Federated Core Trust II, L.P.
Market Plus Core Fund
A Portfolio of Federated Core Trust II, LP
ANNUAL SHAREHOLDER REPORT
December 31, 2007
FINANCIAL HIGHLIGHTS
SHAREHOLDER EXPENSE EXAMPLE
MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE
PORTFOLIO OF INVESTMENTS SUMMARY TABLE
PORTFOLIO OF INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
STATEMENT OF OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
NOTES TO FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
BOARD OF DIRECTORS AND TRUST OFFICERS
EVALUATION AND APPROVAL OF ADVISORY CONTRACT
VOTING PROXIES ON FUND PORTFOLIO SECURITIES
QUARTERLY PORTFOLIO SCHEDULE
not fdic insured may lose value no bank guarantee
Financial Highlights
(For a Share Outstanding Throughout the Period)
| | | | | | | |
Net Asset Value, Beginning of Period | | $12.01 | | $10.32 | | $10.00 | |
Income From Investment Operations: | | | | | | | |
| | 0.68 | | 0.17 | | 0.11 | |
Net realized and unrealized gain(loss) on investments, futures contracts and swap contracts | | | | | | | |
TOTAL FROM INVESTMENT OPERATIONS | | | | | | | |
Net Asset Value, End of Period | | | | | | | |
| | | | | | | |
| | | | | | | | |
Ratios to Average Net Assets: | | | | | | | |
| | | | | | | |
| | | | | | | |
Expense waiver/reimbursement4 | | | | | | | |
| | | | | | | |
Net assets, end of period (000 omitted) | | | | | | | |
| | | | | | | |
1 Reflects operations for the period from October 4, 2005 (date of initial investment) to December 31, 2005.
2 Based on net asset value, which does not reflect the sales charge, redemption fee, or contingent deferred sales charge, if applicable.
Total returns for periods of less than one year are not annualized.
3 Computed on an annualized basis.
4 This expense decrease is reflected in both the net expense and the net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
Shareholder Expense Example
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2007 to December 31, 2007.
ACTUAL EXPENSES
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
| | | Beginning Account Value 7/1/2007 | | Ending Account Value 12/31/2007 | | Expenses Paid During Period1 |
| | | | | | |
Hypothetical (assuming a 5% return before expenses) | | | | | | |
| | 1Expenses are equal to the Fund’s annualized net expense ratio of 0.05%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
Management’s Discussion Of Fund Performance
Fund Performance and Summary
Market Plus Core Fund produced an annual total return of 2.41% as of December 31, 2007. By comparison, the Standard & Poor’s 500 (S&P 500) Index¹ had a total return of 5.49% for the same period. The fund’s total return for the period reflects actual cash flows, transaction costs and other expenses which are not reflected in the total return of the S&P 500 Index.
The fund’s overall investment strategy focused on the combination of a short duration² fixed-income portfolio and S&P 500-based equity derivatives to effectively transform the fixed-income portfolio into a “synthetic” equity portfolio. The fund’s equity derivatives strategy strives to replicate the price performance of the S&P 500 index at a low cost.
The fund’s fixed-income investment strategy focused on: (a) the effective duration of its portfolio; (b) the allocation of portfolio among securities of similar issuers (referred to as “sectors”); (c) the credit ratings of portfolio securities (which indicates the risk that securities will default); (d) the structure risk of asset-backed and mortgage-backed securities; and, (e) the selection of individual securities. These were the most significant factors affecting the fund’s performance during the 12-month reporting period.
Market Overview
Equities had a modestly positive year, while it was a tough year in the bond market for “spread” investors. The yield curve steepened dramatically on a massive flight to quality due to the sub-prime lending crisis. Short-term interest rates finished the year about 175 basis points lower than at year-end 2006.
Positioning and Strategy
The Fund is positioned to perform well when interest rates are falling, and bond spread product is doing well. Although we experienced a declining rate environment in 2007, but it was a very difficult environment for spread product, particularly in the second half of the fiscal year.
Despite significantly underperforming the benchmark in 2007, we remain confident in our investment process and do not plan to make wholesale changes to the fund’s portfolio in the coming fiscal year. Despite the market turmoil, there were some bright spots, the portfolio’s effective yield was 5.28% at year end compared to the 3-Month London Interbank Offered Rate (LIBOR)³ at 4.70% and the portfolio’s average quality remained very high. All-in-all, the sub-prime crisis could continue to plague the financial markets in 2008, but we expect when the markets turn, the snap-back will come quickly.
Bond Portfolio Duration
Duration positioning had an adverse effect on fund performance for the year, the bulk of which occurred in the second half of the year, due to a Treasury Note futures short in a declining interest rate environment. We started to lengthen portfolio duration in December by unwinding the short in 2-Year Treasury Note futures at attractive levels. The futures in the fund’s portfolio were reduced by 20% by year-end. The fund’s dollar-weighted average effective duration was 0.27 years or 100% of the benchmark at the end of the reporting period.
Sector Allocation and Credit Quality
The Fund’s sector positioning and quality stance hurt portfolio performance significantly for all of 2007. In corporate bonds, financials took a beating in the summer and fall. Mortgage-backed securities also did very poorly in this same period. These were two areas where the sector call hurt performance. Furthermore, although the portfolio’s average quality stood at AA+/Aa1 at year-end, our exposure to A-rated and BBB-rated and High Yield corporate bonds hurt performance.
Straight agency-backed pass-thrus and hybrid ARMs were hit hard last year as a massive flight to quality occurred in the second half of 2007. These are high quality securities, and we believe they will eventually be seen as an attractive security with competitive yields.
Security Selection
Credit risk imbedded in the swap agreements was dramatically reduced by the collateralization agreements we previously negotiated.
Overall bond security selection detracted very slightly from portfolio performance. The fund’s Trust Preferred exposure added to performance despite two poor performers (State Street and Wells Fargo). The price of State Street Trust Preferred was particularly hit hard due to the sub-prime crisis. However, we still view State Street as a high quality investment and the performance of these bonds should improve in late 2008.
Other poor performers included ResCap and Capmark. Although the ResCap bonds had a maturity of June 2008, due to concerns regarding the company’s financial viability, we took advantage of a surprise tender offer by the company and sold this position at a price better than the tender. Good performers in the fund’s portfolio included the Zurich Financial and Wachovia securities.
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so
that an investor’s shares, when redeemed, may be worth more or less than their original cost. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance, visit FederatedInvestors.com or call
1-800-341-7400.
1 The S&P 500 is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
2. Duration is a measure of a security’s price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.
3 LIBOR (London Interbank Offered Rate) is the rate banks charge each other on short-term money. The average periodic rate on nine-month LIBOR is calculated as the average of all daily nine-month LIBOR settings during the period under review, adjusted for the length of the period. Note that this figure does not represent actual return on an investment made in an instrument having a rate equal to nine-month LIBOR on the initial day of the period under review and reinvested at the end of nine months (again at a rate equal to the then-prevailing nine-month LIBOR rate) for a further three-month period.
GROWTH OF A $10,000 INVESTMENT
The graph below illustrates the hypothetical investment of $10,0001 in the Market Plus Core Fund (the “Fund”) from October 4, 2005 (start of performance) to December 31, 2007, compared to the S&P 500 Index (S&P 500)2.
Average Annual Total Returns for the Period Ended 12/31/2007 | | |
| | |
Start of Performance (10/4/2005) | | |
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance and after-tax returns, call 1-800-341-7400. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured.
| | 1Represents a hypothetical investment of $10,000 in the Fund. The Fund’s performance assumes the reinvestment of all dividends and distributions. The S&P 500 has been adjusted to reflect reinvestment of dividends on securities in the index. |
| | 2The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees that the Securities and Exchange Commission requires to be reflected in the Fund’s performance. The index is unmanaged and, unlike the Fund, is not affected by cash flows. It is not possible to invest directly in an index. |
Portfolio of Investments Summary Table
At December 31, 2007, the Fund’s portfolio composition1 was as follows:
| | Percentage of Total Net Assets2 | |
Mortgage-Backed Securities3 | | | |
Corporate Debt Securities | | | |
U.S. Treasury and Agency Securities4 | | | |
| | | |
| | | |
| | | |
Other Assets and Liabilities — Net7 | | | |
| | | |
1 See the Fund’s Confidential Private Offering Memorandum for a description of these security types.
2 As of the date specified above, the Fund owned shares of one or more affiliated investment companies. For purposes of this table the affiliated investment company (other than an affiliated money market fund) is not treated as a single portfolio security, but rather the Fund is treated as owning a pro rata portion of each security and each other asset and liability owned by the affiliated investment company. Accordingly, the percentages of total net assets shown in the table will differ from those presented on the Portfolio of Investments.
3 For purposes of this table, Mortgage-Backed Securities include mortgage-backed securities guaranteed by Government Sponsored Entities (GSEs) and adjustable rate mortgage-backed securities.
4 For purposes of this table, U.S. Treasury and Agency Securities do not include mortgage-backed securities guaranteed by GSEs.
5 Based upon net unrealized appreciation (depreciation) on the derivative contracts. Derivative Contracts may consist of futures, forwards, options and swaps. The impact of a derivative contract on the Fund’s performance may be larger than its net unrealized appreciation (depreciation) may indicate. In many cases, the notional value or notional principal amount of a derivative contract may provide a better indication of the contract’s significance to the portfolio. More complete information regarding the Fund’s direct investments in derivative contracts, including unrealized appreciation (depreciation) and notional values or amounts of such contracts, can be found in the table at the end of the Portfolio of Investments included in this report.
6 Cash Equivalents include any investments in money market mutual funds and/or overnight repurchase agreements.
7 Assets, other than investments in securities and derivative contracts, less liabilities. See Statement of Assets and Liabilities.
Portfolio of Investments
December 31, 2007
| | Principal Amount or Shares | | | | | |
| | | | ADJUSTABLE RATE MORTGAGES—29.1% | | | |
| | | | Federal Home Loan Mortgage Corp.—25.4% | | | |
| $ | 5,380,476 | | Federal Home Loan Mortgage Corp., 5.437%, 12/1/2035 | | $ | 5,432,419 |
| | 3,954,508 | | Federal Home Loan Mortgage Corp., 5.614%, 6/1/2036 | | | 3,990,388 |
| | 2,248,357 | | Federal Home Loan Mortgage Corp., 5.624%, 5/1/2037 | | | |
| | | | | | | |
| | | | Federal National Mortgage Association—3.7% | | | |
| | 475,181 | | Federal National Mortgage Association, 4.010%, 5/1/2033 | | | 479,961 |
| | 126,651 | | Federal National Mortgage Association, 5.300%, 5/1/2036 | | | 127,673 |
| | 1,015,271 | | Federal National Mortgage Association, 5.420%, 4/1/2036 | | | 1,026,896 |
| | 25,167 | | Federal National Mortgage Association, 6.980%, 6/1/2035 | | | 25,394 |
| | 28,797 | | Federal National Mortgage Association, 6.990%, 4/1/2035 | | | |
| | | | | | | |
| | | | TOTAL ADJUSTABLE RATE MORTGAGES (IDENTIFIED COST $13,269,432) | | | |
| | | | ASSET-BACKED SECURITIES—8.7% | | | |
| | | | Auto Receivables—1.6% | | | |
| | 320,000 | | Americredit Prime Automobile Receivables Trust 2007-2M, 5.623%, 2/08/2009 | | | 319,863 |
| | 275,000 | | Carmax Auto Owner Trust Series 2007-3 A3B, 5.428%, 12/15/2011 | | | 274,106 |
| | 130,982 | | Harley-Davidson Motorcycle Trust 2003-2, 2.070%, 2/15/2011 | | | |
| | | | | | | |
| | | | Home Equity Loan—4.4% | | | |
| | 92,097 | | Ace Securities Corp. 2006-HE2, 4.925%, 5/25/2036 | | | 91,670 |
| | 18,690 | | Asset Backed Funding Certificate 2005-OPT1 A1MZ, 5.215%, 7/25/2035 | | | 18,322 |
| | 191,580 | | Asset Backed Securities Corp. Home Equity Loan Trust 2005-HE5, 5.135%, 6/25/2035 | | | 190,718 |
| | 24,427 | | Centex Home Equity 2005-D AV2, 5.135%, 10/25/2035 | | | 24,359 |
| | 372,017 | | First Franklin Mortgage Loan Asset Backed Certificates 2006-FFH1 A2, 4.995%, 1/25/2036 | | | 366,611 |
| | 50,910 | | GSAA Home Equity Trust 2005-15 1A2, 5.245%, 1/25/2036 | | | 43,894 |
| | 75,000 | | GSAA Home Equity Trust 2005MTR1 A3, 5.175%, 10/25/2035 | | | 67,992 |
| | 54,239 | | GSAMP Trust 2005-SEA2 A1, 5.215%, 1/25/2045 | | | 50,936 |
| | 116,619 | | Merrill Lynch Mortgage Investors Trust 2005-WMC2, 5.125%, 4/25/2036 | | | 116,487 |
| | 280,000 | | Morgan Stanley ABS Capital I 2004-OP1 M3, 5.545%, 11/25/2034 | | | 252,122 |
| | 196,503 | | Morgan Stanley ABS Capital I 2005-HE3, 5.245%, 7/25/2035 | | | 192,527 |
| | 400,000 | | Morgan Stanley ABS Capital I 2005-WMC4 M1, 5.275%, 4/25/2035 | | | 335,859 |
| | 128,059 | | Nomura Home Equity Loan Inc 2006-HE2 A1, 4.925%, 3/25/2036 | | | 126,849 |
| | 9,065 | | Novastar Home Equity Loan 2004-4 A1B, 5.265%, 3/25/2035 | | | 8,864 |
| | 74,859 | | Option One Mortgage Loan Trust 2005-1 A1B, 5.195%, 3/22/2005 | | | 72,899 |
| | 75,000 | | Popular ABS Mortgage Pass-Through Trust 2005-5 AV2B, 5.125%, 11/25/2035 | | | |
| | | | | | | |
| | | | Non-Agency Mortgage—2.7% | | | |
| | 446,160 | | Countrywide Alternative Loan Trust 2007-OA9 A2, 5.215%, 6/25/2047 | | | 414,510 |
| | 32,584 | | Harborview Mortgage Loan Trust 2006-1 2A1A, 5.205%, 3/19/2037 | | | 30,836 |
| | 480,326 | | Harborview Mortgage Loan Trust 2007-1, 4.995%, 4/19/2038 | | | 451,923 |
| | 500,000 | 1,2 | KLIO Funding Ltd. 2004-1A A1, 5.428%, 4/23/2039 | | | 250,000 |
| | 72,498 | | Washington Mutual 2003-S4 1A3, 5.365%, 6/25/2018 | | | 71,901 |
| | 23,874 | | Washington Mutual 2005-AR17 A-1A1, 5.135%, 12/25/2045 | | | |
| | | | | | | |
| | | | TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $4,383,275) | | | |
| | | | COLLATERALIZED MORTGAGE OBLIGATIONS—7.5% | | | |
| | | | Federal Home Loan Mortgage Corp.—0.4% | | | |
| | 100,443 | | Federal Home Loan Mortgage Corp. REMIC 2395 FA, 5.628%, 6/15/2029 | | | 101,230 |
| | 69,406 | | Federal Home Loan Mortgage Corp. REMIC 2395 FT, 5.478%, 12/15/2031 | | | |
| | | | | | | |
| | | | Federal National Mortgage Association—3.0% | | | |
| | 100,000 | | Federal National Mortgage Association REMIC 0287A FB, 5.591%, 10/25/2031 | | | 100,237 |
| | 142,671 | | Federal National Mortgage Association REMIC 1993-179 FJ, 6.025%, 10/25/2023 | | | 146,385 |
| | 40,969 | | Federal National Mortgage Association REMIC 1993-247 FM, 5.433%, 12/25/2023 | | | 41,121 |
| | 1,060,209 | | Federal National Mortgage Association REMIC 2002-25 FX, 5.865%, 4/25/2032 | | | |
| | | | | | | |
| | | | Non-Agency Mortgage—4.1% | | | |
| | 441,699 | | Citigroup Mortgage Loan Trust, 2004UST1 A2, 4.767%, 8/25/2034 | | | 439,557 |
| | 295,284 | | Washington Mutual 2006-AR1 2A1B, 5.857%, 1/25/2046 | | | 288,679 |
| | 393,805 | | Washington Mutual 2006-AR15 1A, 5.628%, 11/25/2046 | | | 365,734 |
| | 309,003 | | Washington Mutual 2006-AR17 1A, 5.608%, 12/25/2046 | | | 285,551 |
| | 210,812 | | Washington Mutual 2002-AR6 A, 6.188%, 6/25/2042 | | | 208,342 |
| | 365,132 | | Washington Mutual Mortgage Pass -Through Certificates 2007-OA3 DA1C, 5.185%, 4/25/2047 | | | |
| | | | | | | |
| | | | TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (IDENTIFIED COST $3,555,544) | | | |
| | | | CORPORATE BONDS—16.1% | | | |
| | | | Communications - Telecom Wireless—1.3% | | | |
| | 600,000 | | Vodafone Group PLC, Note, 5.320%, 2/27/2012 | | | |
| | | | Communications – Telecom Wirelines—1.6% | | | |
| | 50,000 | | SBC Communications, Inc., 5.080%, 11/14/2008 | | | 50,030 |
| | 300,000 | | Telecom Italia Capital, Note, 5.391%, 2/01/2011 | | | 293,737 |
| | 400,000 | | Telefonica SA, Floating Rate Note, 5.226%, 6/19/2009 | | | |
| | | | | | | |
| | | | Consumer Cyclical - Entertainment—1.1% | | | |
| | 515,000 | | Time Warner, Inc., Floating Rate Note, 5.109%, 11/13/2009 | | | |
| | | | Energy - Independent—0.6% | | | |
| | 280,000 | | Anadarko Petroleum Corp., Floating Rate Note, 5.391%, 9/15/2009 | | | |
| | | | Financial Institution - Banking—9.1% | | | |
| | 900,000 | | Chase Manhattan Corp., Company Guarantee, 5.411%, 2/01/2027 | | | 830,884 |
| | 900,000 | | Nationsbank Capital Trust, Bond, 5.793%, 1/15/2027 | | | 823,955 |
| | 40,000 | | Popular North America, Inc., 5.649%, 4/06/2009 | | | 40,095 |
| | 1,100,000 | | State Street Capital Trust IV, 5.991%, 6/15/2037 | | | 874,865 |
| | 900,000 | | Wachovia Capital Trust II, Company Guarantee, 5.743%, 1/15/2027 | | | 849,266 |
| | 900,000 | | Wells Fargo Capital II, Company Guarantee, 5.484%, 1/30/2027 | | | |
| | | | | | | |
| | | | Financial Institution - Brokerage—0.2% | | | |
| | 50,000 | | Goldman Sachs Group, Inc., Floating Rate Note, 5.430%, 9/29/2014 | | | 47,704 |
| | 50,000 | | Morgan Stanley Group, Inc., 5.459%, 1/18/2011 | | | |
| | | | | | | |
| | | | Financial Institution - Finance Noncaptive—1.0% | | | |
| | 310,000 | | CIT Group, Inc., Sr. Note, 5.129%, 2/13/2012 | | | 271,554 |
| | 250,000 | 1,2 | Capmark Financial Group, Inc., Unsecd. Note, 5.529%, 5/10/2010 | | | |
| | | | | | | |
| | | | Financial Institution - Insurance - P&C—1.2% | | | |
| | 30,000 | | CNA Financial Corp., 6.500%, 8/15/2016 | | | 30,669 |
| | 500,000 | 1,2 | ZFS Finance USA Trust III, Floating Rate Note, 6.141%, 12/15/2065 | | | |
| | | | | | | |
| | | | TOTAL CORPORATE BONDS (IDENTIFIED COST $7,981,272) | | | |
| | | | MORTGAGE—BACKED SECURITIES—16.8% | | | |
| | | | Federal Home Loan Mortgage Corp.—12.8% | | | |
| | 1,883,409 | | Federal Home Loan Mortgage Corp. Pool G08153, 7.000%, 30 Year, 9/1/2036 | | | 1,959,490 |
| | 691,605 | | Federal Home Loan Mortgage Corp. Pool G18124, 6.000%, 15 Year, 6/1/2021 | | | 707,322 |
| | 3,168,253 | | Federal Home Loan Mortgage Corp. Pool G18136, 6.000%, 15 Year, 8/1/2021 | | | |
| | | | | | | |
| | | | Federal National Mortgage Association—4.0% | | | |
| | 445,693 | | Federal National Mortgage Association Pool 256360, 7.000%, 30 Year, 8/1/2036 | | | 463,958 |
| | 1,320,720 | | Federal National Mortgage Association Pool 895073, 7.000%, 30 Year, 8/1/2036 | | | |
| | | | | | | |
| | | | TOTAL MORTGAGE—BACKED SECURITIES (IDENTIFIED COST $7,647,288) | | | |
| | | | U.S. TREASURY—12.2% | | | |
| | | | Treasury Securities—12.2% | | | |
| | 1,213,091 | | U.S. Treasury Inflation Protected Note, Series D-2010, 0.875%, 4/15/2010 | | | 1,209,233 |
| | 4,400,000 | 3,4 | United States Treasury Bill, 3.04% 1/24/2008 | | | |
| | | | TOTAL U.S. TREASURY (IDENTIFIED COST $5,551,079) | | | |
| | | | MUTUAL FUNDS—9.4%5 | | | |
| | 2,828,288 | 6 | Prime Value Obligations Fund, Institutional Shares, 4.86% | | | 2,828,288 |
| | 223,866 | | High Yield Bond Portfolio | | | |
| | | | TOTAL MUTUAL FUNDS (IDENTIFIED COST $4,305,413) | | | |
| | | | TOTAL INVESTMENTS – 99.8%(IDENTIFIED COST $46,693,303) | | | |
| | | | OTHER ASSETS AND LIABILITIES – NET—0.2%7 | | | |
| | | | | | | |
At December 31, 2007, the Fund had the following outstanding futures contracts:
| Description | | | | | | | | | |
8S&P 500 Index Long Futures | | | | | | | | | ) |
8S&P Mini 500 Index Long Futures | | | | | | | | | ) |
8U.S. Treasury Notes 2 Year Short Futures | | | | | | | | | ) |
TOTAL UNREALIZED DEPRECIATION ON FUTURES CONTRACTS | | |
At December 31, 2007, the Fund had the following open swap contracts:
Total Return Swap Counterparty | | | | | | | | | | | | Unrealized Appreciation/ (Depreciation) | |
| Merrill Lynch International | | S&P 500 Total Return | | Buy | | 5.15% | | 09/08/2008 | | $33,558,467 | | | |
| Merrill Lynch International | | S&P 500 Total Return | | Buy | | 5.24% | | 10/06/2008 | | $8,999,393 | | | |
NET UNREALIZED DEPRECIATION ON SWAP CONTRACTS | | |
1 Denotes a restricted security that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) is subject to a contractual restriction on public sales. At December 31, 2007, these restricted securities amounted to $1,082,846, which represented 2.4% of total net assets.
2 Denotes a restricted security that may be resold without restriction to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 and that the Fund has determined to be liquid under criteria established by the Fund’s Board of Directors. At December 31, 2007, these liquid restricted securities amounted to $1,082,846, which represented 2.4% of total net assets.
3 Discount rate at time of purchase.
4 Pledged as collateral to ensure the Fund is able to satisfy the obligations of its outstanding futures contracts.
5 Affiliated companies.
6 7-Day net yield.
7 Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities.
8 Non-income producing security.
Note: The categories of investments are shown as a percentage of total net assets at December 31, 2007.
The following acronym is used throughout this portfolio:
| REMIC | —Real Estate Mortgage Investment Conduit |
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
December 31, 2007
| | | | | | | | |
Total investments in securities, at value including $4,308,044 of investments in affiliated issuers (Note 5) (identified cost $46,693,303) | | | | | | $ | 45,902,012 | |
| | | | | | | 757 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Payable for daily variation margin | | $ | 44,388 | | | | | |
Net payable for swap contracts | | | 443,162 | | | | | |
Payable for auditing fees | | | 16,000 | | | | | |
| | | | | | | | |
| | | | | | | | |
Net assets for 3,742,531 shares outstanding | | | | | | | | |
| | | | | | | | |
| | | | | | $ | 40,726,195 | |
Net unrealized depreciation of investments, futures contracts and swap contracts | | | | | | | (1,295,826 | ) |
Accumulated net realized gain on investments, futures contracts and swap contracts | | | | | | | 3,001,871 | |
Undistributed net investment income | | | | | | | | |
| | | | | | | | |
Net Asset Value, Offering Price and Redemption Proceeds Per Share: | | | | | | | | |
$46,014,619 ÷ 3,742,531 shares outstanding, no par value, unlimited shares authorized | | | | | | | | |
See Notes which are an integral part of the Financial Statements
Statement of Operations
Year Ended December 31, 2007
| | | | | | | | | | | | |
Interest (net of foreign taxes withheld of $1,020) | | | | | | | | | | $ | 2,418,240 | |
Dividends received from an affiliated issuers (Note 5) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Administrative personnel and services fee (Note 5) | | | | $ | | | 150,000 | | | | | |
| | | | | | | 10,756 | | | | | |
Transfer and dividend disbursing agent fees and expenses | | | | | | | 14,667 | | | | | |
Directors’/Trustees’ fees | | | | | | | 4,186 | | | | | |
| | | | | | | 16,000 | | | | | |
| | | | | | | 11,877 | | | | | |
Portfolio accounting fees | | | | | | | 70,597 | | | | | |
| | | | | | | 6,259 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Waiver and Expense Reimbursement (Note 5): | | | | | | | | | | | | |
Waiver of administrative personnel and services fee | | $ | (150,000 | ) | | | | | | | | |
Reimbursement of other operating expenses | | | | | | | | | | | | |
TOTAL WAIVER AND REIMBURSEMENT | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts and Swap Contracts: | | | | | | | | | | | | |
Net realized loss on investments | | | | | | | | | | | (155,180 | ) |
Net realized loss on futures contracts | | | | | | | | | | | (479,674 | ) |
Net realized gain on swap contracts | | | | | | | | | | | 876,841 | |
Net change in unrealized appreciation of investments | | | | | | | | | | | (825,497 | ) |
Net change in unrealized appreciation of futures contracts | | | | | | | | | | | (86,608 | ) |
Net change in unrealized appreciation of swap contracts | | | | | | | | | | | | |
Net realized and unrealized loss on investments, futures contracts and swap contracts | | | | | | | | | | | | |
Change in net assets resulting from operations | | | | | | | | | | | | |
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
| | | | | | | | |
Increase (Decrease) in Net Assets | | | | | | | | |
| | | | | | | | |
| | $ | 2,578,877 | | | $ | 950,871 | |
Net realized gain on investments, futures contracts and swap contracts | | | 241,987 | | | | 2,744,339 | |
Net change in unrealized appreciation/depreciation of investments, futures contracts and swap contracts | | | | | | | | |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | | | | | | | | |
| | | | | | | | |
Proceeds from sale of shares | | | 1,000,000 | | | | 40,200,000 | |
| | | | | | | | |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
End of period (including undistributed net investment income of $3,582,379 and $1,003,502, respectively) | | | | | | | | |
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
December 31, 2007
1. ORGANIZATION
Market Plus Core Fund (the “Fund”) is a diversified portfolio of Federated Core Trust II, L.P. (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “Act”). The Trust is a limited partnership that was established under the laws of the State of Delaware on November 13, 2000 and offered only to registered investment companies and other accredited investors. The Trust consists of two portfolios. The financial statements included herein are only those of the Fund. Each portfolio pays its own expenses. The Fund’s primary investment objective is to seek total return over the business cycle (which may be longer or shorter than a 12-month period) in excess of the S&P 500 Index.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP) in the United States of America.
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
| | · | Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Board of Directors (the “Directors”). |
| | · | Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium). |
| | · | Shares of other mutual funds are valued based upon their reported NAVs. |
| | · | Derivative contracts listed on exchanges are valued at their reported settlement or closing price. |
| | · | Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Directors. |
| | · | Equity securities listed on an exchange or traded through a regulated market system are valued at their last reported sale price or official closing price in their principal exchange or market. |
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund’s NAV.
Fair Valuation and Significant Events Procedures
The Directors have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers, and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Directors.
The Directors also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment’s value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:
| | · | With respect to securities traded in foreign markets, significant trends in U.S. equity markets or in the trading of foreign securities index futures or options contracts; |
| | · | With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets; |
| | · | Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and |
| | · | Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer’s operations or regulatory changes or market developments affecting the issuer’s industry. |
The Directors have approved the use of a pricing service to determine the fair value of equity securities traded principally in foreign markets when the Adviser determines that there has been a significant trend in the U.S. equity markets or in index futures trading. For other significant events, the Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Directors.
Repurchase Agreements
It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund’s custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
With respect to agreements to repurchase U.S. government securities and cash items, the Fund treats the repurchase agreement as an investment in the underlying securities and not as an obligation of the other party to the repurchase agreement. Other repurchase agreements are treated as obligations of the other party secured by the underlying securities. Nevertheless, the insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund’s Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Investment Income, Expenses and Distributions
Interest income and expenses are accrued daily. Dividend income is recorded on the ex-dividend date. Foreign dividends are recorded on the ex-dividend date or when the Fund is informed of the ex-dividend date. Inflation adjustments on Treasury Inflation-Protected Securities (TIPS) are included in interest income. All net income earned and gain/loss (realized and unrealized) will be allocated daily to the shareholders based on their capital contributions to the Fund. The Fund does not currently intend to declare and pay distributions.
Premium and Discount Amortization/ Paydown Gains and Losses
All premiums and discounts on fixed-income securities other than mortgage-backed securities are amortized/accreted for financial statement purposes. Gains and losses realized on principal payment of mortgage-backed securities (paydown gains and losses) are classified as part of investment income.
Federal Taxes
As a partnership, the Fund is not subject to U.S. federal income tax. Instead, each investor reports separately on its own federal income tax return its allocated portion of the Fund’s income, gain, losses, deduction and credits. The Fund adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”, on June 29, 2007. As of and during the period ended December 31, 2007, the Fund did not have a liability for any unrecognized tax expenses. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of December 31, 2007, tax years 2004 through 2007 remain subject to examination by the fund's major tax jurisdictions, which include the United States of America and the state of Delaware.
Withholding taxes and where appropriate, deferred withholding taxes on foreign interest, dividends and capital gains have been provided for in accordance with the applicable country’s tax rules and rates.
When-Issued and Delayed Delivery Transactions
The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Swap Contracts
Swap contracts involve two parties that agree to exchange the returns (or the differential in rates of return) earned or realized on particular predetermined investments, instruments, indices or other measures. The gross returns to be exchanged or “swapped” between parties are generally calculated with respect to a “notional amount” for a predetermined period of time. The Fund may enter into interest rate, total return, credit default, foreign exchange and other swap agreements.
Total return swap agreements involve the commitment to pay or receive an amount generally determined by reference to an interest rate in exchange for a specific market-linked return, based on notional amounts. To the extent that the total return of the security or index underlying the transactions exceeds or falls short of the offsetting interest rate based obligation, the Fund receives or makes a payment to the counterparty. Risks may arise upon entering into swap agreements from the potential inability of the counterparties to meet the terms of their contract from unanticipated changes in the value of the swap agreement.
Upfront payments received or paid by the Fund will be reflected as an asset or liability on the Statement of Assets and Liabilities. Changes in the value of swap contracts are included in Net payable for swap contracts on the Statement of Assets and Liabilities, and periodic payments are reported as Net realized gain on swap contracts in the Statement of Operations. For the year ended December 31, 2007, the Fund had net realized gains on swap contracts $876,841.
Swap contracts outstanding at period end are listed after the Fund’s portfolio of investments.
Futures Contracts
The Fund purchases and sells financial futures contracts to manage cashflows, enhance yield and to establish and maintain continual economic exposure to the changes in the value of the S&P 500 Index and to potentially reduce transaction costs. Upon entering into a financial futures contract with a broker, the Fund is required to deposit in a segregated account a specified amount of cash or U.S. government securities. Futures contracts are valued daily and unrealized gains or losses are recorded in a “variation margin” account. Daily, the Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or loss. Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with the changes in the value of the underlying securities. For the year ended December 31, 2007, the Fund had net realized losses on futures contracts of $479,674.
Futures contracts outstanding at period end are listed after the Fund’s portfolio of investments.
Restricted Securities
Restricted securities are securities that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) are subject to contractual restrictions on public sales. In some cases, when a security cannot be offered for public sale without first being registered, the issuer of the restricted security has agreed to register such securities for resale, at the issuer’s expense, either upon demand by the Fund or in connection with another registered offering of the securities. Many such restricted securities may be resold in the secondary market in transactions exempt from registration. Restricted securities may be determined to be liquid under criteria established by the Directors. The Fund will not incur any registration costs upon such resales. The Fund’s restricted securities are valued at the price provided by dealers in the secondary market or, if no market prices are available, at the fair value as determined in accordance with procedures established by and under the general supervision of the Directors.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
Other
Investment transactions are accounted for on a trade date basis. Realized gains and losses from investment transactions are recorded on an identified cost basis.
3. CONTRIBUTIONS/WITHDRAWALS
Transactions in shares were as follows:
| | | | |
Proceeds from contributions | | 77,881 | | 3,664,540 |
Fair value of withdrawals | | | | |
NET CHANGE RESULTING FROM CONTRIBUTIONS/WITHDRAWALS | | | | |
4. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Investment Counseling is the Fund’s investment adviser (the “Adviser”), subject to the oversight of the Directors. The Adviser provides investment adviser services at no fee, because all investors in the Fund are other Federated funds, insurance company separate accounts, common or commingled trust funds or similar organizations or entities that are “accredited investors” within the meaning of Regulation D of the 1933 Act. The Adviser may voluntarily choose to reimburse certain operating expenses of the Fund. The Adviser can modify or terminate this voluntary reimbursement at any time at its sole discretion. For the year ended December 31, 2007, the Adviser voluntarily reimbursed $111,748 of other operating expenses.
Administrative Fee
Federated Administrative Services, Inc. (FASI), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FASI is based on the average aggregate daily net assets of certain Federated funds as specified below:
| | Average Aggregate Daily Net Assets of the Trust |
| | |
| | |
| | |
| | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio. FASI may voluntarily choose to waive any portion of its fee. FASI can modify or terminate this voluntary waiver at any time at its sole discretion. For the year ended December 31, 2007, FASI waived its entire fee.
General
Certain of the Officers and Directors of the Fund are Officers and Directors or Trustees of the above companies.
Transactions with Affiliated Companies
Affiliated holdings are mutual funds which are managed by the Adviser or an affiliate of the Adviser. Transactions with the affiliated companies during the year ended December 31, 2007 are as follows:
| | Balance of Shares Held 12/31/2006 | | | | | | Balance of Shares Held 12/31/2007 | | | | |
High Yield Bond Portfolio | | | | | | | | | | | | |
Prime Value Obligations Fund, Institutional Shares | | | | | | | | | | | | |
TOTAL OF AFFILIATED TRANSACTIONS | | | | | | | | | | | | |
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations, for the year ended December 31, 2007, were as follows:
6. LINE OF CREDIT
The Fund participates in a $150,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate of 0.65% over the federal funds rate. As of December 31, 2007, there were no outstanding loans. During the year ended December 31, 2007, the Fund did not utilize the LOC.
7. INTERFUND LENDING
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (SEC), the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the funds to borrow from other participating affiliated funds. As of December 31, 2007, there were no outstanding loans. During the year ended December 31, 2007, the program was not utilized.
8. LEGAL PROCEEDINGS
Beginning in October 2003, Federated Investors, Inc. and various subsidiaries thereof (including the advisers and distributor for various investment companies, collectively, “Federated”), along with various investment companies sponsored by Federated (“Funds”) were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. These lawsuits began to be filed shortly after Federated’s first public announcement that it had received requests for information on shareholder trading activities in the Funds from the SEC, the Office of the New York State Attorney General (“NYAG”), and other authorities. In that regard, on November 28, 2005, Federated announced that it had reached final settlements with the SEC and the NYAG with respect to those matters. As Federated previously reported in 2004, it has already paid approximately $8.0 million to certain funds as determined by an independent consultant. As part of these settlements, Federated agreed to pay for the benefit of fund shareholders additional disgorgement and a civil money penalty in the aggregate amount of an additional $72 million. Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees. The Board of the Funds has retained the law firm of Dickstein Shapiro LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys’ fees and expenses, and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board released Statement on Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157), which is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management has concluded that the adoption of FAS 157 is not expected to have a material impact on the Fund’s net assets or results of operations.
Independent Auditor’s Report
TO THE BOARD OF TRUSTEES OF FEDERATED CORE TRUST II, L.P. AND SHAREHOLDERS OF MARKET PLUS CORE FUND:
We have audited the accompanying statement of assets and liabilities of Market Plus Core Fund, (one of the portfolios constituting Federated Core Trust II, L.P.) (the “Fund”), including the portfolio of investments, as of December 31, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Market Plus Core Fund, a portfolio of Federated Core Trust II, L.P., at December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 18, 2008
| | Board of Directors and Trust Officers |
The Board is responsible for managing the Trust’s business affairs and for exercising all the Trust’s powers except those reserved for the shareholders. The following tables give information about each Board member and the senior officers of the Fund. Where required, the tables separately list Board members who are “interested persons” of the Fund (i.e., “Interested” Board members) and those who are not (i.e., “Independent” Board members). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Board members listed is 5800 Corporate Drive, Pittsburgh, PA 15237-7000; Attention: Mutual Fund Board. As of December 31, 2007, the Trust comprised two portfolios, and the Federated Fund Complex consisted
of 40 investment companies (comprising 148 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Board member oversees all portfolios in the Federated Fund Complex and serves for an indefinite term. The Fund’s Statement of Additional Information includes additional information about Trust Directors and is available, without charge and upon request, by calling
1-800-341-7400.
INTERESTED DIRECTORS BACKGROUND
| | | |
Name Birth Date Positions Held with Trust Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 DIRECTOR Began serving: November 2001 | | Principal Occupations: Director or Trustee of the Federated Fund Complex; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Complex’s Executive Committee. Previous Positions: Chairman of the Federated Fund Complex; Trustee, Federated Investment Management Company and Chairman and Director, Federated Investment Counseling. |
| | | |
J. Christopher Donahue* Birth Date: April 11, 1949 PRESIDENT AND DIRECTOR Began serving: November 2000 | | Principal Occupations: Principal Executive Officer and President of the Federated Fund Complex; Director or Trustee of some of the Funds in the Federated Fund Complex; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (Investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
| | | |
*Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to the positions they hold with Federated Investors, Inc. and its subsidiaries.
INDEPENDENT DIRECTORS BACKGROUND
| | | |
Name Birth Date Positions Held with Trust Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
Thomas G. Bigley Birth Date: February 3, 1934 DIRECTOR Began serving: November 2001 | | Principal Occupation: Director or Trustee of the Federated Fund Complex. Other Directorships Held: Director, Member of Executive Committee, Children’s Hospital of Pittsburgh; Director, University of Pittsburgh. Previous Position: Senior Partner, Ernst & Young LLP. |
| | | |
John T. Conroy, Jr. Birth Date: June 23, 1937 DIRECTOR Began serving: November 2001 | | Principal Occupations: Director or Trustee of the Federated Fund Complex; Chairman of the Board, Investment Properties Corporation; Partner or Trustee in private real estate ventures in Southwest Florida. Previous Positions: President, Investment Properties Corporation; Senior Vice President, John R. Wood and Associates, Inc., Realtors; President, Naples Property Management, Inc. and Northgate Village Development Corporation. |
| | | |
Nicholas P. Constantakis Birth Date: September 3, 1939 DIRECTOR Began serving: November 2001 | | Principal Occupation: Director or Trustee of the Federated Fund Complex. Other Directorships Held: Director and Chairman of the Audit Committee, Michael Baker Corporation (engineering and energy services worldwide). Previous Position: Partner, Andersen Worldwide SC. |
| | | |
John F. Cunningham Birth Date: March 5, 1943 DIRECTOR Began serving: November 2001 | | Principal Occupation: Director or Trustee of the Federated Fund Complex; Director, QSGI, Inc. (technology services company). Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. |
| | | |
Peter E. Madden Birth Date: March 16, 1942 DIRECTOR Began serving: November 2001 | | Principal Occupation: Director or Trustee of the Federated Fund Complex. Other Directorships Held: Board of Overseers, Babson College. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. |
| | | |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 DIRECTOR Began serving: November 2001 | | Principal Occupations: Director or Trustee of the Federated Fund Complex; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly, Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President DVC Group, Inc. (marketing, communications and technology). |
| | | |
John E. Murray, Jr., J.D., S.J.D. Birth Date: December 20, 1932 DIRECTOR Began serving: November 2001 | | Principal Occupations: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Complex; Chancellor and Law Professor, Duquesne University; Partner, Murray, Hogue & Lannis. Other Directorships Held: Director, Michael Baker Corp. (engineering, construction, operations and technical services). Previous Positions: President, Duquesne University; Dean and Professor of Law, University of Pittsburgh School of Law; Dean and Professor of Law, Villanova University School of Law. |
| | | |
R. James Nicholson Birth Date: February 4, 1938 DIRECTOR Began serving: January 2008 | | Principal Occupations: Director or Trustee of the Federated Fund Complex; Senior Counsel, Brownstein Hyatt Farber Schrek, P.C.;Former Secretary of the U.S. Dept. of Veterans Affairs; Former U.S. Ambassador to the Holy See; Former Chairman of the Republican National Committee. Other Directorships Held: Director, Horatio Alger Association. Previous Positions: Colonel, U.S. Army Reserve; Partner, Calkins, Kramer, Grimshaw and Harring, P.C.; General Counsel, Colorado Association of Housing and Building; Chairman and CEO, Nicholson Enterprises, Inc.; Chairman and CEO, Renaissance Homes of Colorado. |
| | | |
Thomas M. O’Neill Birth Date: June 14, 1951 DIRECTOR Began serving: October 2006 | | Principal Occupations: Director or Trustee of the Federated Fund Complex; Managing Director and Partner, Navigator Management Company, L.P. (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children’s Hospital of Boston; Visiting Committee on Athletics, Harvard College. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; and Credit Analyst and Lending Officer, Fleet Bank. |
| | | |
Marjorie P. Smuts Birth Date: June 21, 1935 DIRECTOR Began serving: November 2001 | | Principal Occupations: Director or Trustee of the Federated Fund Complex; formerly, Public Relations/Marketing Consultant/Conference Coordinator. Previous Positions: National Spokesperson, Aluminum Company of America; television producer; President, Marj Palmer Assoc.; Owner, Scandia Bord. |
| | | |
John S. Walsh Birth Date: November 28, 1957 DIRECTOR Began serving: November 2001 | | Principal Occupations: Director or Trustee of the Federated Fund Complex; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. |
| | | |
James F. Will Birth Date: October 12, 1938 DIRECTOR Began serving: April 2006 | | Principal Occupations: Director or Trustee of the Federated Fund Complex; formerly, Vice Chancellor and President, Saint Vincent College. Other Directorships Held: Trustee, Saint Vincent College; Alleghany Corporation. Previous Positions: Chairman, President and Chief Executive Officer, Armco, Inc.; President and Chief Executive Officer, Cyclops Industries; President and Chief Operating Officer, Kaiser Steel Corporation |
| | | |
OFFICERS
| | | |
Name Birth Date Positions Held with Trust Date Began Serving | | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: November 2000 | | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Complex; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
| | | |
Richard A. Novak Birth Date: December 25, 1963 TREASURER Began serving: January 2006 | | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Complex; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. |
| | | |
Richard B. Fisher Birth Date: May 17, 1923 VICE CHAIRMAN Began serving: August 2002 | | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Complex; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Complex; Executive Vice President, Federated Investors, Inc. and Director and Chief Executive Officer, Federated Securities Corp. |
| | | |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Complex; Vice President and Chief Compliance Officer of Federated Investors, Inc.; and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. |
| | | |
Stephen F. Auth Birth Date: September 3, 1956 CHIEF INVESTMENT OFFICER Began serving: May 2004 | | Principal Occupations: Chief Investment Officer of this Fund and various other Funds in the Federated Fund Complex; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of Pennsylvania. Previous Positions: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd. (Investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and Portfolio Manager, Prudential Investments. |
| | | |
Robert J. Ostrowski Birth Date: April 26, 1963 CHIEF INVESTMENT OFFICER Began serving: May 2004 | | Principal Occupations: Robert J. Ostrowski has been the Fund’s Portfolio Manager since (insert date). Mr. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund’s Adviser since 1997. Mr. Ostrowski is a Chartered Financial Analyst. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
| | | |
Todd A. Abraham Birth Date: February 10, 1966 VICE PRESIDENT Began serving: May 2004 | | Principal Occupations: Todd A. Abraham is Vice President of the Trust. Mr. Abraham has been a Portfolio Manager since 1995, a Vice President of the Fund’s Adviser since 1997 and a Senior Vice President of the Fund’s Adviser beginning 2007. Mr. Abraham joined Federated in 1993 as an Investment Analyst and served as Assistant Vice President of the Fund’s Adviser from 1995 to 1997. Mr. Abraham served as a Portfolio Analyst at Ryland Mortgage Co. from 1992-1993. Mr. Abraham is a Chartered Financial Analyst and received his M.B.A. in Finance from Loyola College |
| | | |
David P. Gilmore Birth Date: November 11, 1970 VICE PRESIDENT Began serving: May 2004 | | Principal Occupations: David P. Gilmore is Vice President of the Trust. Mr. Gilmore joined Federated in August 1997 as an Investment Analyst. He was promoted to Senior Investment Analyst in July 1999 and became a Vice President of the Fund’s Adviser in July 2001. Mr. Gilmore was a Senior Associate with Coopers & Lybrand from January 1992 to May 1995. Mr. Gilmore is a Chartered Financial Analyst and attended the University of Virginia, where he earned his M.B.A., from September 1995 to May 1997. Mr. Gilmore has a B.S. from Liberty University. |
| | | |
Ihab Salib Birth Date: December 14, 1964 VICE PRESIDENT Began serving: May 2006 | | Principal Occupations: Ihab Salib is Vice President of the Trust. Mr. Salib joined Federated in April 1999 as a Senior Fixed-Income Trader/Assistant Vice President of the Fund’s Adviser. In July 2000, he was named a Vice President of the Fund’s Adviser and in January 2007 he was named a Senior Vice President of the Fund’s Adviser. He has served as a Portfolio Manager since January 2002. From January 1994 through March 1999, Mr. Salib was employed as a Senior Global Fixed-Income Analyst with UBS Brinson, Inc. Mr. Salib received his B.A. with a major in Economics from Stony Brook University. |
| | | |
Evaluation and Approval of Advisory Contract
MARKET PLUS CORE FUND (THE “FUND”)
The Fund’s Board reviewed the Fund’s investment advisory contract at meetings held in May 2007. The Board’s decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements. The Fund is distinctive in that it is designed for the efficient management of a particular asset class and is made available for investment only to other Federated funds and a limited number of other accredited investors. In addition, the Adviser does not charge an investment advisory fee for its services although it or its affiliates may receive compensation for managing assets invested in the Fund.
The Federated funds had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent written evaluation that covered topics discussed below. The Board considered that evaluation, along with other information, in deciding to approve the advisory contract.
As previously noted, the Adviser does not charge an investment advisory fee for its services; however, the Board did consider compensation and benefits received by the Adviser, including fees received for services provided to the Fund by other entities in the Federated organization and research services received by the Adviser from brokers that execute Federated fund trades. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees which have indicated that the following factors may be relevant to an Adviser’s fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the Fund; the Adviser’s cost of providing the services; the extent to which the Adviser may realize “economies of scale” as the Fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser’s relationship with the Fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser’s services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services, and costs to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates from supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund’s advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by the advice of independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer’s evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional reports in connection with the particular meeting at which the Board’s formal review of the advisory contract occurred. Between regularly scheduled meetings, the Board has received information on particular matters as the need arose. Thus, the Board’s consideration of the advisory contract included review of the Senior Officer’s evaluation, accompanying data and additional reports covering such matters as: the Adviser’s investment philosophy, personnel and processes; investment and operating strategies; the Fund’s short- and long-term performance, and comments on the reasons for performance; the Fund’s investment objectives; the Fund’s overall expense structure; the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the Fund’s relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated’s responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board’s evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
Because the Adviser does not charge the Fund an investment advisory fee the Fund’s Board does not consider fee comparisons to other mutual funds or other institutional or separate accounts to be relevant.
The Board also received financial information about Federated, including reports on the compensation and benefits Federated derived from its relationships with the Federated funds. Because the Adviser does not charge an investment advisory fee for its services, these reports generally cover fees received by Federated’s subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds’ administrator). The reports also discussed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waive non-advisory fees and/or reimburse other expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate.
The Board and the Senior Officer also reviewed a report compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated’s profit margins did not appear to be excessive and the Board agreed.
The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. In particular, due to the unusual nature of the Fund as primarily an internal product with no advisory fee, the Board does not consider the assessment of whether economies of scale would be realized if the Fund were to grow to some sufficient size to be relevant. With respect to the factors that were relevant, the Board’s decision to approve the contract reflects its determination that Federated’s performance and actions provided a satisfactory basis to support the decision to continue the existing arrangement.
Voting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund’s portfolio, as well as a report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30, are available, without charge and upon request, by calling 1-800-341-7400. These materials are also available at the SEC’s website at www.sec.gov.
Quarterly Portfolio Schedule
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.)
Mutual funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by
the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government
agency. Investment in mutual funds involves investment risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund’s
Confidential Private Offering Memorandum, which contains facts concerning its objective and policies, management fees,
expenses, and other information.
Cusip 31409R300
34315 (2/08)
(a) As of the end of the period covered by this report, the registrant has adopted a code of ethics (the "Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers") that applies to the registrant's Principal Executive Officer and Principal Financial Officer; the registrant's Principal Financial Officer also serves as the Principal Accounting Officer.
(f)(3) The registrant hereby undertakes to provide any person, without charge, upon request, a copy of the code of ethics. To request a copy of the code of ethics, contact the registrant at 1-800-341-7400, and ask for a copy of the Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers.
The registrant’s Board has determined that each of the following members of the Board’s Audit Committee is an “audit committee financial expert,” and is “independent,” for purposes of this Item: Thomas G. Bigley, Nicholas P. Constantakis and Charles F. Mansfield, Jr.
(b) Audit-Related Fees billed to the registrant for the two most recent fiscal years:
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.
(c) Tax Fees billed to the registrant for the two most recent fiscal years:
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $1,931 and $0 respectively. Fiscal year end 2007 - Tax preparation fees for fiscal year end 2006.
(d) All Other Fees billed to the registrant for the two most recent fiscal years:
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $9,156 and $0 respectively. Fiscal year end 2007 - Service fee for analysis of potential Passive Foreign Investment Company holdings and discussion on accounting related to swaps.
(e)(1) Audit Committee Policies regarding Pre-approval of Services.
The annual Audit services engagement terms and fees will be subject to the specific pre-approval of the Audit Committee. The Audit Committee must approve any changes in terms, conditions and fees resulting from changes in audit scope, registered investment company (RIC) structure or other matters.
In addition to the annual Audit services engagement specifically approved by the Audit Committee, the Audit Committee may grant general pre-approval for other Audit Services, which are those services that only the independent auditor reasonably can provide. The Audit Committee has pre-approved certain Audit services, all other Audit services must be specifically pre-approved by the Audit Committee.
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the independent auditor. The Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor, and has pre-approved certain Audit-related services, all other Audit-related services must be specifically pre-approved by the Audit Committee.
The Audit Committee believes that the independent auditor can provide Tax services to the Company such as tax compliance, tax planning and tax advice without impairing the auditor’s independence. However, the Audit Committee will not permit the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported in the Internal Revenue Code and related regulations. The Audit Committee has pre-approved certain Tax services, all Tax services involving large and complex transactions must be specifically pre-approved by the Audit Committee.
With respect to the provision of services other than audit, review or attest services the pre-approval requirement is waived if:
The Audit Committee may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, and would not impair the independence of the auditor.
The SEC’s rules and relevant guidance should be consulted to determine the precise definitions of prohibited non-audit services and the applicability of exceptions to certain of the prohibitions.
Pre-approval fee levels for all services to be provided by the independent auditor will be established annually by the Audit Committee. Any proposed services exceeding these levels will require specific pre-approval by the Audit Committee.
Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the independent auditor and the Principal Accounting Officer and/or Internal Auditor, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.
(e)(2) Percentage of services identified in items 4(b) through 4(d) that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X:
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
(h) The registrant’s Audit Committee has considered that the provision of non-audit services that were rendered to the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
registrant’s disclosure controls and procedures (as defined in rule 30a-3(c) under the Act) are effective in design and operation and are sufficient to form the basis of the certifications required by Rule 30a-(2) under the Act, based on their evaluation of these disclosure controls and procedures within 90 days of the filing date of this report on Form N-CSR.
(b) There were no changes in the registrant’s internal control over financial reporting (as defined in rule 30a-3(d) under the Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
