,038

30%

62,411

PHP-

4,514,5784,608,7143,417,0314,077,652

16,617,975(4,077,652)12,540,323

30%

3,762,097


201280,000

P10,000 (€144.36)€ 11.5 million

201180,000

P10,000 (€144.36)€ 11.5 million

At January 1Issuance of sharesRedemption of sharesAt December 31

201239,0519,917

(5,354)43,614

201148,206

4,642(13,797)39,051

201036,23223,839

(11,865)48,206


20121,862,031

995,821

2011823,315

2,453,805

20104,210,6562,106,508


2012578,099

41,33313.9864

2011110,976

43,6292.5437

2010333,781

42,2197.9059


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

2012

Interest rates (%)

3.7 - 6.25

2.25 - 4.03.5 - 3.88

3.5 - 4.88

3.5 - 4.754.0

Amount

3,785,084

1,063,650690,674

665,748

595,199270,143

7,070,498

2011

Interest rates (%)

2.6 - 6.25

2.25 - 4.03.5 - 3.88

3.5 - 4.88

3.5 - 4.754.0

Amount

2,845,248

1,069,665534,440

510,518

602,978244,380

5,807,229


Note 10 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for redeemable shares issued or re-purchased respectively is based on the value of the Fund’s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund’s NAV based on PFRS (“PFRS NAV”). In accordance with the provisions of the Fund’s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the 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 movements in accumulated adjustment for market risk follow:


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

The trading NAV per share at December 31 are calculated as follow:


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.

Note 11 - Related party transactionsIn 2010, 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 exercise full control, direc-tion and management of the Fund in accordance with the investment policies and limitations set by the Fund’s BOD, whereby authorizing BPI Investment to purchase and sell investment securities for the account of the Fund. In consid-eration for the above management, distribution and admin-istration 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 connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Bank, Inc. act as the receiving banks for the contributions and with-drawals related to the Fund as transacted by the distributors and shareholders


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

2012127,465

(2,375)125,090

201192,63534,830

127,465


20128,637,954

-(125,090)

8,512,864

20117,193,645(127,465) (66,815)

6,999,365

Trading NAV Total number of shares issued Trading NAV per share

20128,512,864

43,614195.19

20116,999,365

39,051179.24

Note

9


Transactions

28,64228,642

57,284


2,2772,276

4,553




Transactions

29,73629,736

59,472


1,9301,929

3,859




Transactions

20,87020,870

41,740


2,3362,336

4,672



The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of €92 (P5,000) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31, 2012, total remunerations paid to directors and officers charged in profit or loss amounted to €2,263 (2011 - €4,289; 2010 - €4,611). As at reporting dates, there were no outstanding balances related to these fees.

Note 12 - IncomeThe 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.

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

Note 13 - OthersOther expenses in 2012 consist mainly of administrative expenses amounting to €2,329 (2011 - €3,444).

Note 14 - Custodian agreementThe Fund has an existing custodian agreement with Hong Kong & 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, 2012, the market value of securities held by the custodian aggregates to €7,573,954 (2011 - €6,601,342).

Note 15 - Supplementary information required by Bureau of Internal RevenueI. Supplemental information required by Revenue Regulations 15-2010




Total documentary stamp taxes paid on share subscriptions for the year ended December 31, 2012 amounted to €9,239 (P495,850). There are no documentary stamp taxes accrued as at December 31, 2012.




201120,042

(111,571)(91,529)

201060,527

107,803168,330

2012417

392,160392,577

In EuroCreditable income taxes withheld (expanded)

In Philippine PesoCreditable income taxes withheld (expanded)

Accrued

758

40,275

Total

9,720

524,043

Paid

8,962

483,768



There are no other local and national taxes accrued as at December 31, 2012 and 2011.


As at December 31, 2012, open taxable years are 2011, 2010 and 2009. The Fund has not received any Final Assess-ment Notice from the BIR. The Fund is also not a party to any outstanding tax case.

II. Supplementary information required by Revenue Regula-tions No. 19-2011

RR No. 19-2011 prescribes the new BIR forms that should be used for income tax filing covering and starting with the calendar year 2011 and modifies Revenue Memorandum Circular No. 57-2011. In the Guidelines and Instructions Section of the new BIR Form 1702 (version November 2011), a required attachment to the income tax return is an Account Information Form and/or Financial Statements that include in the Notes to Financial Statements schedules of sales/re-ceipts/fees, cost of sales/services, non-operating and taxable other income, itemized deductions (if the taxpayer did not avail of the Optional Standard Deduction or OSD), taxes and licenses and other information prescribed to be disclosed in the Notes to the Financial Statements.


a) Income

Total income for the year


b) Cost of services




d) Details of the Fund’s taxes & licenses are presented in section I of this note.



In EuroMunicipal and other related taxesCommunity taxOthersTotal

Amount

831135

20986

In Philippine PesoMunicipal and other related taxesCommunity taxOthersTotal

Amount

46,5427,5651,400

55,507

Interest incomeSubject to 30%Subject to 20%Subject to 7.5%

Net realized fair value gainsSubject to 0%

Total

EUR

14810,882

268,086279,116

417279,533

Taxable amount PHP

8,038590,979

14,559,18815,158,205

22,64615,180,851

Direct charges

Trust feesTaxes and licensesTotal cost of services

EUR57,28410,22567,509


3,110,974555,298

3,666,272

Nature of expense

Other professional feesMiscellaneousTotal

EUR10,8612,329

13,190


589,838126,483716,321



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


We have audited the accompanying financial statements of Philippine Stock Index Fund Corp., which comprise the state-ments of financial position as at December 31, 2012 and 2011, and the statements of total income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory informa-tion.





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 consid-ers 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 evaluat-ing 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 suf-ficient 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 Growth Fund, Inc. as at December 31, 2012 and 2011, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards.


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 13 to the financial state-ments is presented for purposes of filing with the Bureau of In-ternal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibil-ity of management and has been subjected to the auditing pro-cedures applied in our audits of the basic financial statements. In our opinion, the supplementary financial information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Isla Lipana & Co.





50 ALFM MUTUAL FUNDS 2012 ANNUAL REPORT50 ALFM MUTUAL FUNDS 2012 ANNUAL REPORT


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, 2012, on which we have rendered the attached report dated April 11, 2013. 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, 2012 as required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A and H as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, are presented for purposes of filing with the Securities and Exchange Commission and are not required parts of the basic financial statements. Such supplementary information are the responsibility of management and have been subjected to the auditing procedures applied in the audits of the basic financial statements. In our opinion, the supplementary information have been prepared in accordance with Rule 68 of the Securi-ties Regulation Code.


Isla Lipana & Co.




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

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

The supplementary information on taxes and licenses is pre-sented in Note 13 to the financial statements.

Isla Lipana & Co.




Philippine Stock Index Fund Corp.

Statements of Comprehensive IncomeFor each of the three years in the period ended December 31, 2012

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


INCOME Dividend income Interest income Other Income Net gain on financial assets at fair value

through profit or loss EXPENSES

Management feesTaxes and licenses Professional fees Other

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

2012

89,93683

617

1,120,3671,211,003

61,9445,8331,7967,178

76,7511,134,252

-1,134,252137.2435

2011

93,95045

282

94,662188,939

42,5991,922

7821,493

46,796142,143

-142,14325.4322

2010

92,803463185

781,504874,955

37,241878

1,7851,994

41,898833,057

-833,057

122.3839

Notes5

11

12

9




ASSETS



Notes

465

6117

9

10

2012

15,0947,480,997

121,1097,617,200

-7,786

179,937187,723

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

2011

2,5812,647,168

45,7172,695,466

50,721 2,6623,164

56,547

516,03516,084

2,106,8002,638,9192,695,466

ASSETSCash in bankFinancial assets at fair value through profit or lossDue from brokers and other receivables

Total assets

LIABILITIESDue to brokerManagement fee payableOther liabilities

Total liabilities EQUITY

Redeemable sharesShare premiumRetained earnings

Total equityTotal liabilities and equity






Balance at January 1, 2010 Comprehensive 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, 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 owners Balance at December 31, 2012

Share

premium740,616

---

261,999(653,457)(391,458)349,158

--

844,224(1,177,298)

(333,074) 16,084

---

4,406,971(1,232,562)3,174,4093,190,493

Retained earnings

1,131,600

833,057-

833,057

---

1,964,657

142,143-

142,143

---

2,106,800

1,134,252-

1,134,252

-(138,936)(138,936)

3,102,116


833,057-

833,057

356,186(905,458)(549,272)

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

Redeem-able

shares (Note 9)

759,598

---

94,187(252,001)(157,814)601,784

--

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

---

914,814(293,981)620,833





CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year Adjustment for: Unrealized fair value (gains) losses, net Interest income

Operating profit before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in:

Financial assets at fair value through profit or lossDue from broker and other receivables

Increase (decrease) in:Management fee payableDue to brokerOther liabilities

(Forward)

2012

1,134,252

(799,851)(83)

334,318

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

5,124(50,721)176,773

2011

142,143

407,897(45)

549,995

(133,715) (34,298)

(300) 40,849

(1,796)

2010

833,057

(537,971)(463)

294,623

230,50623,250

(281)(2,519)3,041

Notes

5





Cash (used in) from operations Interest received Net cash (used in) from operating activitiesCASH FLOWS FROM FINANCING ACTIVITY Proceeds from issuance of shares Redemption of shares Net cash generated (used in) from financing activitiesNET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1 December 31

2012(3,643,876)

83(3,643,793)

5,321,784(1,665,478)3,656,306

12,513

2,58115,094

2011 420,735 45

420,780

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

(418,823)

1,957

624 2,581

2010548,620

463549,083

356,187(905,458)(549,271)

(188)

812624

Notes

9

4



Note 1 - General informationPhilippine Stock Index Fund Corp. (the “Fund”) was incor-porated in the Philippines primarily to subscribe, invest and reinvest, sell, transfer or otherwise dispose of securities of all kinds and generally to carry on the business of an open-end investment fund. It was registered on December 11, 2002 with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 or Republic Act No. 2629 and The Securities Regulation Code of 2000 or Repub-lic Act No. 8799.

The Fund aims to provide the Fund’s investors with a return that tracks the performance of PSEi, the main stock index of the Philippine Stock Exchange (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 (see Note 10).

The Fund is considered to be an issuer of securities that are registered with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registra-tion statement filed by the Fund for an increase in authorized shares was approved by the SEC on September 13, 2007 (see 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.

The Fund has no employees. The principal manage-ment and administration functions are outsourced to BPI Investment Management, Inc. (BPI Investment) (the “Fund Manager”). (see Note 11)

The financial statements have been approved and autho-rized for issue by the Fund’s Board of Directors (BOD) on March 21, 2013. There were no material events that occurred subsequent to March 21, 2013 until April 11, 2013.



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.


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.

New standards, interpretations and amendments to pub-lished standards




A number of new standards and amendments to standards and interpretations are effective for annual periods begin-ning after January 1, 2012, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial state-ments of the Fund, except the following as set out below:

• PFRS 9, Financial Instruments (effective January 1, 2015). This new standard addresses the classification, measure-ment and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39 that relate to the classification and measurement of financial instruments. 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 determina-tion 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. The Fund is yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 beginning January 1, 2015. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued.

• PFRS 13, Fair Value Measurement (effective January 1, 2013). This new standard aims to improve consistency and reduce complexity by providing a clarified definition of fair value and a single source of fair value measure-ment and disclosure requirements for use across PFRS. The requirements, which are largely aligned with IFRS and US GAAP, 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 or US GAAP. The Fund will adopt PFRS 13 effective January 1, 2013 but is yet to assess the full impact of the new standard.



(a) Classification

The Fund classifies its investments as financial assets 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. As at December 31, 2012 and 2011, the Fund has no financial as-sets under available-for-sale and held-to-maturity categories.

Financial assets at fair value through profit or loss are clas-sified 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.


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 acquisi-tion 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 derecogni-tion are recognized within Net gain (loss) on financial assets at fair value through profit or loss.


Financial assets at fair value through profit or loss are subse-quently 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 gain (loss) on financial assets at fair value through profit or loss in the state-ment of total income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.



The quoted prices of the Fund’s listed equity securities are obtained from the quotation report of the PSE while other investments are based on the net asset value per share/unit as set by the distributors.

(d) 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 collec-tive 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 carry-ing amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the statements of total income. 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 subse-quent 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 al-lowance account. The amount of the reversal is recognized in the statements of total income as a reduction of impairment losses for the year.




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


Financial liabilities that are not classified as at fair value through profit or loss fall into this category and are measured at amortized cost. Financial liabilities measured at amortized cost include due to broker, management fee payable and other 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 dif-ference in the respective carrying amounts is recognized in profit or loss.



2.5 Cash in bank

Cash and cash equivalents includes deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

2.6 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.

Due from brokers are classified as loans and receivables. The related policies on recognition, derecognition, subsequent measurement and impairment are disclosed in Note 2.2.

Due to brokers are classified as financial liabilities at amortized cost. The related policies on measurement and derecognition are disclosed in Note 2.3.


The shares issued by the Fund are redeemable at the holder’s option and are classified as equity and are recog-nized at par value.

Share premium includes any premiums or consideration received in excess of par value on the issuance of redeem-able 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 re-deemable 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 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.


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 common shares.


2.11 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 provi-sions where appropriate on the basis of amounts expected to be paid to the tax authorities.

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 are presented net of taxes paid or withheld.


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 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.


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



Revenue Regulation No. 19-2011, issued on December 9, 2011, prescribed the New Income Tax Form No. 1702. This regulation further requires the inclusion of supplementary schedules of sales/receipts/fees, costs of sales/services, non-operating and taxable other income, itemized deduction (if the taxpayer did not avail of OSD), taxes and licenses, and other information in the notes to the financial statements.


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 influ-ence 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 re-porting 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.


Post year-end events that provide additional information about the Fund’s financial position at reporting date (adjust-ing 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 financial risks, mainly market price risk and liquidity risk. The Fund has minimal exposures on credit risk, 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 movements 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.

If the PSEi has strengthened/weakened by 14.65% (2011 – 18.11%) based on the volatility of PSEi for the past one year with all other variables held constant, net income and equity would have been approximately P1,088 million (2011 – P403 million) higher/lower mainly due to marked-to-market fluc-tuations of financial assets at fair value through profit or loss.

The table below is a summary of the significant sector con-centrations within the portfolio.

The primary responsibility of the Fund Manager is to reflect changes in the weightings 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 0% and 0% as at December 31, 2012 and 2011, respectively.

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’s credit risk is limited to counterparty risk.

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’s cash and cash equivalents as at December 31, 2012 and 2011 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.

HoldingsBanksProperty Communications Power and energy FoodMining Others Total

201233%16%15%13%11%5%2%5%

100%

201121%13%11%17%10%8%4%

16%100%

Cash and cash equivalentsDue from brokers and other receivables

201215,093

121,109136,202

20112,581

45,71748,298



Subject to the approval by the SEC, 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 on February 27, 2013.

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


Note 10 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for ordinary shares issued or re-purchased respectively is based on the value of the Fund’s NAV per redeemable share at the date of the transac-tion. 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, 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 adjust-ment 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 un-til 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 then include: Fund Return - Net of Fees and Expenses, Fund Return - Gross of Fees and Expenses, PSEI Price Return and PSEI Total Return.

The movements in the allowance for market risk follow:


Reconciliations of the Fund’s PFRS NAV to its trading NAV at December 31, 2012 is provided below:



The Fund’s retained earnings generally exceed 100% of its paid-up capital. This, however, is not construed as a compel-ling factor for the Fund to declare dividends. Such retained will be converted into realized profits by the shareholders upon redemption of their shareholdings in the Fund.

Note 11 - Related party transactionsIn 2010, BPI Investment and BPI - Asset Management Trust Group (BPI - AMTG) were designated as fund manager and investment advisor of the Fund, respectively. As fund man-ager, BPI Investment shall exercise full control, direction and management of the Fund in accordance with the investment policies and limitations set by the Fund’s BOD, 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 prepara-tion of economic, industry, market, corporate, and

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 ba-sis 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 consid-ered readily realizable as they are listed in the PSE and are heavily traded being component stocks of PSE’s main index. The Fund’s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date.

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 2011.

The Fund’s financial liabilities pertain to management fee payable, due to broker and other liabilities which are con-tractually due in less than 1 month.


The capital of the Fund is represented by total equity as shown in the statements of financial position. 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:


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






3.6 Fair value estimation

PFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are ob-servable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable in-puts reflect the Fund’s market assumptions. These two types of inputs have created the following fair value hierarchy:


• 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). This level includes the majority of the OTC derivative contracts. The primary source of input param-eters 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 avail-able. The Fund considers relevant and observable market prices in its valuations where possible.


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.

Note 4 - Cash in bankThe account at December 31 consists of:

Cash in bank earns interest at the respective bank deposit rates.

Note 5 - Financial assets at fair value through profit or lossThe account at December 31 consists of investments in:

Investments in equity securities are listed at the PSE. Other investment consists of units/shares in unit investment trust and mutual funds with investments in a diversified portfolio of high-grade fixed income instruments. These investments are held for trading.

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

The movements in the account for the years ended Decem-ber 31 are summarized as follows:

Dividend income arising from investments in listed equity securities recognized in profit or loss amounted to P89,936 (2011 – P93,950; 2010 – P92,803).

Note 6 - Due from broker/due to brokerAmounts 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 statements of financial position date, respectively. These accounts are required to be settled within three days from transaction date.

Note 7 - Other liabilitiesThe account consists mainly of amounts due to Fund’s inves-tors for share redemptions, advertising fees payable and withholding tax on management fees.

Note 8 - Income taxesThe 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:

Note 9 - Redeemable sharesThe details of the Fund’s authorized number of shares at December 31, 2012 and 2011 follow:


Details of issuances and redemptions of the Fund’s redeem-able shares follow:

Cash in bank 2012

15,094 2011

2,581

Listed equity securitiesOther investments

20127,306,932

174,0657,480,997

20112,470,165

177,0032,647,168

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

2012799,851320,516

1,120,367

2011(407,897)502,55994,662

Beginning of the yearAdditionsDisposalsUnrealized fair value (loss) gain, netEnd of year

20122,647,1689,992,927(5,972,376)

813,2787,480,997

20112,921,3481,619,506(1,485,789)

(407,897)2,647,168

Capital shares redeemed payableWithholding tax on management fees

2012177,651

2,286179,937

20112,1121,0523,164


Expired NOLCO

Income tax rate


Unrecognized deferred income tax asset

201276,13546,79641,89837,355

202,184(37,355)164,829

30%49,449

201146,79641,89837,35536,286

162,335(36,286)126,049

30%37,815


201214.68 million

P 100P 1,468 billion

201114.68 million

P 100P 1,468 billion

Outstanding, January 1Issuance of sharesRedemptions of sharesOutstanding, December 31

20116,017,8472,387,175 (3,244,668)5,160,354

20107,595,981

941,875(2,520,009)6,017,847

20125,160,3549,148,140(2,939,811)

11,368,683


20125,321,7841,665,478

20111,082,9421,501,765

2010 356,187905,458

Profit for the yearWeighted average number

of shares outstanding during the yearBasic and diluted earnings

per share

2011142,143

5,589

25.4322

2010833,057

6,807

122.3839

20121,134,251

8,265

137.2435

At January 1Provisions for market risk during the yearDistribution of provisions for market riskAt December 31

2012194,137

-(61,319)

132,818

2011171,306

58,380(35,549)

194,137


20127,429,477

-(132,818)

7,296,659

20112,638,919

13,426(194,137)

2,458,208

Trading NAVTotal number of shares issuedTrading NAV per share

Note

9

20127,296,659

11,369641.80

20112,458,208

5,160 476.40



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). Un-der the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as co-distributors to per-form principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders.

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

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, 2012, total remunerations paid to directors and officers charged in profit or loss amounted to P154 (2011 - P258; 2010 - P311). As at reporting dates, there were no outstanding balances related to these fees.

Note 12 - Custodian agreementThe Fund has an existing custodian agreement with Hong Kong and Shanghai Banking Corporation Ltd. (HSBC) for custodial services of the Fund’s proprietary assets and/or as-sets 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, 2012, the market value of securities in custody of HSBC aggregates to P7,426,859 (2011 - P2,647,167).


Transactions

21,30021,299

42,599


1,3311,331

2,662




Transac-tions

18,62118,620

37,241


1,4811,481

2,962




Transactions

30,97230,972

61,944


3,8933,893

7,786


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

Note 13 - Supplementary information required by BIR Revenue RegulationsI. Supplementary information required by Revenue Regula-tions No. 15-2010


Below is the additional information required by RR No. 15-2010 that is relevant to the Fund. This information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. Amounts are presented in Philippine Peso.


The documentary stamp taxes paid on share subscriptions for the year ended December 31,2012 amounted to P4,610. There are no documentary stamp taxes accrued as at De-cember 31, 2012 and 2011.


Withholding taxes paid/accrued and/or withheld for the years ended December 31, 2012 amounted to:c) All other local and national taxes


There are no other local and national taxes accrued as at December 31, 2012 and 2011.


As at December 31, 2012, open taxable years are 2011, 2010 and 2009. The Fund has not received any Final Assess-ment Notice from the BIR. The Fund is also not a party to any outstanding tax case.




a) Income

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

Nature of expenseOther Professional feesMiscellaneous

Deductible amount1,7967,1798,975

Total income for the periodDividend incomeInterest incomeOther incomeTotal realized gains/(losses)

Rate

Municipal and other related taxesMayor’s permitCommunity taxOthers

Amount1,206

5111

Direct chargesTrust feeTaxes and licenses


5,83367,777

b) Cost of services




d) Details of the Fund’s taxes and licenses are presented in section 1 of this note.




Paid

7,479

Total

8,520

Accrued

1,041


To the Board of Directors and Shareholders ofALFM Growth Bond 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 statement of financial position as at December 31, 2012 and 2011, and the statements of total income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of signifi-cant accounting policies and other explanatory information.





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 consid-ers 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 evaluat-ing 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 suf-ficient 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 Growth Fund, Inc. as at December 31, 2012 and 2011, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards.


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 13 to the financial state-ments is presented for purposes of filing with the Bureau of In-ternal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibil-ity of management and has been subjected to the auditing pro-cedures applied in our audits of the basic financial statements. In our opinion, the supplementary financial information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Isla Lipana & Co.







We have audited the financial statements of ALFM Dollar Bond Growth, Inc. as at and for the year ended December 31, 2012, on which we have rendered the attached report dated April 11, 2013. 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, 2012 as required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A and H as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, are presented for purposes of filing with the Securities and Exchange Commission and are not required parts of the basic financial statements. Such supplementary information are the responsibility of management and have been subjected to the auditing procedures applied in the audits of the basic financial statements. In our opinion, the supplementary information have been prepared in accordance with Rule 68 of the Securi-ties Regulation Code.


Isla Lipana & Co.







Isla Lipana & Co.




ALFM Growth Fund, Inc.

Statements of Comprehensive IncomeFor each of the three years in the period ended December 31, 2012

(All amounts in Philippine Peso)


INCOME Dividend income Interest income Net gain on financial assets at fair value

through profit or loss Other Income

EXPENSESManagement feesRegistration feesOthers

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

2012

50,316,4054,236,795

452,220,2941,767,122

508,540,616

71,364,255-

13,523,09284,887,347

423,653,269-

423,653,26925.1806

2011

60,178,3091,059,863

5,739,1623,472,674

70,450,008

49,138,8213,022,5827,610,767

59,772,17010,677,838

-10,677,838

0.8933

2010

22,371,357451,248

508,708,9252,776,548

534,308,078

18,995,7582,032,8307,077,051

28,105,639506,202,439

-506,202,439

58.3612

Notes

6

6

11

9




ASSETS



Notes

465

7

9

10

2012

12,033,5754,785,599,722

30,810,0674,828,443,364

23,203,243

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

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

2011

217,413,8752,012,825,206

58,090,5652,288,329,646

79,201,496

1,194,066,100 457,855,420

557,206,6302,209,128,1502,288,329,646

ASSETSCash and cash equivalentsFinancial assets at fair value through profit or lossDue from broker and other receivables

Total current assets

LIABILITIESAccrued expenses

EQUITYRedeemable sharesShare premiumRetained earnings

Total equityTotal liabilities and equity



`ALFM Growth Fund, Inc.



Balance at January 1, 2010 Comprehensive 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, 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 owners Balance at December 31, 2012

Share

premium69,155,112

---

715,883,632(298,069,717)417,813,915486,969,027

---

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

Retained earnings40,326,352

506,202,439-

506,202,439

---

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


506,202,439-

506,202,439

1,844,892,432(768,671,917)

1,076,220,5152,230,062,318

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

Redeem-able

shares (Note 9)538,157,900

---

1,129,008,800(470,602,200)658,406,600

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)976,786,500





CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year Adjustment for: Unrealized fair value (gains) losses, net

Operating profit before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in:

Financial assets at fair value through profit or lossDue from broker and other receivables

(Decrease) increase in: Accrued expenses Net cash generated from operating activities

(Forward)

2012

423,653,269

(193,067,015)

230,586,254

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

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

2011

10,677,837

47,016,322

57,694,159

176,354,47435,260,745

(21,077,015)

248,232,363

2010

506,202,439

(73,587,331)

432,615,108

(1,517,745,609)(62,505,045)

71,870,992(1,075,764,554)

Notes

6





CASH FLOWS FROM FINANCING ACTIVITY Proceeds from issuance of shares Redemption of shares Net cash generated from financing activitiesNET INCREASE IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS January 1 December 31

2012

4,017,418,024(1,844,959,320)2,172,458,704

(205,380,300)

217,413,87512,033,575

2011

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

(31,612,007)

216,620,356

793,519217,413,875

2010

1,844,892,432(768,671,917)

1,076,220,515

455,961

337,558793,519

Notes

99

4



Note 1 - General informationALFM Growth Fund, Inc. (the “Fund”) was incorporated in the Philippines primarily to subscribe, invest and reinvest, sell, transfer or otherwise dispose of securities of all kinds and generally to carry on the business of an open-end investment fund. It was registered on November 26, 2007 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 or Repub-lic Act No. 2629 and the Securities Regulation Code of 2000 or 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 regis-tration 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 December 21, 2011.


The Fund has no employees. The principal manage-ment and administration functions are outsourced to BPI Investment Management, Inc. (BPI Investment) (the “Fund Manager”) (see Note 11)




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.


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.

New standards, interpretations and amendments to pub-lished standards


There are no PFRS or IFRIC interpretations that are effective for the first time for the financial year beginning January 1,

2012 that have a material impact on the Fund.



• PFRS 9, Financial Instruments (effective January 1, 2015). This new standard addresses the classification, measure-ment and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39 that relate to the classification and measurement of financial instruments. 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 determina-tion 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. The Fund is yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 beginning January 1, 2015. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued.




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.


(a) Classification

The Fund classifies its investments as financial assets 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. As at December 31, 2012 and 2011, the Fund has no financial as-sets under available-for-sale and held-to-maturity categories.


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 broker.


Regular-way purchases and sales of financial assets are rec-ognized 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 attribut-able 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 gain (loss) on financial assets at fair value through profit or loss in the state-ment of total income.


Financial assets at fair value through profit or loss are subse-quently 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 gain (loss) on financial assets at fair value through profit or loss in the state-ment of total income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method.



(d) Impairment

The Fund assesses at each date whether there is objective evidence that a financial asset or a group of financial assets is impaired.

Loans and receivables are tested for impairment if there are indicators of impairment. The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate (recoverable amount). Impairment loss is recognized in the statement of total income and the carrying amount of the asset is reduced through the use of an allowance. An impairment charge is reversed subsequently by adjusting the allowance account if the decrease in impairment loss can be related objectively to an event occurring after the impairment loss is recognized. The amount of reversal is recognized in the statement of total income.



Financial liabilities at fair value through profit or loss compris-es 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. Gains and losses arising from changes in fair value of financial liabilities classified held for trading are included in the statement of total income. The Fund has no financial liabilities that are designated at fair value through profit loss.

Financial liabilities that are not classified as at fair value through profit or loss fall into the other liabilities measured at amortized cost category and are measured at amortized cost. Financial liabilities measured at amortized cost include accrued expenses.





2.6 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.

Due from brokers are classified as loans and receivables. The related policies on recognition, derecognition, subsequent measurement and impairment are disclosed in Note 2.3.

Due to brokers are classified as financial liabilities at amortized cost. The related policies on measurement and derecognition are disclosed in Note 2.3.







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 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.


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 common shares.


2.11 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 provi-sions where appropriate on the basis of amounts expected to be paid to the tax authorities.

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 are presented net of taxes paid or withheld.


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 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.





Revenue Regulation No. 19-2011, issued on December 9, 2011, prescribed the New Income Tax Form No. 1702. This regulation further requires the inclusion of supplementary schedules of sales/receipts/fees, costs of sales/services, non-operating and taxable other income, itemized deduction (if the taxpayer did not avail of OSD), taxes and licenses, and other information in the notes to the financial statements.




Post year-end events that provide additional information about the Fund’s financial position at statement of financial position 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: 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 devel-oping policies on market and liquidity 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.

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. The Fund’s maximum exposure to market risk pertains to its investments on equity securities shown in the statement of financial position sheet as financial assets at fair value through profit or loss.

All securities investments present a risk of loss of capital. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund’s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a quarterly basis by the BOD.

The Fund’s policy is to concentrate the equity investment portfolio in sectors where management believes the Fund can maximize the returns derived for level of risk which the Fund is exposed. The table below is a summary of the signifi-cant sector concentrations within the portfolio.

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.

To estimate its exposure to market price risk, the Fund Manager computes the statistical “value at risk” (VAR) of its investments. 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, 2012, the Fund’s VAR with respect to price volatilities amounts to P390,331,130 (2011 – P282,572,868).

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 instrumen-talities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee Fund.

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’s cash and cash equivalents consist of regular sav-ings deposit with a local universal bank and special deposit accounts issued by Bangko Sentral ng Pilipinas (BSP) (Note 4).

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 the desired mix of equity and fixed-income securities and re-demptions 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 financial assets at fair value through profit or loss and

HoldingsProperty BanksPower and energyCommunications MiningTransportation OthersTotal

201226%17%13%11%7%5%4%

17%100%

201113%11%9%

13%13%9%5%

27%100%

Cash and cash equivalentsDue from brokers and other receivables

201212,033,57530,810,06742,843,642

2011217,413,875

58,090,565275,504,440


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


Reconciliations of the Fund’s PFRS NAV to its trading NAV is provided below:




Note 11 - Related party transactionsIn 2010, BPI Investment and BPI - Asset Management Trust Group (BPI - AMTG) were designated as fund manager and investment advisor of the Fund, respectively. As fund man-ager, BPI Investment shall exercise full control, direction and management of the Fund in accordance with the investment policies and limitations set by the Fund’s BOD, 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 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 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 1% 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 trad-ing 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.


Investments in equity securities are listed at the PSE. Invest-ment in unit investment trust fund consists of placements in a fund with investments in short-term fixed income instruments.

Dividend income arising from investments in listed equity se-curities recognized in profit or loss amounted to P50,316,405 (2011 - P60,178,309; 2010 – P22,371,357).

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

The movements in the account for the years ended December 31 are summarized as follows:

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

Due to broker represents payables for securities purchased that have been contracted but not yet settled at statement of financial position date.

Capital shares redeemed payable represents outstanding redemptions as at December 31, 2012 which has been subsequently paid on January 2 and 3, 2013.

Note 8 - Income taxesThe 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:

Note 9 - Redeemable sharesThe details of the Fund’s authorized shares at December 31, 2012, and 2011 follow:

On August 19, 2010, the Board approved an increase in authorized shares from 10 million shares to 20 million shares at P100 par value. The SEC approved such increase in authorized capital stock on January 19, 2011.

On November 24, 2010, the Board approved a further increase in authorized shares from 20 million shares to 30 million shares at P100 par value. The SEC approved such increase in authorized capital stock on December 21, 2011.



As at December 31, 2012, the Fund has 5,701 shareholders (2011 – 2,438).

Subject to the approval by the SEC, 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 on September 24, 2012.



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 capital of the Fund is represented by total equity as shown in the statement of financial position. The Fund’s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discre-tion of shareholders. The Fund’s objective when managing capital is as follows:


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





The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity. 3.6 Fair value estimation






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 earns interest at the respective bank deposit rates. Short term deposits as at December 31, 2012 have a maturity of 6 days and carry interest rate of 1.25%.

Note 5 - Due from broker/Due to brokerAmounts 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 6 - Financial assets at fair value through profit or lossThe carrying values of financial assets at FVTPL which are held-for-trading have been determined as follows:

Cash in banksShort-term deposits

201212,033,575

-12,033,575

2011413,875

217,000,000217,413,875

Listed equity securitiesUnit investment trust fundMutual fundsGovernment Securities

20124,226,031,632

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

4,785,599,722

20111,599,199,244

211,721,680201,904,282

-2,012,825,206

Realized gain on saleUnrealized fair value gain (loss), net

2012259,153,279193,067,015452,220,294

201152,755,484

(47,016,322)5,739,162

Beginning of yearAdditions Disposals Unrealized fair value gain (loss) End of year

20122,012,825,206

25,304,688,841(22,724,981,340)

193,067,0154,785,599,722

20112,236,196,003

10,636,730,983(10,813,085,458)

(47,016,322)2,012,825,206

Due to brokerCapital shares redeemed

payableManagement fee payableWithholding tax payable

Notes5

11

20127,100,288

1,986,2321,300,789

12,815,93423,203,243

201158,157,163

16,386,6283,471,6771,186,028

79,201,496


Expired NOLCO

Income tax rate



201282,272,86655,933,94628,105,6398,176,646

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

166,312,45130%

49,893,735

2011-

55,933,94628,105,6398,176,646

92,216,231(1,452,375)90,763,856

30%27,229,157

Number of authorized sharesPar value per shareAmount

201230 million

P 100P 3 billion

201130 million

P 100P 3 billion

PFRS NAVAdjustments on market valuationTrading NAV

20124,805,240,121

-4,805,240,121

20112,209,128,150

8,716,1032,217,844,253

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

20124,805,240,121

21,708,526221.35

20112,217,844,253

11,940,661185.74


20124,017,418,0241,844,959,321

20101,844,892,432

768,671,917

20111,961,446,0111,993,058,018

Issued and outstanding, January 1Issuance of sharesRedemptions of shares

2012

11,940,66118,511,162(8,743,297)

21,708,526

2010

5,381,57911,290,088 (4,706,022)11,965,645

2011

11,965,64511,027,319 (11,052,303)11,940,661


of shares outstanding during the year

Basic and diluted earnings per share

2012423,653,269

16,824,594

25.1806

201110,677,838

11,953,153

0.8933

2010506,202,439

8,673,612

58.3612


Transactions

35,682,12835,682,127

71,364,255


650,395650,394

1,300,789





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, 2012, total remunerations paid to directors and officers charged in profit or loss amounted to P341,000 (2011 - P236,500; 2010 - P275,200). As at reporting dates, there were no outstanding balances related to these fees.

Note 12 - Custodian agreementThe Fund has an existing custodian agreement with Hong Kong and 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, 2012, the market value of securities in custody of HSBC aggregates P4,246,454 (2011-P2,012,825).

Note 13 - Supplementary information required by Bureau of Internal RevenueThe following information is presented for purposes of filing with the 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. This information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. Amounts are presented in Philip-pine Peso.


Total documentary stamp taxes paid on share subscriptions for the year ended December 31,2012 amounted to P9,255,581. There are no documentary stamp taxes accrued as at December 31, 2012 and 2011.






d) Tax cases and assessments As at December 31, 2012, open taxable years are 2011, 2010 and 2009. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case.


RR No. 19-2011 prescribes the new BIR forms that should be used for income tax filing cover-ing and starting with the calendar year 2011 and modifies Revenue Memorandum Circular No. 57-2011. In the Guidelines and Instructions Section of the new BIR Form 1702 (version November 2011), a required attachment to the income tax return is an Account Information Form and/or Financial Statements that include in the Notes to Financial Statements schedules of sales/receipts/fees, cost of sales/services, non-operating and taxable other income, item-ized deductions (if the taxpayer did not avail of the Optional Standard Deduction or OSD), taxes and licenses and other information prescribed to be disclosed in the Notes to the Financial Statements.


a) Income

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

b) Cost of services

The above direct charges are subject to the regular tax rate of 30%. c) Itemized deductions


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




Transactions

24,569,41124,569,410

49,138,821


1,735,8391,735,838

3,471,677

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


Transac-tions

9,497,8799,497,879

18,995,758Outstanding balances

1,205,1931,205,192

2,410,385

Terms and conditionsThe outstanding balance is unsecured, unguaranteed, non-interest bearing and payable in cash a month after the manage-

Creditable income taxes withheld (expanded)Paid

8,978,851Total

9,960,079Accrued981,228

Total income for the periodDividend incomeOther incomeInterest income-Loans & DiscountsTotal realized gain/(losses)

Rate0%

30%20%0%

Taxable amount50,316,4051,767,1224,236,795

259,153,279315,473,601

Direct chargesTrust feeTaxes & licenses

Deductible amount71,364,25510,565,04781,929,302

Nature of expenseOther professional feesMiscellaneous

Deductible amount1,487,959

622,7272,110,686

Municipal and other related taxesMayor’s permitCommunity taxOthersTotal

Amount247,773

5,00010,5001,900

265,173


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 accompanying financial statements of ALFM Money Market Fund, Inc., which comprise the state-ments of financial position as at December 31, 2012 and 2011, 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, 2012, and a summary of significant accounting policies and other explanatory information.




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 assur-ance 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 circum-stances, 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 suffi-cient and appropriate to provide a basis for our audit opinion.


Opinion

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Money Market Fund, Inc. as at December 31, 2012 and 2011, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2012 in accor-dance with Philippine Financial Reporting Standards.


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 13 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 audit of the basic financial statements. In our opinion, the supplementary financial infor-mation is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Isla Lipana & Co.

(original signed) Blesilda A. PestañoPartnerCPA Cert. No. 40446P.T.R. No. 0007713, January 2, 2013, Makati CitySEC A.N. (individual) as general auditor 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. 08-000745-7-2010, issued on May 31, 2010; effective until May 30, 2013BOA/PRC Reg. No. 0142, effective until December 31, 2013





We have audited the financial statements of ALFM Money Market Fund, Inc. as at and for the year ended December 31, 2012, on which we have rendered the attached report dated April 11, 2013. 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, 2011 as required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A and H as required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, are presented for purposes of filing with the Securities and Exchange Commission and are not required parts of the basic financial statements. Such supplementary information are the responsibility of management and have been subjected to the auditing procedures applied in the audits of the basic financial statements. In our opinion, the supplementary information have been prepared in accordance with Rule 68 of the Securi-ties Regulation Code.


Isla Lipana & Co.








Isla Lipana & Co.





ALFM Money Market Fund, Inc.



ASSETS



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

Total assets

LIABILITIES Accrued expensesEQUITYRedeemable sharesShare premiumRetained earnings

Total equity Total liabilities and equity

Notes

567

8

10

11

2012

849,730,88788,792,218

109,680,4903,975,134

1,052,178,729

645,668

95,799,480935,503,82720,229,754

1,051,533,0611,052,178,729

2011

230,312,70251,314,78239,832,5391,452,597

322,912,620

198,900

30,343,770279,698,92512,671,025

322,713,720322,912,620





INCOMEInterest incomeNet gain (loss) on financial assets at fair value through profit or lossOther income

EXPENSESManagement feesProfessional feesTaxes and licensesOthers


2012

13,157,938

14,914,77042,315

28,115,023

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

110,5507,584,585

20,530,4381,130,623

19,399,815-

19,399,8153.0758

2011

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

2010

7,931,715

1,392,0538,107

9,331,875

907,379303,783169,994399,354

1,780,5107,551,3651,229,8476,321,518

-6,321,518

4.6531

Notes6

12

9

10






Balance at January 1, 2010Comprehensive income

Profit for the yearOther comprehensive income for the year

Total comprehensive income for the yearTransactions with owners

Issuance of shares Redemption of shares

Total transactions with ownersBalance at December 31, 2010Comprehensive income



Issuance of shares Redemption of shares

Total transactions with ownersBalance at December 31, 2011Comprehensive income



Issuance of sharesRedemption of shares

Total transactions with ownersBalance at December 31, 2012

Share

premium45,141,443

---

411,353,294 (209,427,010)201,926,284247,067,727

---

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

32,631,198279,698,925

---

1,406,270,830(750,465,928)655,804,902935,503,827

Retained earnings (682,449)

6,321,518-

6,321,518

---

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


6,321,518-

6,321,518

456,215,054 (232,122,280)

224,092,774279,873,286

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)709,419,526

1,051,533,061

Redeemableshares

(Note 10)5,000,000

---

44,861,760 (22,695,270)

22,166,49027,166,490

---

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

3,177,28030,343,770

---

143,774,730(78,319,020)65,455,71095,799,480



CASH FLOWS FROM OPERATING ACTIVITIES Profit before provision for income tax

Adjustments for: Unrealized fair value losses (gains), net Interest income

Operating income (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 Loans and receivables Other receivables

Increase (decrease) in: 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 from financing activitiesNET INCREASE IN CASH AND CASH EQUIVALENTS CASH January 1 December 31

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)

6,57275,442,9309,682,246(662,949)

84,462,227

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

35,808,478120,270,705

110,041,997230,312,702

2010

7,551,365

(846,585) (7,931,715)

(1,226,935)

(55,820,285) (60,585,650)

(15,576)

(3,776)(117,652,222)

4,705,234(1,229,847)

(114,176,835)

456,215,054(232,122,280)224,092,774109,915,939

126,058110,041,997

Notes

6

10

5





Notes to FiNaNcial statemeNtsAs at December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 (In the notes, all amounts are shown in Philippine Peso unless otherwise stated)

Note 1 - General informationALFM Money Market Fund, Inc. (the “Fund”) was incorpo-rated 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 or Republic Act No. 2629 and the Se-curities Regulation Code of 2000 or Republic Act No. 8799. On February 25, 2010, the SEC issued the Certificate of Permit to Offer Securities for Sale covering all of the Fund’s authorized redeemable shares.

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 instru-ments.


The Fund has no employees. The principal management and administration functions are outsourced from BPI Invest-ment Management, Inc. (BPI Investment) (Note 12).


Note 2 - Summary of significant accounting policiesThe principal accounting policies applied in the preparation of the Company’s financial statements are set out below. These policies have been consistently applied to both years presented, unless otherwise stated.


The financial statements of the Company 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 Com-mittee (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 critical accounting estimates. It also requires management to exercise its judg-ment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. New standards, interpretations and amendments to pub-lished standards





• PFRS 9, Financial Instruments (effective January 1, 2015). This new standard addresses the classification, measure-ment and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39 that relate to the classification and measurement of financial instruments. 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 determina-tion 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. The Fund is yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 beginning January 1, 2015. 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.


(a) Classification

The Fund classifies its investments as financial assets 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. As at December 31, 2012 and 2011, the Fund has no financial as-sets under available-for-sale and held-to-maturity categories.


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, loans and receivables and other receivables.


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 acquisi-tion 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 derecogni-tion are recognized within Net gain (loss) on financial assets at fair value through profit or loss in profit or loss.


Financial assets at fair value through profit or loss are subse-quently 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 gain (loss) on financial assets at fair value through profit or loss in profit or loss in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effec-tive interest method.



(d) Impairment


Loans and receivables are tested for impairment if there are indicators of impairment. The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate (recoverable amount). Impairment loss is recognized in the statement of total comprehensive income and the carrying amount of the asset is reduced through the use of an allow-ance. An impairment charge is reversed subsequently by ad-justing the allowance account if the decrease in impairment loss can be related objectively to an event occurring after the impairment loss is recognized. The amount of reversal is recognized in the statement of total comprehensive income.


(a) Classification and measurement of financial liabilities

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


Financial liabilities that are not classified as at fair value through profit or loss fall into the other liabilities measured at amortized cost category and are measured at amortized cost. Financial liabilities measured at amortized cost include accrued expenses.




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.











Subscriptions and redemptions of the Fund’s redeemable shares are denominated in Philippine Peso (“Peso”). The performance of the Fund is measured and reported to the in-vestors in Peso. The BOD considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Peso, which is the Fund’s func-tional and presentation currency.


Basic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares as at year-end. 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 common shares.


2.10 Income tax


The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date. Management periodically evaluates posi-tions 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 has interest income from government securi-ties and special deposit accounts from Bangko Sentral ng Pilipinas which are subject to final withholding tax. Such income is presented at gross amount and the related final tax is presented as Provision for income tax (Note 9) in profit or loss. Realized gain on sale of financial assets at fair value through profit or loss is tax-exempt.

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

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax or MCIT) to the extent that it is probable that future taxable profit will

be available against which the temporary differences can be utilized.



On December 28, 2010, Revenue Regulations (RR) No. 15-2010 became effective and amended certain provisions of RR No. 21-2001 prescribing the manner of compliance with any documentary and/or procedural requirements in connection with the preparation and submission of financial statements, income tax returns and information on taxes, duties and license fees paid or accrued during the year.

Revenue Regulations No. 19-2011, issued on December 9, 2011, prescribed the New Income Tax Form No. 1702. This regulation further requires the inclusion of supplementary schedules of sales/receipts/fees, costs of sales/services, non-operating and taxable other income, itemized deduction (if the taxpayer did not avail of OSD), taxes and licenses, and other information in the notes to the financial statements.




Post year-end events that provide additional information about the Fund’s financial position at reporting date (adjust-ing 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 Company’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 li-abilities are denominated in Philippine Peso and is not there-fore 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 devel-oping policies on market and liquidity 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.

3.2 Price risk

The Fund trades in financial instruments, taking posi-tions 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 primarily exposures to interest rates.

The Fund’s price 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 mar-ket 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 market price risk is managed through diversifica-tion of the investment portfolio ratios by exposures. The Fund is also actively managed via portfolio duration manage-ment, yield curve positioning, credit diversification, portfolio quality and liquidity management.

The Fund also sets up a provision for market risk on its in-vestment portfolio which is deducted from the Fund’s net as-set 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,


Term loans, which are classified under Loans and receivables amount to P109,680,490 and P39,832,539 as at December 31, 2012 and 2011, respectively. There is no impairment loss recognized for the years ended December 31, 2012, 2011 and 2010.


Special savings deposits consist of BSP Special Deposit Ac-counts bearing effective interest of 0.07% (2011 - 4.63% to 4.69%). Short-term time deposits bear interest rates ranging from 3.70% to 4.13% (2011 - 1.13% to 4.19%) with maturity dates within January 31, 2013 (2011 - January 31, 2012).

Note 6 - Financial assets at fair value through profit or lossThe account at December 31 consists of investments in the following:

The movements of the account for the years ended December 31 are summarized as follows:

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.

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

Note 7 - Loans and receivablesThe account as at December 31, 2012 consists of term loans amounting to P109,680,490 (2011 – P39,832,539).

As at December 31, 2012, loans and receivables maturing in more than one year from statements of financial position date amount to P59,680,490 (2011 – P19,800,000).

The total amount of loans and receivables outstanding is unsecured.

The term loans carry effective interest rates ranging from 4.38% to 8.67% (2011 - 5.97% to 6.50%).

The maturity patterns of loans and receivables follow:

Note 8 - Accrued expenses The account at December 31 consists of the following:

Note 9 - Income taxesProvision for income tax substantially represents tax withheld for income subject to final tax.


there remains 1% statistical probability that the portfolios’ actual loss could be greater than the VAR estimate.

As at December 31, 2012, the Fund’s VAR with respect to market interest rate volatilities amounts to P60,921 (2011 – P20,810).

3.3 Interest rate risk


The Fund’s financial assets at fair value through profit are mostly non-repricing and hence exposed to fair value inter-est rate risk. The Fund Manager monitors this risk through the VAR calculation (Note 3.2). The Fund’s financial liabilities are all non-interest bearing.

3.4 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 instrumen-talities, 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 car-rying amount of the financial assets as set out below:

The Fund invests primarily in high-grade investment instru-ments and securities. Details of ratings of the Fund’s invest-ments at December 31, 2012 and 2011 based on external credit rating agencies follow:

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 BSP special deposit accounts (Note 5).

There were no renegotiated financial assets as at December 31, 2012 and 2011.


The total amount of loans and receivables outstanding is unsecured.


3.5 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.


The Fund’s financial liabilities pertain to management fee

payable and other liabilities which are contractually due in less than 1 month.


The capital of the Fund is represented by total equity as shown in the balance sheet. 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:


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 companies under Investment Company Act of 1960. In order to maintain or adjust the capital structure, the Fund’s policy is to perform the following:

a) Monitor the level of daily subscriptions and redemp-tions relative to the assets it expects to be able to liquidate within 7 days; and

b) 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.







The fair values of loans and receivables which represent the discounted amount of estimated future cash flows expected to be received amount to P109,696,970 as at December 31, 2012. Expected cash flows are discounted at current market rates to determine fair value. The carrying amounts of the Fund’s other financial assets and financial liabilities at report-ing period approximate their fair values considering that these have short-term maturities.

Note 4 - Critical accounting judgmentEstimates, assumptions and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reason-able under the circumstances. The judgment that has a significant risk of causing a material adjustment to the carry-ing 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 report-ing 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. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

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.

In addition to specific allowance against individually significant loans and receivables, the Fund also makes a collective impairment test on exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This collective allowance is based on any deterioration in the internal rating of the loan or investment since it was granted or acquired. These internal ratings take into consideration factors such as any deterioration in country risk, industry, and technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.

The amount and timing of recorded expenses for any period would differ if the Fund made different judgments or utilized different estimates.

Short-term time depositsSpecial savings depositsRegular savings deposits

2012161,000,000671,000,00017,730,887

849,730,887

201143,500,000

156,076,86330,735,839

230,312,702

Government securitiesCorporate bonds

Interestrate (%)

9.56.9

Interestrate (%)5.0 - 5.6

7.0

2012 2011

Amount69,458,09019,334,12888,792,218

Amount31,681,51019,633,27251,314,782

At January 1Additions Disposals Unrealized fair value gains (losses), netAt December 31

201251,314,782

7,112,115,129(7,075,886,455)

1,248,76288,792,218

2011106,195,910

51,429,427(105,661,090)

(649,465)51,314,782


201213,666,0081,248,762

14,914,770

20113,599,015

(649,465)2,949,550

2010545,468846,585

1,392,053


201250,000,00059,680,490

109,680,490

201120,032,53919,800,00039,832,539

Management fee payableWithholding tax on management fees

2012486,163

159,505645,668

2011151,799

47,101198,900

Note12

Cash and cash equivalentsFinancial assets at fair value through

profit or lossLoans and receivablesOther receivables

2012849,730,887

88,792,218109,680,490

3,975,1341,052,178,729

2011230,312,702

51,314,78239,832,5391,452,597

322,912,620

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

AaaUnrated


BB +Philippine Ratings Services Corp.

AaaUnrated


69,458,090

19,334,128

88,792,218

31,681,510

19,633,272-

51,314,782

Loans and receiv-ables

-

-109,680,490109,680,490

-

10,000,000 29,832,53939,832,539



Expired NOLCO

Income tax rate



20121,305,667

109,576(109,576)

1,305,66730%

391,700

2011990,851

(881,275)109,576

30%32,873

55,933,946


Note 12- Related party transactionsIn 2010, 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. As fund manager, BPI Investment shall exercise full control, direction and management of the Fund in accordance with the investment policies and limitations set by the Fund’s BOD, 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 connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Bank, Inc. act as the receiving banks for the contributions and with-drawals related to the Fund as transacted by the distributors and shareholders.


The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of 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, 2012, total remunerations paid to directors and officers charged in profit or loss amounted to P141,250 (2011 - P236,500; 2010 - P194,800). As at reporting dates, there were no outstanding balances related to these fees.

Note 13- Supplementary information required by Bureau of Internal RevenueI. Supplementary information required by Revenue Regula-tions No. 15-2010



a) Documentary stamp taxes

Total documentary stamp taxes paid on share subscrip-tions for the year ended December 31, 2012 amounted to P718,874. There are no documentary stamp taxes accrued as at December 31, 2012 and 2011.


Withholding taxes paid/accrued and/or withheld for the years ended December 31, 2012 consist of:

There are no creditable withholding taxes for interest income received for the year ended December 31, 2012.




d) Tax assessments and cases

As at December 31, 2012, open taxable years are 2011, 2010 and 2009. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case.




a) Income

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


b) Cost of services




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



Note 10 - Redeemable sharesThe details of the Fund’s authorized shares at December 31, 2012 and 2011 follow:



As at December 31, 2012, the Fund has 958 shareholders (2011 - 271).

During the year, the Fund increased its authorized shares from 5 million to 10 million with par value of P10 per share which was approved by SEC on January 24, 2012.

Subject to the approval by the SEC, 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.



Note 11 - Net Asset Value (NAV) for share subscriptions and redemptionsThe consideration received or paid for redeemable shares issued or re-purchased respectively is based on the value of the Fund’s NAV per share at the date of the transaction. The total equity as shown in the 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 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 movements in allowance for market risk follow:


A reconciliation of the Fund’s PFRS NAV to its trading NAV is provided below:




2012400,229696,547

1,096,776

2011-

400,229400,229

PFRS NAVAdjustments on market valuationAllowance for market riskTrading NAVTotal outstanding sharesTrading NAV per share

20121,051,533,061

-(1,096,776)

1,050,436,2859,579,948

109.65

2011322,713,720

670,290(400,229)

322,983,7813,034,377

106.44

Note

10


Transactions

945,525945,524

1,891,049


75,90075,899

151,799




Transac-tions

453,690453,689

907,379Outstanding

balances

75,12075,119

150,239Terms and condi-

tionsThe outstand-ing balance is unsecured, unguaranteed, non-interest bearing and payable in cash a month after the management fee is

Nature of expenseProfessional feesMiscellaneous

Deductible amount1,638,921

110,5511,749,472

Total income for the yearInterest income

Subject to 30%Subject to 20%

Net realized fair value gains/(losses)Subject to 0%

Total

Taxable amount

6,278,9196,921,334

13,200,253

13,666,00826,866,261


201210 million

P 10P100 million

20115 million

P 10P50 million

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

20112,716,6492,302,803

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

2010500,000

4,486,176 (2,269,527) 2,716,649

20123,034,377

14,377,473(7,831,902)9,579,948


20121,550,045,560

840,626,034

2011243,127,923207,319,445

2010456,215,054 232,122,280


of shares outstanding during the yearBasic and diluted earnings

per share

20117,031,956

2,875,513

2.4455

20106,321,518

1,358,575

4.6531

201219,399,815

6,307,163

3.0758


Transactions

2,184,7512,184,751

4,369,502


243,082243,081

486,163


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


Paid

568,855

Total

643,532

Accrued

74,677

Municipal and other related taxesMayor’s permitOthersTotal

Amount40,777

7,5851,400

49,762

Direct chargesTrust feeTaxes and licensesTotal cost of services

Deductible amount4,369,5021,465,6125,835,114

Board of Directors

Romeo l. BernardoCHAIRMAN

sherisa P. NuesaDIRECTOR

maria theresa marcial-Javier VICE CHAIRMAN

John Philip s. orbetaDIRECTOR


Officers

(L-R) John Philip S. Orbeta, Director; Romeo L. Bernardo, Chairman; Maria Theresa Marcial-Javier, Vice Chairman; Sherisa P. Nuesa, Director; Atty. Maria Paz A. Garcia, Compliance Officer; Fernando J. Sison III, Treasurer; Atty. Sabino B. Padilla IV, Corporate Secretary


Investment Advisor

“Best Asset Management Company in the

Philippines”The Asset Triple A

Investment Awards, 2012

“Trusted Brand, 2012, Philippines”

Investment Fund Company category of Reader’s Digest

“Best Onshore Funds House in the Philippines”

Asian Investor, 2012 Investment Performance

Awards

(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 www.facebook.com/alfmmutualfunds @ALFMMutualFunds

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