Federated Core Trust II, L.P.
John W. McGonigle, Esquire
Emerging Markets fixed Income
Core fund
A Portfolio of Federated Core Trust II, L.P.
SEMI-ANNUAL SHAREHOLDER REPORT
May 31, 2009
FINANCIAL HIGHLIGHTS
SHAREHOLDER EXPENSE EXAMPLE
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
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 Each Period)
| | | Six Months Ended (unaudited) | | | | |
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Net Asset Value, Beginning of Period | | $15.99 | | | $22.07 | | | $20.69 | | | $18.08 | | | $15.91 | | | $14.39 | |
Income From Investment Operations: | | | | | | | | | | | | | | | | | | |
| | 0.88 | 1 | | 1.69 | 1 | | 1.47 | 1 | | 1.34 | 1 | | 1.29 | 1 | | 0.91 | |
Net realized and unrealized gain (loss) on investments, written options, futures contracts, swap contracts and foreign currency transactions | | | | | | | | | | | | | | | | | | |
TOTAL FROM INVESTMENT OPERATIONS | | | | | | | | | | | | | | | | | | |
Net Asset Value, End of Period | | | | | | | | | | | | | | | | | | |
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Ratios to Average Net Assets: | | | | | | | | | | | | | | | | | | |
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Expense waiver/reimbursement4 | | | | | | | | | | | | | | | | | | |
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Net assets, end of period (000 omitted) | | | | | | | | | | | | | | | | | | |
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1Per share numbers have been calculated using the average shares method.
2Based 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.
3Computed on an annualized basis.
4This 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 (unaudited)
As a shareholder of the Fund, you incur ongoing costs, to the extent applicable, including management fees, 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 December 1, 2008 to May 31, 2009.
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 12/1/2008 | | Ending Account Value 5/31/2009 | | Expenses Paid During Period1 |
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Hypothetical (assuming a 5% return before expenses) | | | | | | |
| 1 | Expenses are equal to the Fund’s annualized net expense ratio of 0.01%, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). |
Portfolio of Investments Summary Table (unaudited)
At May 31, 2009, the Fund’s issuer country exposure composition was as follows:
| Exposure as a Percentage of Total Net Assets1 |
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Other Assets and Liabilities – Net3 | |
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1This column depicts the Fund’s exposure to various countries through its investment in foreign fixed-income securities. With respect to foreign fixed-income securities, country allocations are based primarily on the country in which the issuing company (the “Issuer”) has registered the security. However, the Fund’s adviser may allocate the Issuer to a country based on other factors such as the location of the Issuer’s office, the jurisdiction of the Issuer’s incorporation, the location of the principal trading market for the Issuer’s securities or the country from which a majority of the Issuer’s revenue is derived.
2Cash Equivalents include any investments in money market mutual funds and/or overnight repurchase agreements. This does not include cash held in the Fund that is denominated in foreign currencies. See the Statement of Assets and Liabilities for information regarding the Fund’s foreign cash position.
3Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities.
Portfolio of Investments
May 31, 2009 (unaudited)
| Shares, Principal Amount or Foreign Currency Par Amount | | | | | |
| | | | COMMON STOCK—0.0% | | | |
| | | | Telecommunications & Cellular —0.0% | | | |
| | 8,000 | 1 | Satelites Mexicanos SA, de CV, Class INS (IDENTIFIED COST $4,960,000) | | | |
| | | | CORPORATE BONDS—17.4% | | | |
| | | | Banking—4.9% | | | |
| $ | 4,100,000 | 2,3 | Banco Credito del Peru, Sub. Note, Series 144A, 6.95%, 11/7/2021 | | | |
| | 5,000,000 | 2,3 | Banco Nacional de Desenvolvimento Economico e Social, Sr. Unsecd.,144A, 6.369%, 6/16/2018 | | | 5,087,500 |
| | 2,500,000 | 2,3 | ICICI Bank Ltd., Note, Series 144A, 6.625%, 10/3/2012 | | | 2,467,440 |
| | 1,200,000 | 2,3 | Kazkommerts International BV, Company Guarantee, Series 144A, 8.00%, 11/3/2015 | | | 678,000 |
| | 2,500,000 | 2,3 | Turanalem Finance BV, Bank Guarantee, 144A, 8.50%, 2/10/2015 | | | 600,000 |
| | 3,500,000 | 2,3 | VTB Capital SA, Bond, Series 144A, 6.25%, 6/30/2035 | | | |
| | | | | | | |
| | | | Broadcast Radio & TV—1.2% | | | |
| | 3,800,000 | | Grupo Televisa S.A., Sr. Note, 8.50%, 3/11/2032 | | | |
| | | | Cable & Wireless Television—0.2% | | | |
| | 4,287,792 | | Satelites Mexicanos SA, Sr. Note, 10.125%, 11/30/2013 | | | |
| | | | Container & Glass Products—0.8% | | | |
| | 5,400,000 | | Vitro SA, Note, 11.75%, 11/1/2013 | | | 1,815,750 |
| | 2,000,000 | | Vitro SA, Sr. Unsecd. Note, 9.125%, 2/1/2017 | | | |
| | | | | | | |
| | | | Metals & Mining—1.0% | | | |
| | 3,850,000 | | Vale Overseas Ltd., 6.875%, 11/21/2036 | | | |
| | | | Oil & Gas—8.8% | | | |
| | 10,850,000 | 2,3 | Gazprom, Note, Series 144A, 8.625%, 4/28/2034 | | | 10,755,063 |
| | 4,160,000 | 2,3 | Gazprom, Note, Series 144A, 9.625%, 3/1/2013 | | | 4,280,640 |
| | 5,300,000 | | Petrobras International Finance, Company Guarantee, 7.875%, 3/15/2019 | | | 5,810,125 |
| | 4,650,000 | 2,3 | Petroleos Mexicanos, Note, Series 144A, 8.00%, 5/3/2019 | | | 5,180,196 |
| | 1,115,991 | 2,3 | Tengizchevroil LLP, Series 144A, 6.124%, 11/15/2014 | | | 959,752 |
| | 2,000,000 | 2,3 | Transportadora de Gas de Sur S.A., Series 144A, 7.875%, 5/14/2017 | | | |
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| | | | Utilities—0.5% | | | |
| | 1,500,000 | 2,3 | ISA Capital DO Brasil SA, Series 144A, 8.80%, 1/30/2017 | | | |
| | | | TOTAL CORPORATE BONDS (IDENTIFIED COST $70,515,618) | | | |
| | | | FLOATING RATE LOAN—0.4% | | | |
| | 1,400,000 | 4 | Carolbrl, 4.406%, 9/30/2010 (IDENTIFIED COST $1,389,629) | | | |
| | | | GOVERNMENTS/AGENCIES—74.2% | | | |
| | | | Sovereign—74.2% | | | |
| | 1,060,000 | | Argentina, Government of, 12.00%, 6/19/2031 | | | 148,400 |
| | 7,150,000 | | Argentina, Government of, Bond, 1.683%, 8/3/2012 | | | 2,309,450 |
| | 2,000,000 | | Argentina, Government of, Note, 2.2798%, 12/15/2035 | | | 82,000 |
| | 12,314,541 | | Argentina, Government of, Note, 8.28%, 12/31/2033 | | | 5,048,962 |
| | 5,000,000 | | Argentina, Government of, Unsub., 2.50%, 12/31/2038 | | | 1,150,000 |
| | 10,850,000 | | Brazil, Government of, 5.875%, 1/15/2019 | | | 10,961,213 |
| | 15,300,000 | | Brazil, Government of, 6.00%, 8/15/2010 | | | 14,545,785 |
| | 3,000,000 | | Brazil, Government of, Note, 8.00%, 1/15/2018 | | | 3,367,500 |
| | 2,700,000 | | Colombia, Government of, 7.375%, 9/18/2037 | | | 2,760,750 |
| | 6,800,000,000 | | Colombia, Government of, 9.85%, 6/28/2027 | | | 3,462,145 |
| | 3,100,000 | | Colombia, Government of, Note, 7.375%, 1/27/2017 | | | 3,425,500 |
| | 1,750,000 | 2,3 | Guatemala, Government of, Note, Series 144A, 9.25%, 8/1/2013 | | | 1,881,250 |
| | 10,000,000 | | Indonesia, Government of, 7.75%, 1/17/2038 | | | 9,413,000 |
| | 3,500,000 | 2,3 | Indonesia, Government of, 144A, 8.50%, 10/12/2035 | | | 3,605,000 |
| | 5,300,000 | 2,3 | Indonesia, Government of, Sr. Unsecd. Note, 144A, 11.625%, 3/4/2019 | | | 6,691,250 |
| | 5,090,000 | | Panama, Government of, 6.70%, 1/26/2036 | | | 5,013,650 |
| | 6,595,000 | | Peru, Government of, 6.55%, 3/14/2037 | | | 6,512,563 |
| | 3,480,000 | | Republica Oriental del Uruguay, 7.625%, 3/21/2036 | | | 3,453,900 |
| | 54,739,200 | 2,3 | Russia, Government of, Unsub., 144A, 7.50%, 3/31/2030 | | | 54,878,785 |
| | 10,000,000 | | Turkey, Government of, 14.00%, 9/26/2012 | | | 6,616,688 |
| | 8,570,000 | | Turkey, Government of, 6.875%, 3/17/2036 | | | 7,798,700 |
| | 6,650,000 | | Turkey, Government of, 7.00%, 9/26/2016 | | | 6,783,000 |
| | 11,350,000 | | Turkey, Government of, Note, 7.375%, 2/5/2025 | | | 11,435,125 |
| | 600,000 | | Ukraine, Government of, Bond, 7.65%, 6/11/2013 | | | 470,730 |
| | 15,000,000 | | United Mexican States, 6.75%, 9/27/2034 | | | 15,375,000 |
| | 10,850,000 | | United Mexican States, Sr. Unsecd. Note, 5.95%, 3/19/2019 | | | 11,088,700 |
| | 3,600,000 | | Uruguay, Government of, Note, 8.00%, 11/18/2022 | | | 3,798,000 |
| | 20,400,000 | | Venezuela, Government of, 10.75%, 9/19/2013 | | | 16,167,000 |
| | 34,450,000 | | Venezuela, Government of, 9.375%, 1/13/2034 | | | 19,981,000 |
| | 700,000 | | Venezuela, Government of, Note, 7.65%, 4/21/2025 | | | |
| | | | TOTAL GOVERNMENTS/AGENCIES (IDENTIFIED COST $257,414,921) | | | |
| | | | MUTUAL FUND—6.4% | | | |
| | 20,613,342 | 5,6 | Prime Value Obligations Fund, Institutional Shares, 0.87% (AT NET ASSET VALUE) | | | |
| | | | TOTAL INVESTMENTS —- 98.4% (IDENTIFIED COST $354,893,510)7 | | | |
| | | | OTHER ASSETS AND LIABILITIES - NET—1.6%8 | | | |
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1Non-income producing security.
2Denotes 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 May 31, 2009, these restricted securities amounted to $106,767,267, which represented 33.2% of total net assets.
3Denotes 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 (the “Directors”). At May 31, 2009, these liquid restricted securities amounted to $106,767,267, which represented 33.2% of total net assets.
4The rate shown represents a weighted average coupon rate on settled positions at period end. Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest which are determined periodically by reference to a base lending rate plus premium.
5Affiliated company.
67-Day net yield.
7The cost of investments for federal tax purposes amounts to $355,377,938.
8Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities.
Note: The categories of investments are shown as a percentage of total net assets at May 31, 2009.
Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below:
Level 1 – quoted prices in active markets for identical securities
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used, as of May 31, 2009, in valuing the Fund’s assets carried at fair value:
| | Investments in Securities |
Level 1 – Quoted Prices and Investments in Mutual Funds | | |
Level 2 – Other Significant Observable Inputs | | |
Level 3 – Significant Unobservable Inputs | | |
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The following acronym is used throughout this portfolio:
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
May 31, 2009 (unaudited)
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Total investments in securities, at value including $20,613,342 of investments in an affiliated issuer (Note 5), (identified cost $354,893,510) | | | | | | $ | 316,714,045 | |
| | | | | | | 10,000 | |
| | | | | | | 6,242,205 | |
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Payable for investments purchased | | $ | 1,135,278 | | | | | |
Payable for custodian fees | | | 62,491 | | | | | |
Payable for Directors’/Trustees’ fees | | | 258 | | | | | |
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Net assets for 15,895,484 shares outstanding | | | | | | | | |
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| | | | | | $ | 211,219,606 | |
Net unrealized depreciation of investments and translation of assets and liabilities in foreign currency | | | | | | | (38,166,827 | ) |
Accumulated net realized gain on investments, futures contracts, swap contracts and foreign currency transactions | | | | | | | 11,969,265 | |
Undistributed net investment income | | | | | | | | |
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Net Asset Value, Offering Price and Redemption Proceeds Per Share: | | | | | | | | |
$321,736,121 ¸ 15,895,484 shares outstanding | | | | | | | | |
See Notes which are an integral part of the Financial Statements
Statement of Operations
Six Months Ended May 31, 2009 (unaudited)
| | | | | | | | | | | | |
Interest (net of foreign taxes withheld of $25,272) | | | | | | | | | | $ | 10,031,688 | |
Dividends received from an affiliated issuer (Note 5) | | | | | | | | | | | | |
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Administrative personnel and services fee (Note 5) | | | | | $ | | 79,456 | | | | | |
| | | | | | | 84,982 | | | | | |
Transfer and dividend disbursing agent fees and expenses | | | | | | | 8,035 | | | | | |
Directors’/Trustees’ fees | | | | | | | 5,075 | | | | | |
| | | | | | | 13,343 | | | | | |
| | | | | | | 6,616 | | | | | |
Portfolio accounting fees | | | | | | | 23,370 | | | | | |
| | | | | | | 2,370 | | | | | |
| | | | | | | 12,516 | | | | | |
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Waiver and Reimbursement (Note 5): | | | | | | | | | | | | |
Waiver of administrative personnel and services fee | $ | | (79,456 | ) | | | | | | | | |
Reimbursement of other operating expenses | | | | | | | | | | | | |
TOTAL WAIVER AND REIMBURSEMENT | | | | | | | | | | | | |
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Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions: | | | | | | | | | | | | |
Net realized loss on investments and foreign currency transactions | | | | | | | | | | | (13,219,344 | ) |
Net change in unrealized depreciation of investments and translation of assets and liabilities in foreign currency | | | | | | | | | | | | |
Net realized and unrealized gain on investments and foreign currency transactions | | | | | | | | | | | | |
Change in net assets resulting from operations | | | | | | | | | | | | |
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
| | | | Six Months Ended (unaudited) 5/31/2009 | | | | | |
Increase (Decrease) in Net Assets | | | | | | | | |
| | | | | | | | |
| | $ | 10,085,270 | | | $ | 28,753,433 | |
Net realized loss on investments, futures contracts, swap contracts and foreign currency transactions | | | (13,219,344 | ) | | | (22,386,123 | ) |
Net change in unrealized appreciation/depreciation of investments, swap contracts and translation of assets and liabilities in foreign currency | | | | | | | | |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | | | | | | | | |
| | | | | | | | |
| | | 111,487,796 | | | | 53,104,506 | |
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CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | | | | | | | | |
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End of period (including undistributed net investment income of $136,714,077 and $126,628,807, respectively) | | | | | | | | |
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
May 31, 2009 (unaudited)
1. ORGANIZATION
Emerging Markets Fixed Income Core Fund (the “Fund”) is a non-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. The Fund’s primary investment objective is to achieve total return on its assets. Its secondary investment objective is to achieve a high level of income. The Fund pursues these objectives by investing primarily in emerging market fixed-income securities.
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 U.S. generally accepted accounting principles (GAAP).
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 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). |
| · | 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 on their principal exchange or market. |
| · | 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. |
| · | Shares of other mutual funds are valued based upon their reported NAVs. |
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 and mortgage-backed 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
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. All net income 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
All premiums and discounts on fixed-income securities are amortized/accreted for financial statement purposes.
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, deductions and credits (including foreign tax credits for creditable foreign taxes imposed on the Fund). The Fund complies with the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. As of and during the six months ended May 31, 2009, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of May 31, 2009, tax years 2005 through 2008 remain subject to examination by the Fund’s major tax jurisdictions, which include the United States of America and the Commonwealth of Pennsylvania.
The Fund may be subject to taxes imposed by governments of countries in which it invests. Such taxes are generally based on either income or gains earned or repatriated. The Fund accrues and applies such taxes to net investment income, net realized gains and net unrealized gains as income and/or gains are earned.
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, currency and other swap agreements. 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. The Fund uses credit default swaps to manage exposure to a given issuer or sector by either selling protection to increase exposure, or buying protection to reduce exposure. The “buyer” in a credit default swap is obligated to pay the “seller” a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or the “par value”, of the reference obligation in exchange for the reference obligation. In connection with these agreements, securities may be identified as collateral in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default or bankruptcy/insolvency. Recovery values are assumed by market makers considering either industry standard recovery rates or entity specific factors and considerations until a credit event occurs. If a credit event has occurred, the recovery value is typically determined by a facilitated auction whereby a minimum number of allowable broker bids, together with a specified valuation method, are used to calculate the settlement value. The maximum amount of the payment that may occur, as a result of a credit event payable by the protection seller, is equal to the notional amount of the underlying index or security.
The Fund’s maximum risk of loss from counterparty credit risk, either as the protection buyer or as the protection seller, is the fair value of the contract. This risk is mitigated by having a master netting arrangement between the Fund and the counterparty and by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty.
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 Swaps, at value on the Statement of Assets and Liabilities, and periodic payments are reported as Net realized gain or loss on swap contracts on the Statement of Operations.
At May 31, 2009, the Fund had no outstanding swap contracts.
Futures Contracts
The Fund purchases and sells financial futures contracts to manage cash flows, enhance yield and to potentially reduce transaction costs. Upon entering into a bond interest rate 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. There is minimal counterparty risk to the Fund since futures are exchange traded and the exchange’s clearinghouse, as counterparty to all exchange traded futures, guarantees the futures against default.
At May 31, 2009, the Fund had no outstanding futures contracts.
Foreign Exchange Contracts
The Fund may enter into foreign exchange contracts for the delayed delivery of securities or foreign currency exchange transactions. The Fund may enter into foreign exchange contracts to protect assets against adverse changes in foreign currency exchange rates or exchange control regulations. Purchased contracts are used to acquire exposure to foreign currencies, whereas, contracts to sell are used to hedge the Fund’s securities against currency fluctuations. Risks may arise upon entering into these transactions from the potential inability of counterparties to meet the terms of their commitments and from unanticipated movements in security prices or foreign exchange rates. The foreign exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the settlement date.
At May 31, 2009, the Fund had no outstanding foreign exchange contracts.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies (FCs) are translated into U.S. dollars based on the rates of exchange of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of portfolio securities, sales and maturities of short-term securities, sales of FCs, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund’s books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate.
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.
Other
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.
3. CONTRIBUTIONS/WITHDRAWALS
Transactions in shares were as follows:
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Proceeds from contributions | | | | | |
Fair value of withdrawals | | | | | |
TOTAL CHANGE RESULTING FROM CONTRIBUTIONS/WITHDRAWALS | | | | | |
4. FEDERAL TAX INFORMATION
At May 31, 2009, the cost of investments for federal tax purposes was $355,377,938. The net unrealized depreciation of investments for federal tax purposes excluding any unrealized appreciation resulting from changes in foreign currency exchange rates was $38,663,893. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $5,390,164 and net unrealized depreciation from investments for those securities having an excess of cost over value of $44,054,057.
5. 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. 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 six months ended May 31, 2009, the Adviser voluntarily reimbursed $152,243 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 the Trust as specified below:
| | Average Aggregate Daily Net Assets of the Trust |
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| | 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 six months ended May 31, 2009, FASI voluntarily waived its entire fee of $79,456.
General
Certain 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 company during the six months ended May 31, 2009 were as follows:
| | Balance of Shares Held 11/30/2008 | | | | | | Balance of Shares Held5/31/2009 | | | | |
Prime Value Obligations Fund, Institutional Shares | | | | | | | | | | | | |
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations (and in-kind contributions), for the six months ended May 31, 2009, were as follows:
7. CONCENTRATION OF RISK
Compared to diversified mutual funds, the Fund may invest a higher percentage of its assets among fewer issuers of portfolio securities. This increases the Fund’s risk by magnifying the impact (positively or negatively) that any one issuer has on the Fund’s share price and performance. The Fund invests in securities of non-U.S. issuers. Political or economic developments may have an effect on the liquidity and volatility of portfolio securities and currency holdings.
8. 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 May 31, 2009, there were no outstanding loans. During the six months ended May 31, 2009, the program was not utilized.
9. LEGAL PROCEEDINGS
Since October 2003, Federated Investors, Inc. and related entities (collectively, “Federated”), and various Federated funds (“Federated Funds”) have been 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 Federated 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 entities have also been named as defendants in several additional lawsuits that 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 Federated Funds retained the law firm of Dickstein Shapiro LLP to represent the Federated Funds in these lawsuits. Federated and the Federated Funds, and their respective counsel have been defending this litigation, and none of the Federated Funds remains a defendant in any of the lawsuits (though some could potentially receive any recoveries as nominal defendants). 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 Federated 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 Federated Fund redemptions, reduced sales of Federated Fund shares, or other adverse consequences for the Federated Funds.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2009, FASB released Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4) which is effective for interim and annual reporting periods ending after June 15, 2009. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements. Management has concluded that the adoption of FSP FAS 157-4 is not expected to have a material impact on the Fund’s net assets or results of operations.
Evaluation and Approval of Advisory Contract –May 2009
EMERGING MARKETS FIXED INCOME CORE FUND (THE “FUND”)
The Fund’s Board reviewed the Fund’s investment advisory contract at meetings held in May 2009. 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’ Board 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 the cost 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 for 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 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. Moreover, the Board receives regular reports regarding the institution or elimination of these voluntary waivers.
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
Each 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.
IMPORTANT NOTICE ABOUT FUND DOCUMENT DELIVERY
In an effort to reduce costs and avoid duplicate mailings, the Fund(s) intend to deliver a single copy of certain documents to each household in which more than one shareholder of the Fund(s) resides (so-called “householding”), as permitted by applicable rules. The Fund’s “householding” program covers its/their Prospectus and Statement of Additional Information, and supplements to each, as well as Semi-Annual and Annual Shareholder Reports and any Proxies or information statements. Shareholders must give their written consent to participate in the “householding” program. The Fund is also permitted to treat a shareholder as having given consent (“implied consent”) if (i) shareholders with the same last name, or believed to be members of the same family, reside at the same street address or receive mail at the same post office box, (ii) the Fund gives notice of its intent to “household” at least sixty (60) days before it begins “householding” and (iii) none of the shareholders in the household have notified the Fund(s) or their agent of the desire to “opt out” of “householding.” Shareholders who have granted written consent, or have been deemed to have granted implied consent, can revoke that consent and opt out of “householding” at any time: shareholders who purchased shares through an intermediary should contact their representative; other shareholders may call the Fund at 1-800-341-7400.
Cusip 31409R102
31868 (7/09)
Item 10. Submission of Matters to a Vote of Security Holders
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.
