UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22148
PowerShares Actively Managed Exchange-Traded Fund Trust
(Exact name of registrant as specified in charter)
3500 Lacey Road
Downers Grove, IL 60515
(Address of principal executive offices) (Zip code)
Daniel E. Draper
President
3500 Lacey Road
Downers Grove, IL 60515
(Name and address of agent for service)
Registrant’s telephone number, including area code: 800-983-0903
Date of fiscal year end: October 31
Date of reporting period: April 30, 2016
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
The Registrant’s semi-annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows:
| April 30, 2016 |
2016 Semi-Annual Report to Shareholders
| PSR | PowerShares Active U.S. Real Estate Fund | |
| LALT | PowerShares Multi-Strategy Alternative Portfolio | |
| PHDG | PowerShares S&P 500® Downside Hedged Portfolio | |
| Actively Managed Funds | ||||
| Schedules of Investments | ||||
| 3 | ||||
| 5 | ||||
| 7 | ||||
| Statements of Assets and Liabilities | 13 | |||
| Statements of Operations | 14 | |||
| Statements of Changes in Net Assets | 15 | |||
| Financial Highlights | 16 | |||
| Notes to Financial Statements | 19 | |||
| Fees and Expenses | 30 | |||
| Board Considerations Regarding Continuation of Investment Advisory Agreement and Sub-Advisory Agreement | 31 | |||
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2 |
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PowerShares Active U.S. Real Estate Fund (PSR)
April 30, 2016
(Unaudited)
Schedule of Investments(a)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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3 |
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PowerShares Active U.S. Real Estate Fund (PSR) (continued)
April 30, 2016
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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4 |
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PowerShares Multi-Strategy Alternative Portfolio (LALT)
April 30, 2016
(Unaudited)
Schedule of Investments(a)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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5 |
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PowerShares Multi-Strategy Alternative Portfolio (LALT) (continued)
April 30, 2016
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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6 |
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PowerShares S&P 500® Downside Hedged Portfolio (PHDG)
April 30, 2016
(Unaudited)
Schedule of Investments(a)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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7 |
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PowerShares S&P 500® Downside Hedged Portfolio (PHDG) (continued)
April 30, 2016
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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8 |
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PowerShares S&P 500® Downside Hedged Portfolio (PHDG) (continued)
April 30, 2016
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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9 |
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PowerShares S&P 500® Downside Hedged Portfolio (PHDG) (continued)
April 30, 2016
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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10 |
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PowerShares S&P 500® Downside Hedged Portfolio (PHDG) (continued)
April 30, 2016
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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11 |
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PowerShares S&P 500® Downside Hedged Portfolio (PHDG) (continued)
April 30, 2016
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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12 |
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Statements of Assets and Liabilities
April 30, 2016
(Unaudited)
| PowerShares Active U.S. Real Estate Fund (PSR) |
PowerShares Multi-Strategy Alternative Portfolio (LALT) |
PowerShares S&P 500® Downside Hedged Portfolio (PHDG) |
||||||||||
| Assets: | ||||||||||||
| Unaffiliated investments, at value |
$ | 25,853,834 | $ | 4,278,976 | $ | 258,289,292 | ||||||
| Affiliated investments, at value |
5,958 | 6,645,700 | 35,228,042 | |||||||||
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| Total investments, at value |
25,859,792 | 10,924,676 | 293,517,334 | |||||||||
| Cash |
— | 5,391 | — | |||||||||
| Cash collateral for futures contracts |
— | 532,996 | 14,708,380 | |||||||||
| Receivables: |
||||||||||||
| Dividends |
9,360 | 7,037 | 295,243 | |||||||||
| Shares sold |
— | 5,105 | — | |||||||||
| Unrealized appreciation on forward foreign currency contracts outstanding |
— | 27,690 | — | |||||||||
| Unrealized appreciation on futures contracts |
— | — | 683,128 | |||||||||
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| Total Assets |
25,869,152 | 11,502,895 | 309,204,085 | |||||||||
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| Liabilities: | ||||||||||||
| Unrealized depreciation on forward foreign currency contracts outstanding |
— | 47,856 | — | |||||||||
| Unrealized depreciation on futures contracts |
— | 138,545 | — | |||||||||
| Accrued unitary management fees |
17,094 | 8,109 | 97,321 | |||||||||
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| Total Liabilities |
17,094 | 194,510 | 97,321 | |||||||||
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| Net Assets | $ | 25,852,058 | $ | 11,308,385 | $ | 309,106,764 | ||||||
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| Net Assets Consist of: | ||||||||||||
| Shares of beneficial interest |
$ | 25,056,047 | $ | 12,637,241 | $ | 387,608,797 | ||||||
| Undistributed net investment income |
110,745 | 7,715 | (73,148 | ) | ||||||||
| Undistributed net realized gain (loss) |
(392,284 | ) | (1,134,534 | ) | (100,114,856 | ) | ||||||
| Net unrealized appreciation (depreciation) |
1,077,550 | (202,037 | ) | 21,685,971 | ||||||||
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| Net Assets | $ | 25,852,058 | $ | 11,308,385 | $ | 309,106,764 | ||||||
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| Shares outstanding (unlimited amount authorized, $0.01 par value) |
350,000 | 500,000 | 12,450,000 | |||||||||
| Net asset value |
$ | 73.86 | $ | 22.62 | $ | 24.83 | ||||||
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| Market price |
$ | 73.85 | $ | 22.60 | $ | 24.81 | ||||||
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| Unaffiliated investments, at cost |
$ | 24,776,285 | $ | 4,322,302 | $ | 237,257,397 | ||||||
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| Affiliated investments, at cost |
$ | 5,958 | $ | 6,645,700 | $ | 35,257,094 | ||||||
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| Total investments, at cost |
$ | 24,782,243 | $ | 10,968,002 | $ | 272,514,491 | ||||||
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See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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13 |
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For the six months ended April 30, 2016
(Unaudited)
| PowerShares Active U.S. Real Estate Fund (PSR) |
PowerShares Multi-Strategy Alternative Portfolio (LALT) |
PowerShares S&P 500® Downside Hedged Portfolio (PHDG) |
||||||||||
| Investment Income: | ||||||||||||
| Unaffiliated dividend income |
$ | 692,431 | $ | 101,799 | $ | 3,219,196 | ||||||
| Affiliated dividend income |
1,013 | 5,063 | 86,135 | |||||||||
| Foreign withholding tax |
— | (513 | ) | — | ||||||||
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| Total Income |
693,444 | 106,349 | 3,305,331 | |||||||||
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| Expenses: | ||||||||||||
| Unitary management fees |
170,125 | 60,974 | 687,328 | |||||||||
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| Less: Waivers |
(69 | ) | (3,096 | ) | (50,168 | ) | ||||||
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| Net Expenses |
170,056 | 57,878 | 637,160 | |||||||||
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| Net Investment Income |
523,388 | 48,471 | 2,668,171 | |||||||||
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| Realized and Unrealized Gain (Loss): | ||||||||||||
| Net realized gain (loss) from: |
||||||||||||
| Investment securities |
(1,527,771 | ) | (402,576 | ) | (1,722,684 | ) | ||||||
| In-kind redemptions |
1,696,927 | — | 7,215,156 | |||||||||
| Futures contracts |
— | (402,655 | ) | (2,636,937 | ) | |||||||
| Foreign currencies |
— | (11,837 | ) | — | ||||||||
| Forward foreign currency contracts |
— | 17,787 | — | |||||||||
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| Net realized gain (loss) |
169,156 | (799,281 | ) | 2,855,535 | ||||||||
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| Change in net unrealized appreciation (depreciation) on: |
||||||||||||
| Investment securities |
(1,618,440 | ) | 330,953 | (3,067,125 | ) | |||||||
| Futures contracts |
— | 388,791 | 74,879 | |||||||||
| Forward foreign currency contracts |
— | (31,443 | ) | — | ||||||||
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| Net change in unrealized appreciation (depreciation) |
(1,618,440 | ) | 688,301 | (2,992,246 | ) | |||||||
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| Net realized and unrealized gain (loss) |
(1,449,284 | ) | (110,980 | ) | (136,711 | ) | ||||||
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| Net increase (decrease) in net assets resulting from operations |
$ | (925,896 | ) | $ | (62,509 | ) | $ | 2,531,460 | ||||
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See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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14 |
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Statements of Changes in Net Assets
For the six months ended April 30, 2016 and the year ended October 31, 2015
(Unaudited)
| PowerShares Active U.S. Real Estate Fund (PSR) |
PowerShares Multi-Strategy Alternative Portfolio (LALT) |
PowerShares S&P 500® Downside Hedged Portfolio (PHDG) |
||||||||||||||||||||||
| April 30, 2016 | October 31, 2015 | April 30, 2016 | October 31, 2015 | April 30, 2016 | October 31, 2015 | |||||||||||||||||||
| Operations: | ||||||||||||||||||||||||
| Net investment income (loss) |
$ | 523,388 | $ | 1,039,541 | $ | 48,471 | $ | (24,792 | ) | $ | 2,668,171 | $ | 7,283,018 | |||||||||||
| Net realized gain (loss) |
169,156 | 2,358,526 | (799,281 | ) | (583,036 | ) | 2,855,535 | (76,992,835 | ) | |||||||||||||||
| Net change in unrealized appreciation (depreciation) |
(1,618,440 | ) | (1,016,843 | ) | 688,301 | (1,037,931 | ) | (2,992,246 | ) | (1,303,621 | ) | |||||||||||||
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| Net increase (decrease) in net assets resulting from operations |
(925,896 | ) | 2,381,224 | (62,509 | ) | (1,645,759 | ) | 2,531,460 | (71,013,438 | ) | ||||||||||||||
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| Distributions to Shareholders from: | ||||||||||||||||||||||||
| Net investment income |
(766,660 | ) | (860,284 | ) | — | — | (3,668,791 | ) | (7,133,672 | ) | ||||||||||||||
| Net realized gains |
(621,532 | ) | — | — | — | — | (27,026,571 | ) | ||||||||||||||||
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| Total distributions to shareholders |
(1,388,192 | ) | (860,284 | ) | — | — | (3,668,791 | ) | (34,160,243 | ) | ||||||||||||||
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| Shareholder Transactions: | ||||||||||||||||||||||||
| Proceeds from shares sold |
— | 25,408,584 | — | 7,198,920 | 23,111,108 | 290,676,953 | ||||||||||||||||||
| Value of shares repurchased |
(26,902,972 | ) | (14,256,223 | ) | (4,441,407 | ) | (11,880,789 | ) | (129,847,785 | ) | (297,987,820 | ) | ||||||||||||
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| Net increase (decrease) in net assets resulting from shares transactions |
(26,902,972 | ) | 11,152,361 | (4,441,407 | ) | (4,681,869 | ) | (106,736,677 | ) | (7,310,867 | ) | |||||||||||||
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| Increase (Decrease) in Net Assets |
(29,217,060 | ) | 12,673,301 | (4,503,916 | ) | (6,327,628 | ) | (107,874,008 | ) | (112,484,548 | ) | |||||||||||||
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| Net Assets: | ||||||||||||||||||||||||
| Beginning of period |
55,069,118 | 42,395,817 | 15,812,301 | 22,139,929 | 416,980,772 | 529,465,320 | ||||||||||||||||||
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| End of period |
$ | 25,852,058 | $ | 55,069,118 | $ | 11,308,385 | $ | 15,812,301 | $ | 309,106,764 | $ | 416,980,772 | ||||||||||||
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| Undistributed net investment income (loss) at end of period |
$ | 110,745 | $ | 354,017 | $ | 7,715 | $ | (40,756 | ) | $ | (73,148 | ) | $ | 927,472 | ||||||||||
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| Changes in Shares Outstanding: | ||||||||||||||||||||||||
| Shares sold |
— | 350,000 | — | 300,000 | 950,000 | 10,350,000 | ||||||||||||||||||
| Shares repurchased |
(400,000 | ) | (200,000 | ) | (200,000 | ) | (500,000 | ) | (5,250,000 | ) | (11,550,000 | ) | ||||||||||||
| Shares outstanding, beginning of period |
750,000 | 600,000 | 700,000 | 900,000 | 16,750,000 | 17,950,000 | ||||||||||||||||||
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| Shares outstanding, end of period |
350,000 | 750,000 | 500,000 | 700,000 | 12,450,000 | 16,750,000 | ||||||||||||||||||
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See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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15 |
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PowerShares Active U.S. Real Estate Fund (PSR)
| Six Months Ended April 30, 2016 (Unaudited) |
Year Ended October 31, | |||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||
| Per Share Operating Performance: | ||||||||||||||||||||||||
| Net asset value at beginning of period |
$ | 73.43 | $ | 70.66 | $ | 60.33 | $ | 55.99 | $ | 50.32 | $ | 45.42 | ||||||||||||
| Net investment income(a) |
0.87 | 1.51 | 0.92 | 0.93 | 0.77 | 0.54 | ||||||||||||||||||
| Net realized and unrealized gain on investments |
1.62 | 2.51 | 10.33 | 4.20 | 5.82 | 5.15 | ||||||||||||||||||
| Total from investment operations |
2.49 | 4.02 | 11.25 | 5.13 | 6.59 | 5.69 | ||||||||||||||||||
| Distributions to shareholders from: |
||||||||||||||||||||||||
| Net investment income |
(1.23 | ) | (1.25 | ) | (0.92 | ) | (0.79 | ) | (0.84 | ) | (0.79 | ) | ||||||||||||
| Net realized gains |
(0.83 | ) | — | — | — | (0.08 | ) | — | ||||||||||||||||
| Total distributions |
(2.06 | ) | (1.25 | ) | (0.92 | ) | (0.79 | ) | (0.92 | ) | (0.79 | ) | ||||||||||||
| Net asset value at end of period |
$ | 73.86 | $ | 73.43 | $ | 70.66 | $ | 60.33 | $ | 55.99 | $ | 50.32 | ||||||||||||
| Market price at end of period(b) |
$ | 73.85 | $ | 73.49 | $ | 70.63 | $ | 60.35 | $ | 55.94 | $ | 50.36 | ||||||||||||
| Net Asset Value Total Return(c) | 3.46 | % | 5.72 | % | 18.95 | % | 9.23 | % | 13.22 | % | 12.77 | % | ||||||||||||
| Market Price Total Return(c) | 3.37 | % | 5.85 | % | 18.86 | % | 9.37 | % | 13.03 | % | 12.86 | % | ||||||||||||
| Ratios/Supplemental Data: | ||||||||||||||||||||||||
| Net assets at end of period (000’s omitted) |
$ | 25,852 | $ | 55,069 | $ | 42,396 | $ | 33,180 | $ | 22,394 | $ | 17,612 | ||||||||||||
| Ratio to average net assets of: |
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| Expenses, after Waivers |
0.80 | %(d) | 0.80 | % | 0.80 | % | 0.80 | % | 0.80 | % | 0.80 | % | ||||||||||||
| Expenses, prior to Waivers |
0.80 | %(d) | 0.80 | % | 0.80 | % | 0.80 | % | 0.80 | % | 0.80 | % | ||||||||||||
| Net investment income |
2.46 | %(d) | 2.09 | % | 1.46 | % | 1.56 | % | 1.42 | % | 1.10 | % | ||||||||||||
| Portfolio turnover rate(e) |
105 | % | 199 | % | 169 | % | 131 | % | 33 | % | 37 | % | ||||||||||||
| (a) | Based on average shares outstanding. |
| (b) | The mean between the last bid and ask price. |
| (c) | Net asset value total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and the redemption on the last day of the period. Net asset value total return includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Market price total return is calculated assuming an initial investment made at the market price at the beginning of the period, reinvestment of all dividends and distributions at market price during the period, and sale at the market price on the last day of the period. Total investment returns calculated for a period of less than one year are not annualized. |
| (d) | Annualized. |
| (e) | Portfolio turnover rate is not annualized for periods less than one year, if applicable, and does not include securities received or delivered from processing creations or redemptions. |
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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16 |
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Financial Highlights (continued)
PowerShares Multi-Strategy Alternative Portfolio (LALT)
| Six Months Ended April 30, 2016 (Unaudited) |
Year Ended October 31, 2015 |
For the Period May 27, 2014(a) Through October 31, 2014 |
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| Per Share Operating Performance: | ||||||||||||
| Net asset value at beginning of period |
$ | 22.59 | $ | 24.60 | $ | 25.00 | ||||||
| Net investment income (loss)(b) |
0.08 | (0.04 | ) | 0.01 | ||||||||
| Net realized and unrealized gain (loss) on investments |
(0.05 | ) | (1.97 | ) | (0.41 | ) | ||||||
| Total from investment operations |
0.03 | (2.01 | ) | (0.40 | ) | |||||||
| Net asset value at end of period |
$ | 22.62 | $ | 22.59 | $ | 24.60 | ||||||
| Market price at end of period(c) |
$ | 22.60 | $ | 22.60 | $ | 24.55 | ||||||
| Net Asset Value Total Return(d) | 0.13 | % | (8.17 | )% | (1.60 | )%(f) | ||||||
| Market Price Total Return(d) | 0.00 | %(e) | (7.94 | )% | (1.80 | )%(f) | ||||||
| Ratios/Supplemental Data: | ||||||||||||
| Net assets at end of period (000’s omitted) |
$ | 11,308 | $ | 15,812 | $ | 22,140 | ||||||
| Ratio to average net assets of: |
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| Expenses, after Waivers |
0.90 | %(g)(h) | 0.93 | %(g) | 0.90 | %(g)(h) | ||||||
| Expenses, prior to Waivers |
0.95 | %(g)(h) | 0.95 | %(g) | 0.95 | %(g)(h) | ||||||
| Net investment income (loss), after Waivers |
0.76 | %(h) | (0.15 | )% | 0.08 | %(h) | ||||||
| Portfolio turnover rate(i) |
86 | % | 154 | % | 63 | % | ||||||
| (a) | Commencement of investment operations. |
| (b) | Based on average shares outstanding. |
| (c) | The mean between the last bid and ask price. |
| (d) | Net asset value total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and the redemption on the last day of the period. Net asset value total return includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Market price total return is calculated assuming an initial investment made at the market price at the beginning of the period, reinvestment of all dividends and distributions at market price during the period, and sale at the market price on the last day of the period. Total investment returns calculated for a period of less than one year are not annualized. |
| (e) | Amount represents less than 0.005%. |
| (f) | The net asset value total return from Fund Inception (May 29, 2014, the first day of trading on the exchange) to October 31, 2014 was (1.64)%. The market price total return from Fund Inception to October 31, 2014 was (1.92)%. |
| (g) | In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the investment companies in which the Fund invests. Estimated investment companies’ expenses are not expenses that are incurred directly by the Fund. They are expenses that are incurred directly by the investment companies and are deducted from the value of the investment companies the Fund invests in. The effect of the estimated investment companies’ expenses that the Fund bears indirectly is included in the Fund’s total return. |
| (h) | Annualized. |
| (i) | Portfolio turnover rate is not annualized for periods less than one year, if applicable, and does not include securities received or delivered from processing creations or redemptions. |
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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Financial Highlights (continued)
PowerShares S&P 500® Downside Hedged Portfolio (PHDG)
| Six Months Ended April 30, 2016 (Unaudited) |
Year Ended October 31, | For the
Period December 4, 2012(a) Through October 31, 2013 |
||||||||||||||
| 2015 | 2014 | |||||||||||||||
| Per Share Operating Performance: | ||||||||||||||||
| Net asset value at beginning of period |
$ | 24.89 | $ | 29.50 | $ | 27.15 | $ | 25.00 | ||||||||
| Net investment income(b) |
0.19 | 0.33 | 0.33 | 0.33 | ||||||||||||
| Net realized and unrealized gain (loss) on investments |
0.00 | (c) | (3.39 | ) | 2.49 | 2.04 | ||||||||||
| Total from investment operations |
0.19 | (3.06 | ) | 2.82 | 2.37 | |||||||||||
| Distributions to shareholders from: |
||||||||||||||||
| Net investment income |
(0.25 | ) | (0.32 | ) | (0.47 | ) | (0.22 | ) | ||||||||
| Net realized gains |
— | (1.23 | ) | — | — | |||||||||||
| Total distributions |
(0.25 | ) | (1.55 | ) | (0.47 | ) | (0.22 | ) | ||||||||
| Net asset value at end of period |
$ | 24.83 | $ | 24.89 | $ | 29.50 | $ | 27.15 | ||||||||
| Market price at end of period(d) |
$ | 24.81 | $ | 24.92 | $ | 29.49 | $ | 27.23 | ||||||||
| Net Asset Value Total Return(e) | 0.79 | % | (10.83 | )% | 10.50 | % | 9.51 | %(f) | ||||||||
| Market Price Total Return(e) | 0.59 | % | (10.69 | )% | 10.14 | % | 9.83 | %(f) | ||||||||
| Ratios/Supplemental Data: | ||||||||||||||||
| Net assets at end of period (000’s omitted) |
$ | 309,107 | $ | 416,981 | $ | 529,465 | $ | 89,582 | ||||||||
| Ratio to average net assets of: |
||||||||||||||||
| Expenses, after Waivers |
0.36 | %(g)(h) | 0.35 | %(g) | 0.36 | %(g) | 0.38 | %(h) | ||||||||
| Expenses, prior to Waivers |
0.39 | %(g)(h) | 0.39 | %(g) | 0.39 | %(g) | 0.39 | %(h) | ||||||||
| Net investment income, after Waivers |
1.51 | %(h) | 1.23 | % | 1.16 | % | 1.37 | %(h) | ||||||||
| Portfolio turnover rate(i) |
201 | % | 478 | % | 58 | % | 99 | % | ||||||||
| (a) | Commencement of investment operations. |
| (b) | Based on average shares outstanding. |
| (c) | Amount represents less than $0.005. |
| (d) | The mean between the last bid and ask price. |
| (e) | Net asset value total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, and the redemption on the last day of the period. Net asset value total return includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Market price total return is calculated assuming an initial investment made at the market price at the beginning of the period, reinvestment of all dividends and distributions at market price during the period, and sale at the market price on the last day of the period. Total investment returns calculated for a period of less than one year are not annualized. |
| (f) | The net asset value total return from Fund Inception (December 6, 2012, the first day of trading on the exchange) to October 31, 2013 was 8.99%. The market price total return from Fund Inception to October 31, 2013 was 9.26%. |
| (g) | In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the investment companies in which the Fund invests. Estimated investment companies’ expenses are not expenses that are incurred directly by the Fund. They are expenses that are incurred directly by the investment companies and are deducted from the value of the investment companies the Fund invests in. The effect of the estimated investment companies’ expenses that the Fund bears indirectly is included in the Fund’s total return. |
| (h) | Annualized. |
| (i) | Portfolio turnover rate is not annualized for periods less than one year, if applicable, and does not include securities received or delivered from processing creations or redemptions. |
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
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PowerShares Actively Managed Exchange-Traded Fund Trust
April 30, 2016
(Unaudited)
Note 1. Organization
PowerShares Actively Managed Exchange-Traded Fund Trust (the “Trust”) was organized as a Delaware statutory trust on November 6, 2007 and is authorized to have multiple series of portfolios. The Trust is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). As of April 30, 2016, the Trust offered three portfolios:
| Full Name |
Short Name | |
| PowerShares Active U.S. Real Estate Fund (PSR) | “Active U.S. Real Estate Fund” | |
| PowerShares Multi-Strategy Alternative Portfolio (LALT) | “Multi-Strategy Alternative Portfolio” | |
| PowerShares S&P 500® Downside Hedged Portfolio (PHDG) | “S&P 500® Downside Hedged Portfolio” |
Each portfolio (each, a “Fund”, and collectively, the “Funds”) represents a separate series of the Trust. The shares of the Funds are referred to herein as “Shares” or “Fund’s Shares.” Each Fund’s Shares are listed and traded on NYSE Arca, Inc., except for Shares of Multi-Strategy Alternative Portfolio, which are listed and traded on The NASDAQ Stock Market LLC.
The market price of each Share may differ to some degree from the Fund’s net asset value (“NAV”). Unlike conventional mutual funds, each Fund issues and redeems Shares on a continuous basis, at NAV, only in a large specified number of Shares, each called a “Creation Unit.” Creation Units for Active U.S. Real Estate Fund are issued and redeemed principally in exchange for the deposit or delivery of a basket of securities (“Deposit Securities”). Creation Units for Multi-Strategy Alternative Portfolio are issued and redeemed principally in exchange for the deposit or delivery of cash. Creation Units for S&P 500® Downside Hedged Portfolio are issued and redeemed partially in exchange for the deposit or delivery of cash and partially in exchange for Deposit Securities. Except when aggregated in Creation Units by Authorized Participants, the Shares are not individually redeemable securities of the Funds.
The investment objective for Active U.S. Real Estate Fund is high total return through growth of capital and current income. The investment objective for Multi-Strategy Alternative Portfolio is to seek a positive total return that has a low correlation to the broader securities markets. The investment objective for S&P 500® Downside Hedged Portfolio is to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed income market returns.
Note 2. Significant Accounting Policies
The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements, including estimates and assumptions related to taxation. Actual results could differ from these estimates. In addition, the Funds monitor for material events or transactions that may occur or become known after the period-end date and before the date the financial statements are released to print. The following is a summary of the significant accounting policies followed by the Funds in preparation of the financial statements.
A. Security Valuation
Securities, including restricted securities, are valued according to the following policies:
A security listed or traded on an exchange (except convertible securities) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on prices furnished by independent pricing services or market makers. When such securities are valued by an independent pricing service they may be considered fair valued. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and asked prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and asked prices. For purposes of determining NAV per Share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange (“NYSE”).
Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day NAV per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded.
Debt obligations (including convertible securities) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted
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prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, dividend rate (for unlisted equities), yield (for debt obligations), quality, type of issue, coupon rate (for debt obligations), maturity (for debt obligations), individual trading characteristics and other market data. Securities with a demand feature exercisable within one to seven days are valued at par. Debt obligations are subject to interest rate and credit risks. In addition, all debt obligations involve some risk of default with respect to interest and/or principal payments.
Foreign securities’ (including foreign exchange contracts’) prices are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the London world markets. If market quotations are available and reliable for foreign exchange-traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that Invesco PowerShares Capital Management LLC (the “Adviser”) determines are significant and make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities’ prices meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, American Depositary Receipts and domestic and foreign index futures. Foreign securities may have additional risks including exchange rate changes, potential for sharply devalued currencies and high inflation, political and economic upheaval, the relative lack of issuer information, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards.
Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources. The last bid price may be used to value equity securities. The mean between the last bid and asked prices is used to value debt obligations, including corporate loans.
Securities for which market quotations are not readily available or became unreliable are valued at fair value as determined in good faith following procedures approved by the Board of Trustees. Issuer-specific events, market trends, bid/asked quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security’s fair value.
Each Fund may invest in securities that are subject to interest rate risk, meaning the risk that the prices will generally fall as interest rates rise and, conversely, the prices will generally rise as interest rates fall. Specific securities differ in their sensitivity to changes in interest rates depending on their individual characteristics. Changes in interest rates may result in increased market volatility, which may affect the value and/or liquidity of certain Fund investments.
Valuations change in response to many factors, including the historical and prospective earnings of the issuer, the value of the issuer’s assets, general economic conditions, interest rates, investor perceptions and market liquidity. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may materially differ from the value received upon actual sale of those investments.
B. Other Risks
Equity Risk. Equity risk is the risk that the value of the securities that each Fund holds will fall due to general market and economic conditions, perceptions regarding the industries in which the issuers of securities that a Fund holds participate or factors relating to specific companies in which the Fund invests. For example, an adverse event, such as an unfavorable earnings report, may depress the value of securities a Fund holds; the price of securities may be particularly sensitive to general movements in the stock market; or a drop in the stock market may depress the price of most or all of the securities a Fund holds. In addition, securities of an issuer in the Fund’s portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition.
REIT Risk. For Active U.S. Real Estate Fund, although the Fund will not invest in real estate directly, the REITs in which the Fund invests are subject to risks inherent in the direct ownership of real estate. These risks include, but are not limited to, a possible lack of mortgage funds and associated interest rate risks, overbuilding, property vacancies, increases in property taxes and operating expenses, changes in zoning laws, losses due to environmental damages and changes in neighborhood values and appeal to purchasers.
Non-Diversified Fund Risk. Because each Fund (except S&P 500® Downside Hedged Portfolio) is non-diversified and can invest a greater portion of its assets in securities of individual issuers than diversified funds, changes in the market value of a single investment could cause greater fluctuations in Share price than would occur in a diversified fund. This may increase each Fund’s volatility and cause the performance of a relatively small number of issuers to have a greater impact on each Fund’s performance.
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Management Risk. The Funds are subject to management risk because they are actively managed portfolios. In managing a Fund’s portfolio securities, the Adviser or a sub-adviser (as applicable and as set forth below), applies investment techniques and risk analyses in making investment decisions, but there can be no guarantee that these will produce the desired results.
Cash Transaction Risk. Unlike most exchange-traded funds (“ETFs”), Multi-Strategy Alternative Portfolio currently effects creations and redemptions principally for cash and S&P 500® Downside Hedged Portfolio currently effects creations and redemptions partially for cash and partially in-kind, rather than primarily in-kind, because of the nature of each of these Funds’ investments. As such, investments in each Fund’s Shares may be less tax efficient than investments in shares of conventional ETFs that utilize an entirely in-kind redemption process.
VIX Index Risk. For Multi-Strategy Alternative Portfolio and S&P 500® Downside Hedged Portfolio, the Chicago Board Options Exchange (“CBOE”) can make methodological changes to the calculation of the Chicago Board Options Exchange Volatility Index (“VIX Index”) that could affect the value of the futures contracts on the VIX Index. There can be no assurance that the CBOE will not change the VIX Index calculation methodology in a way that may affect the value of your investment. Additionally, the CBOE may alter, discontinue or suspend calculation or dissemination of the VIX Index and/or the exercise settlement value. Any of these actions could adversely affect the value of each Fund’s Shares.
Tax Risk. Multi-Strategy Alternative Portfolio may purchase and sell interest rate futures, including Eurodollar interest rate futures or Euro Euribor interest rate futures, and VIX Index futures contracts. S&P 500® Downside Hedged Portfolio will gain most of its exposure to the futures markets by entering into VIX Index futures (and, to a lesser extent, S&P 500® Index futures (“S&P 500 Futures”)). To qualify as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), the Funds must meet a qualifying income test each taxable year. The S&P 500® Downside Hedged Portfolio has received a private letter ruling from the Internal Revenue Service (“IRS”) that income it derives from VIX Index futures contracts will constitute qualifying income for purposes of that test. Multi-Strategy Alternative Portfolio received an opinion of its counsel (which is not binding on the IRS or courts) stating that such income should be qualifying for purposes of that test. Failure to comply with the qualifying income test in any taxable year would have significant negative tax consequences to shareholders of the Funds. If the IRS were to determine that the income that the Funds derive from futures did not constitute qualifying income, the Funds likely would be required to reduce their exposure to such investments in order to maintain qualification as a RIC, which may result in difficulty in implementing their investment strategies.
Risk of Investing in Investment Companies. Because Multi-Strategy Alternative Portfolio may invest in other investment companies generally and S&P 500® Downside Hedged Portfolio may invest in other ETFs specifically, each Fund’s investment performance may depend on the investment performance of the funds in which it invests. An investment in an investment company is subject to the risks associated with that investment company. Each Fund will pay indirectly a proportional share of the fees and expenses of the investment companies in which it invests (including costs and fees of the investment companies), while continuing to pay its own management fee to the Adviser. As a result, shareholders will absorb duplicate levels of fees with respect to a Fund’s investments in other investment companies.
Commodity Pool Risk. Multi-Strategy Alternative Portfolio and S&P 500® Downside Hedged Portfolio invest in futures contracts, which cause each to be deemed to be a commodity pool, thereby subjecting each Fund to regulation under the Commodity Exchange Act and rules of the Commodity Futures Trading Commission (“CFTC”). The Adviser is registered as a Commodity Pool Operator (“CPO”) and as a commodity trading advisor (“CTA”), and the Funds will be operated in accordance with CFTC rules. Registration as a CPO or CTA subjects the Adviser to additional laws, regulations and enforcement policies, all of which could increase compliance costs and may affect the operations and financial performance of these Funds. Registration as a commodity pool may have negative effects on the ability of each of these Funds to engage in their respective planned investment program.
C. Federal Income Taxes
Each Fund intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), applicable to regulated investment companies and to distribute substantially all of the Fund’s taxable earnings to its shareholders. As such, the Funds will not be subject to federal income taxes on otherwise taxable income (including net realized gains) that is distributed to the shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements.
Each Fund recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained. Management has analyzed each Fund’s uncertain tax positions and concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions. Management is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.
Income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are primarily due to differing book and tax treatments for in-kind transactions, losses deferred due to wash sales, and passive foreign investment company adjustments, if any.
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The Funds file U.S. federal tax returns and tax returns in certain other jurisdictions. Generally, a Fund is subject to examinations by such taxing authorities for up to three years after the filing of the return for the tax period.
D. Investment Transactions and Investment Income
Investment transactions are accounted for on a trade date basis. Realized gains and losses from the sale or disposition of securities are computed on the specific identified cost basis. Interest income is recorded on the accrual basis. Dividend income (net of withholding tax, if any) is recorded on the ex-dividend date. Realized gains, dividends and interest received by a Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.
The Funds may periodically participate in litigation related to each Fund’s investments. As such, the Funds may receive proceeds from litigation settlements. Any proceeds received are included in the Statements of Operations as realized gain (loss) for investments no longer held and as unrealized gain (loss) for investments still held.
Corporate actions (including cash dividends) are recorded net of non-reclaimable foreign tax withholdings on the ex-date.
Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of net realized and unrealized gain (loss) from investment securities reported in the Statements of Operations and the Statements of Changes in Net Assets and the net realized and unrealized gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of each Fund’s net asset value and, accordingly, they reduce each Fund’s total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statements of Operations and the Statements of Changes in Net Assets, or the net investment income per share and the ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between each Fund and the Adviser.
E. Country Determination
For the purposes of making investment selection decisions and presentation in the Schedule of Investments, the Adviser may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer’s securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America, unless otherwise noted.
F. Expenses
Each Fund has agreed to pay an annual unitary management fee to the Adviser. Out of the unitary management fee, the Adviser has agreed to pay for substantially all expenses of the Funds, including payments to the Affiliated Sub-Advisers (as defined below) for Active U.S. Real Estate Fund and Multi-Strategy Alternative Portfolio, and for each Fund, the cost of transfer agency, custody, fund administration, legal, audit and other services, except for advisory fees, distribution fees, if any, brokerage expenses, taxes, interest, acquired fund fees and expenses, if any, litigation expenses and other extraordinary expenses.
Expenses of the Trust that are excluded from a Fund’s unitary management fee and are directly identifiable to a specific Fund are applied to that Fund. Expenses of the Trust that are excluded from each Fund’s unitary management fee and that are not readily identifiable to a specific Fund are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expense and the relative net assets of each Fund.
To the extent a Fund invests in other investment companies, the expenses shown in the accompanying financial statements reflect the expenses of the Fund and do not include any expenses of the investment companies in which it invests. The effects of such investment companies’ expenses are included in the realized and unrealized gain or loss on the investments in the investment companies.
G. Dividends and Distributions to Shareholders
Active U.S. Real Estate Fund and S&P 500® Downside Hedged Portfolio declare and pay dividends from net investment income, if any, to their shareholders quarterly and record such dividends on ex-dividend date. Multi-Strategy Alternative Portfolio declares and pays dividends from net investment income, if any, to their shareholders annually and record such dividends on ex-dividend date. Generally, each Fund distributes net realized taxable capital gains, if any, annually in cash and records them on ex-dividend date. Such distributions on a tax basis are determined in conformity with federal income tax regulations which may differ from GAAP. Distributions in excess of tax basis earnings and profits, if any, are reported in such Fund’s financial statements as a tax return of capital at fiscal year-end.
H. Foreign Currency Translations
Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation.
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Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Funds do not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statements of Operations. Reported net realized foreign currency gains or losses arise from (1) sales of foreign currencies, (2) currency gains or losses realized between the trade and settlement dates on securities transactions, and (3) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on each Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period-end, resulting from changes in exchange rates.
The Funds may invest in foreign securities, which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which each Fund invests.
I. Forward Foreign Currency Contracts
Multi-Strategy Alternative Portfolio engages in foreign currency transactions either on a spot (i.e. for prompt delivery and settlement) basis at the rate prevailing in the currency exchange market at the time or through forward foreign currency contracts to manage or minimize currency or exchange rate risk.
The Fund also enters into forward foreign currency contracts for the purchase or sale of a security denominated in a foreign currency in order to “lock in” the U.S. dollar price of that security, or the Fund also enters into forward foreign currency contracts that do not provide for physical settlement of the two currencies, but instead are settled by a single cash payment calculated as the difference between the agreed upon exchange rate and the spot rate at settlement based upon an agreed upon notional amount (non-deliverable forwards). The Fund sets aside liquid assets in an amount equal to daily mark-to-market obligation for forward foreign currency contracts.
A forward foreign currency contract is an obligation between two parties (“Counterparties”) to purchase or sell a specific currency for an agreed-upon price at a future date. The use of forward foreign currency contracts does not eliminate fluctuations in the price of the underlying securities the Fund owns or intends to acquire but establishes a rate of exchange in advance. Fluctuations in the value of these contracts are measured by the difference in the contract date and reporting date exchange rates and are recorded as unrealized appreciation (depreciation) until the contracts are closed. When the contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains (losses) on the contracts are included in the Statements of Operations. The primary risks associated with forward foreign currency contracts include failure of the Counterparty to meet the terms of the contract and the value of the foreign currency changing unfavorably. These risks may be in excess of the amounts reflected in the Statements of Assets and Liabilities.
J. Futures Contracts
Multi-Strategy Alternative Portfolio and S&P 500® Downside Hedged Portfolio entered into futures contracts to simulate full investment in securities or manage exposure to equity and market price movements and/or currency risks and provide exposure to markets and indexes. Multi-Strategy Alternative Portfolio entered into currency futures and interest rate futures including Eurodollar interest rate futures or Euro Euribor interest rate futures, and VIX Index futures contracts. S&P 500® Downside Hedged Portfolio entered into U.S. listed futures contracts on the VIX Index and on S&P 500 Futures to simulate full investment in the S&P 500® Dynamic VEQTOR Index, to facilitate trading or to reduce transaction costs.
A futures contract is an agreement between Counterparties to purchase or sell a specified underlying security or index for a specified price at a future date. Multi-Strategy Alternative Portfolio and S&P 500® Downside Hedged Portfolio will only enter into futures contracts that are traded on a U.S. exchange and that are standardized as to maturity date and underlying financial instrument. Initial margin deposits required upon entering into futures contracts are satisfied by the segregation of specific securities or cash as collateral at the futures commission merchant broker. During the period the futures contracts are open, changes in the value of the contracts are recognized as unrealized gains or losses by recalculating the value of the contracts on a daily basis. Subsequent or variation margin payments are received or made depending upon whether unrealized gains or losses are incurred. These amounts are reflected as a receivable or payable on the Statements of Assets and Liabilities. When the contracts are closed or expire, each Fund recognizes a realized gain or loss equal to the difference between the proceeds from, or cost of, the closing transaction and the Fund’s basis in the contract. The net realized gain (loss) and the change in unrealized gain (loss) on futures contracts held during the period is included on the Statements of Operations.
The primary risks associated with futures contracts are market risk, leverage risk and the absence of a liquid secondary market. If a Fund were unable to liquidate a futures contract and/or enter into an offsetting closing transaction, the Fund would continue to be subject to market risk with respect to the value of the contracts and may be required to continue to maintain the margin deposits on the futures contracts until the position expired or matured. As futures contracts approach expiration, they may be replaced by similar contracts that have a later expiration. This process is referred to as “rolling.” If the market for these contracts is in “contango,” meaning
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that the prices of futures contracts in the nearer months are lower than the price of contracts in the distant months, the sale of the near-term month contract would be at a lower price than the longer-term contract, resulting in a cost to “roll” the futures contract. The actual realization of a potential roll cost will depend on the difference in price of the near and distant contracts. The contracts included in the VIX Index historically have traded in “contango” markets, resulting in a roll cost, which could adversely affect the value of Shares of the S&P 500® Downside Hedged Portfolio. Futures have minimal Counterparty risk since the exchange’s clearinghouse, as Counterparty to all exchange-traded futures contracts, guarantees the futures against default. Risks may exceed amounts recognized in the Statements of Assets and Liabilities.
Note 3. Investment Advisory Agreement and Other Agreements
The Trust has entered into an Investment Advisory Agreement with the Adviser on behalf of each Fund, pursuant to which the Adviser has overall responsibility for the selection and ongoing monitoring of the Funds’ investments, managing the Funds’ business affairs, providing certain clerical, bookkeeping and other administrative services, and for Active U.S. Real Estate Fund and Multi-Strategy Alternative Portfolio, oversight of Invesco Advisers, Inc., Invesco Asset Management Deutschland GmbH, Invesco Asset Management Limited, Invesco Asset Management (Japan) Limited, Invesco Hong Kong Limited, Invesco Senior Secured Management, Inc. and Invesco Canada Ltd. (collectively, the “Affiliated Sub-Advisers”).
As compensation for its services, each Fund has agreed to pay the Adviser an annual unitary management fee. Out of the unitary management fee, the Adviser has agreed to pay for substantially all expenses of the Funds, including for Active U.S. Real Estate Fund and Multi-Strategy Alternative Portfolio, payments to the Affiliated Sub-Advisers, and for each Fund, the cost of transfer agency, custody, fund administration, legal, audit and other services, except for advisory fees, distribution fees, if any, brokerage expenses, taxes, interest, acquired fund fees and expenses, if any, litigation expenses and other extraordinary expenses. The unitary management fee is paid by each Fund to the Adviser at the following annual rates:
| % of Average Daily Net Assets |
||||
| Active U.S. Real Estate Fund | 0.80 | % | ||
| Multi-Strategy Alternative Portfolio | 0.95 | % | ||
| S&P 500® Downside Hedged Portfolio | 0.39 | % | ||
The Adviser has entered into an Investment Sub-Advisory Agreement with the Affiliated Sub-Advisers for each of Active U.S. Real Estate Fund and Multi-Strategy Alternative Portfolio. The sub-advisory fee for these Funds is paid by the Adviser to the Affiliated Sub-Advisers at 40% of the Adviser’s compensation of the sub-advised assets of each Fund.
Further, through August 31, 2018, the Adviser has contractually agreed to waive a portion of each Fund’s management fee in an amount equal to 100% of the net advisory fees an affiliate of the Adviser receives that are attributable to certain of the Fund’s investments in money market funds managed by that affiliate. The Adviser cannot discontinue this waiver prior to its expiration.
For the six-month period ended April 30, 2016, the Adviser waived fees for each Fund in the following amounts:
| Active U.S. Real Estate Fund | $ | 69 | ||
| Multi-Strategy Alternative Portfolio | 3,096 | |||
| S&P 500® Downside Hedged Portfolio | 50,168 |
The Trust has entered into a Distribution Agreement with Invesco Distributors, Inc. (the “Distributor”), which serves as the distributor of Creation Units for each Fund. The Distributor does not maintain a secondary market in the Shares. The Funds are not charged any fees pursuant to the Distribution Agreement. The Distributor is an affiliate of the Adviser.
The Trust has entered into service agreements whereby The Bank of New York Mellon, a wholly-owned subsidiary of The Bank of New York Mellon Corporation, serves as the administrator, custodian, fund accountant and transfer agent for each Fund.
Note 4. Investments in Affiliates
The Adviser is a wholly-owned subsidiary of Invesco Ltd. and therefore, Invesco Ltd. is considered to be affiliated with the Funds. The table below shows S&P 500® Downside Hedged Portfolio’s transactions in, and earnings from, its investment in affiliates for the six-month period ended April 30, 2016.
S&P 500® Downside Hedged Portfolio
| Value October 31, 2015 |
Purchases at Cost |
Proceeds from Sales |
Change in Unrealized Appreciation (Depreciation) |
Realized Gain (Loss) |
Value April 30, 2016 |
Dividend Income |
||||||||||||||||||||||
| Invesco Ltd. | $ | 293,057 | $ | 1,676 | $ | (71,927 | ) | $ | (2,439 | ) | $ | (12,445 | ) | $ | 207,922 | $ | 4,212 | |||||||||||
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Note 5. Additional Valuation Information
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, under current market conditions. GAAP establishes a hierarchy that prioritizes the inputs to valuation methods, giving the highest priority to readily available unadjusted quoted prices in an active market for identical assets (Level 1) and the lowest priority to significant unobservable inputs (Level 3), generally when market prices are not readily available or are unreliable. Based on the valuation inputs, the securities or other investments are tiered into one of three levels. Changes in valuation methods may result in transfers in or out of an investment’s assigned level:
| Level 1 — | Prices are determined using quoted prices in an active market for identical assets. |
| Level 2 — | Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants may use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves, loss severities, default rates, discount rates, volatilities and others. |
| Level 3 — | Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used. Unobservable inputs reflect a Fund’s own assumptions about the factors market participants would use in determining fair value of the securities or instruments and would be based on the best available information. |
Except for the Fund listed below, as of April 30, 2016, all of the securities in each Fund were valued based on Level 1 inputs (see the Schedules of Investments for security categories). The appreciation on futures contracts held in S&P 500® Downside Hedged Portfolio were based on Level 1 inputs. The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may materially differ from the value received upon actual sale of those investments.
| Investments in Securities | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Multi-Strategy Alternative Portfolio | ||||||||||||||||
| Equity Securities |
$ | 10,924,676 | $ | — | $ | — | $ | 10,924,676 | ||||||||
| Forward Foreign Currency Contracts(a) |
— | (20,166 | ) | — | (20,166 | ) | ||||||||||
| Futures(a) |
(138,545 | ) | — | — | (138,545 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments |
$ | 10,786,131 | $ | (20,166 | ) | $ | — | $ | 10,765,965 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | Unrealized appreciation (depreciation). |
Note 6. Derivative Investments
Value of Derivative Investments at Period-End
The table below summarizes the value of each Fund’s derivative investments, detailed by primary risk exposure, held as of April 30, 2016:
| Value | ||||||||||||||||
| Multi-Strategy Alternative Portfolio |
S&P 500® Downside Hedged Portfolio |
|||||||||||||||
| Risk Exposure/Derivative Type |
Assets | Liabilities | Assets | Liabilities | ||||||||||||
| Currency risk: | ||||||||||||||||
| Forward foreign currency contracts(a) |
$ | 27,690 | $ | (47,856 | ) | $ | — | $ | — | |||||||
| Equity risk: | ||||||||||||||||
| Futures contracts(b) |
13,403 | (162,069 | ) | 683,128 | — | |||||||||||
| Interest rate risk: | ||||||||||||||||
| Futures contracts(b) |
10,121 | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 51,214 | $ | (209,925 | ) | $ | 683,128 | $ | — | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | Values are disclosed on the Statements of Assets and Liabilities under the caption Unrealized appreciation on forward foreign currency contracts outstanding and Unrealized depreciation on forward foreign currency contracts outstanding. |
| (b) | Values are disclosed on the Statements of Assets and Liabilities under the caption Unrealized appreciation on futures contracts and Unrealized depreciation on futures contracts. |
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25 |
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Effect of Derivative Investments for the Six-Month Period Ended April 30, 2016
The table below summarizes each Fund’s gains (losses) on derivative investments, detailed by primary risk exposure, recognized in earnings during the period:
| Location of Gain (Loss) on Statements of Operations | ||||||||||||
| Multi-Strategy Alternative Portfolio |
S&P 500® Downside Hedged Portfolio |
|||||||||||
| Futures | Forward Foreign Currency Contracts |
Futures | ||||||||||
| Realized Gain (Loss): | ||||||||||||
| Currency risk |
$ | — | $ | 17,787 | $ | — | ||||||
| Equity risk |
(259,876 | ) | — | (2,636,937 | ) | |||||||
| Interest rate risk |
(142,779 | ) | — | — | ||||||||
| Change in Net Unrealized Appreciation (Depreciation): | ||||||||||||
| Currency risk |
— | (31,443 | ) | — | ||||||||
| Equity risk |
403,506 | — | 74,879 | |||||||||
| Interest rate risk |
(14,715 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | (13,864 | ) | $ | (13,656 | ) | $ | (2,562,058 | ) | |||
|
|
|
|
|
|
|
|||||||
The table below summarizes the average notional value of futures contracts and forward foreign currency contracts outstanding during the period.
| Average Notional Value | ||||||||
| Multi-Strategy Alternative Portfolio |
S&P 500® Downside Hedged Portfolio |
|||||||
| Futures contracts | $ | 38,554,180 | $ | 69,485,038 | ||||
| Forward foreign currency contracts | 3,614,595 | — | ||||||
| Open Futures Contracts |
||||||||||||||
| Multi-Strategy Alternative Portfolio | ||||||||||||||
| Number of Contracts |
Expiration Date/Commitment |
Notional Value |
Unrealized Appreciation (Depreciation) |
|||||||||||
| CBOE Volatility Index (VIX) Futures | 29 | June-2016/Short | $ | (550,275 | ) | $ | (9,785 | ) | ||||||
| CBOE Volatility Index (VIX) Futures | 5 | July-2016/Long | 98,875 | 4,888 | ||||||||||
| CBOE Volatility Index (VIX) Futures | 15 | August-2016/Long | 301,125 | 8,515 | ||||||||||
| S&P 500 E-Mini Futures | 42 | June-2016/Short | (4,324,110 | ) | (152,284 | ) | ||||||||
|
|
|
|
|
|||||||||||
| Subtotal — Equity Risk |
$ | (4,474,385 | ) | $ | (148,666 | ) | ||||||||
|
|
|
|
|
|||||||||||
| Eurodollar Futures | 80 | March-2017/Long | 19,816,000 | 10,121 | ||||||||||
|
|
|
|
|
|||||||||||
| Subtotal — Interest Rate Risk |
$ | 19,816,000 | $ | 10,121 | ||||||||||
|
|
|
|
|
|||||||||||
| Total Futures Contracts | $ | 15,341,615 | $ | (138,545 | ) | |||||||||
|
|
|
|
|
|||||||||||
| S&P 500® Downside Hedged Portfolio | ||||||||||||||
| Number of Contracts |
Expiration Date/Commitment |
Notional Value |
Unrealized Appreciation |
|||||||||||
| CBOE Volatility Index (VIX) Futures | 209 | May-2016/Long | $ | 3,526,875 | $ | 87,364 | ||||||||
| CBOE Volatility Index (VIX) Futures | 114 | June-2016/Long | 2,163,150 | 81,007 | ||||||||||
| CBOE Volatility Index (VIX) Futures | 20 | August-2016/Long | 401,500 | 20,953 | ||||||||||
| CBOE Volatility Index (VIX) Futures | 31 | September-2016/Long | 636,275 | 27,517 | ||||||||||
| CBOE Volatility Index (VIX) Futures | 31 | October-2016/Long | 644,025 | 25,967 | ||||||||||
| CBOE Volatility Index (VIX) Futures | 12 | November-2016/Long | 250,800 | 7,362 | ||||||||||
| S&P 500 E-Mini Futures | 418 | June-2016/Long | 43,035,190 | 432,958 | ||||||||||
|
|
|
|
|
|||||||||||
| Total Futures Contracts — Equity Risk | $ | 50,657,815 | $ | 683,128 | ||||||||||
|
|
|
|
|
|||||||||||
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26 |
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Multi-Strategy Alternative Portfolio
| Open Forward Foreign Currency Contracts | ||||||||||||||||||||||
| Counterparty |
Contract to | Notional Value | Unrealized Appreciation (Depreciation) |
|||||||||||||||||||
| Settlement Date | Deliver | Receive | ||||||||||||||||||||
| 5/20/2016 | Morgan Stanley | CAD | 998,068 | USD | 777,000 | $ | 796,797 | $ | (19,797 | ) | ||||||||||||
| 5/20/2016 | Morgan Stanley | CHF | 1,109,693 | USD | 1,153,300 | 1,158,747 | (5,447 | ) | ||||||||||||||
| 5/20/2016 | Morgan Stanley | SEK | 7,729,544 | USD | 952,600 | 964,182 | (11,582 | ) | ||||||||||||||
| 5/20/2016 | Morgan Stanley | USD | 760,100 | AUD | 982,383 | 749,070 | (11,030 | ) | ||||||||||||||
| 5/20/2016 | Morgan Stanley | USD | 725,300 | EUR | 639,660 | 733,070 | 7,770 | |||||||||||||||
| 5/20/2016 | Morgan Stanley | USD | 146,100 | GBP | 102,329 | 149,910 | 3,810 | |||||||||||||||
| 5/20/2016 | Morgan Stanley | USD | 566,900 | JPY | 61,587,556 | 575,881 | 8,981 | |||||||||||||||
| 5/20/2016 | Morgan Stanley | USD | 192,200 | NOK | 1,577,413 | 195,876 | 3,676 | |||||||||||||||
| 5/20/2016 | Morgan Stanley | USD | 492,200 | NZD | 709,621 | 495,653 | 3,453 | |||||||||||||||
|
|
|
|||||||||||||||||||||
| Total Forward Foreign Currency Contracts — Currency Risk | $ | (20,166 | ) | |||||||||||||||||||
|
|
|
|||||||||||||||||||||
Currency Abbreviations:
AUD—Australian Dollar
CAD—Canadian Dollar
CHF—Swiss Franc
EUR—Euro
GBP—Pound Sterling
JPY—Japanese Yen
NOK—Norwegian Krone
NZD—New Zealand Dollar
SEK—Swedish Krona
USD—U.S. Dollar
Offsetting Assets and Liabilities
Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which was subsequently clarified in Financial Accounting Standards Board ASU 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” is intended to enhance disclosures about financial instruments and derivative investments that are subject to offsetting arrangements on the Statements of Assets and Liabilities and to enable investors to better understand the effect of those arrangements on each Fund’s financial position. In order for an arrangement to be eligible for netting, the Funds must have a basis to conclude that such netting arrangements are legally enforceable. The Funds enter into netting agreements and collateral agreements in an attempt to reduce the Funds’ counterparty credit risk by providing for a single net settlement with a counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement.
The following tables present derivative investments that are either subject to an enforceable netting agreement or offset by collateral arrangements as of April 30, 2016.
Multi-Strategy Alternative Portfolio
| Gross Amounts Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||||
| Gross Amounts of Recognized Assets |
Financial Instruments | Collateral Received | Net Amount | |||||||||||||||||
| Counterparty |
Non-Cash | Cash | ||||||||||||||||||
| Morgan Stanley | $ | 27,690 | $ | (27,690 | ) | $ | — | $ | — | $ | — | |||||||||
| Gross Amounts Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||||
| Gross Amounts of Recognized Liabilities |
Financial Instruments | Collateral Pledged | Net Amount | |||||||||||||||||
| Counterparty |
Non-Cash | Cash | ||||||||||||||||||
| Morgan Stanley | $ | 47,856 | $ | (27,690 | ) | $ | — | $ | — | $ | 20,166 | |||||||||
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Note 7. Tax Information
The amount and character of income and gains to be distributed are determined in accordance with federal income tax regulations, which may differ from GAAP. Reclassifications are made to the Funds’ capital accounts to reflect income and gains available for distribution (or available capital loss carryforwards) under federal income tax regulations. The tax character of distributions paid during the year and the tax components of net assets will be reported at the Funds’ fiscal year-end.
Capital loss carryforwards are calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforwards actually available for the Funds to utilize. Capital losses generated in years beginning after December 22, 2010 can be carried forward for an unlimited period, whereas previous losses expire in eight tax years. Capital losses with an expiration period may not be used to offset capital gains until all net capital losses without an expiration date have been utilized. Capital loss carryforwards with no expiration date will retain their character as either short-term or long-term capital losses instead of as short-term capital losses as under prior law. The ability to utilize capital loss carryforwards in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions.
The Funds had capital loss carryforwards as of October 31, 2015 as follows:
| Post-effective/no expiration | ||||||||||||
| Short-Term | Long-Term | Total* | ||||||||||
| Active U.S. Real Estate Fund | $ | — | $ | — | $ | — | ||||||
| Multi-Strategy Alternative Portfolio | 335,179 | 473,169 | 808,348 | |||||||||
| S&P 500® Downside Hedged Portfolio | 31,316,870 | 46,975,304 | 78,292,174 | |||||||||
| * | Capital loss carryforwards as of the date listed above are reduced for limitations, if any, to the extent required by the Internal Revenue Code and may be further limited depending upon a variety of factors, including the realization of net unrealized gains or losses as of the date of any reorganization. |
Note 8. Investment Transactions
For the six-month period ended April 30, 2016, the cost of securities purchased and proceeds from sales of securities (other than short-term securities, U.S. Treasury obligations, money market funds and in-kind transactions, if any) were as follows:
| Purchases | Sales | |||||||
| Active U.S. Real Estate Fund | $ | 44,002,175 | $ | 46,397,592 | ||||
| Multi-Strategy Alternative Portfolio | 5,481,819 | 7,497,097 | ||||||
| S&P 500® Downside Hedged Portfolio | 589,499,977 | 629,875,675 | ||||||
For the six-month period ended April 30, 2016, in-kind transactions associated with creations and redemptions were as follows:
| Cost of Securities Received |
Value of Securities Delivered |
|||||||
| Active U.S. Real Estate Fund | $ | — | $ | 25,264,122 | ||||
| Multi-Strategy Alternative Portfolio | — | 2,129,534 | ||||||
| S&P 500® Downside Hedged Portfolio | 15,138,074 | 106,057,562 | ||||||
Gains (losses) on in-kind transactions are generally not considered taxable gains (losses) for federal income tax purposes.
At April 30, 2016, the cost of investments on a tax basis includes adjustments for financial reporting purposes, as of the most recently completed federal income tax reporting period-end:
| Gross Unrealized Appreciation |
Gross Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
Cost | |||||||||||||
| Active U.S. Real Estate Fund | $ | 1,344,326 | $ | (827,811 | ) | $ | 516,515 | $ | 25,343,277 | |||||||
| Multi-Strategy Alternative Portfolio | 262,419 | (359,986 | ) | (97,567 | ) | 11,022,243 | ||||||||||
| S&P 500® Downside Hedged Portfolio | 23,639,198 | (26,706,323 | ) | (3,067,125 | ) | 296,584,459 | ||||||||||
Note 9. Trustees’ and Officer’s Fees
Trustees’ and Officer’s Fees include amounts accrued by the Funds to pay remuneration to each Trustee who is not an “interested person” as defined in the 1940 Act (an “Independent Trustee”) and an Officer of the Trust. The Adviser, as a result of each Fund’s unitary management fee, pays for such compensation. The Trustee who is an “interested person” of the Trust does not receive any Trustees’ fees.
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28 |
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The Trust has adopted a deferred compensation plan (the “Plan”). Under the Plan, an Independent Trustee who has executed a Deferred Fee Agreement (a “Participating Trustee”) may defer receipt of all or a portion of his compensation (“Deferral Fees”). Such Deferral Fees are deemed to be invested in select PowerShares Funds. The Deferral Fees payable to the Participating Trustee are valued as of the date such Deferral Fees would have been paid to the Participating Trustee. The value increases with contributions or with increases in the value of the Shares selected, and the value decreases with distributions or with declines in the value of the Shares selected. Obligations under the Plan represent unsecured claims against the general assets of the Funds.
Note 10. Capital
Shares are created and redeemed by each Fund only in Creation Units of 50,000 Shares (100,000 Shares for Multi-Strategy Alternative Portfolio). Only Authorized Participants are permitted to purchase or redeem Creation Units from the Funds. For Active U.S. Real Estate Fund, such transactions are principally permitted in exchange for Deposit Securities, with a balancing cash component to equate the transaction to the NAV per Share of the Fund of the Trust on the transaction date. For Multi-Strategy Alternative Portfolio, Creation Units are issued and redeemed principally in exchange for the deposit or delivery of cash, and for S&P 500® Downside Hedged Portfolio, Creation Units are issued and redeemed partially in exchange for the deposit or delivery of cash and partially in exchange for Deposit Securities. However, for all Funds, cash in an amount equivalent to the value of certain securities may be substituted, generally when the securities are not available in sufficient quantity for delivery, not eligible for trading by the Authorized Participant or as a result of other market circumstances.
To the extent that the Funds permit transactions in exchange for Deposit Securities, each Fund may issue Shares in advance of receipt of Deposit Securities subject to various conditions, including a requirement to maintain on deposit with the Trust cash at least equal to 105% of the market value of the missing Deposit Securities. In accordance with the Trust’s Participant Agreement, Creation Units will be issued to an Authorized Participant, notwithstanding the fact that the corresponding Deposit Securities have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by the Authorized Participant’s delivery and maintenance of collateral consisting of cash in the form of U.S. dollars in immediately available funds having a value (marked-to-market daily) at least equal to 105%, which the Adviser may change from time to time, of the value of the missing Deposit Securities.
On February 18, 2016, mutual funds affiliated with the Funds’ Adviser sold in the secondary market 426,491 Shares of Active U.S. Real Estate Fund valued at $28,609,016.
Transactions in each Fund’s Shares are disclosed in detail in the Statements of Changes in Net Assets.
Note 11. Indemnifications
Under the Trust’s organizational documents, its officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. Each Independent Trustee is also indemnified against certain liabilities arising out of the performance of his duties to the Trust pursuant to an Indemnification Agreement between the Independent Trustee and the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred. However, based on experience, the Trust believes the risk of loss to be remote.
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29 |
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As a shareholder of a Fund of the PowerShares Actively Managed Exchange-Traded Fund Trust, you incur a unitary management fee. In addition to the unitary management fee, a shareholder may pay distribution fees, if any, brokerage expenses, taxes, interest, including acquired fund fees and expenses, if any, litigation expenses and other extraordinary expenses. The expense examples below are intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended April 30, 2016.
In addition to the fees and expenses which the PowerShares Multi-Strategy Alternative Portfolio and the PowerShares S&P 500® Downside Hedged Portfolio (collectively, the “Portfolios”) bear directly, the Portfolios indirectly bear a pro rata share of the fees and expenses of the investment companies in which the Portfolios invest. The amount of fees and expenses incurred indirectly by the Portfolios will vary because the investment companies have varied expenses and fee levels and the Portfolios may own different proportions of the investment companies at different times. Estimated investment companies’ expenses are not expenses that are incurred directly by the Portfolios. They are expenses that are incurred directly by the investment companies and are deducted from the value of the investment companies the Portfolios invest in. The effect of the estimated investment companies’ expenses that the Portfolios bear indirectly is included in each Portfolio’s total return.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid 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 line under the heading “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed annualized rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and 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 and do not reflect any transactional costs, such as sales charges and brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, expenses shown in the table do not include the expenses of the underlying funds, which are borne indirectly by a Fund. If transaction costs and indirect expenses were included, your costs would have been higher.
| Beginning Account Value November 1, 2015 |
Ending Account Value April 30, 2016 |
Annualized Expense Ratio Based on the Six-Month Period |
Expenses Paid During the Six-Month Period(1) |
|||||||||||||
| PowerShares Active U.S. Real Estate Fund (PSR) | ||||||||||||||||
| Actual |
$ | 1,000.00 | $ | 1,034.63 | 0.80 | % | $ | 4.05 | ||||||||
| Hypothetical (5% return before expenses) |
1,000.00 | 1,020.89 | 0.80 | 4.02 | ||||||||||||
| PowerShares Multi-Strategy Alternative Portfolio (LALT) | ||||||||||||||||
| Actual |
1,000.00 | 1,001.32 | 0.90 | 4.48 | ||||||||||||
| Hypothetical (5% return before expenses) |
1,000.00 | 1,020.39 | 0.90 | 4.52 | ||||||||||||
| PowerShares S&P 500® Downside Hedged Portfolio (PHDG) | ||||||||||||||||
| Actual |
1,000.00 | 1,007.90 | 0.36 | 1.80 | ||||||||||||
| Hypothetical (5% return before expenses) |
1,000.00 | 1,023.07 | 0.36 | 1.81 | ||||||||||||
| (1) | Expenses are calculated using the annualized expense ratio, which represents the ongoing expenses as a percentage of net assets for the six-month period ended October 31, 2015. Expenses are calculated by multiplying the Fund’s annualized expense ratio by the average account value for the period, then multiplying the result by 182/366. |
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30 |
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Board Considerations Regarding Continuation of Investment Advisory Agreement and Sub-Advisory Agreement
At a meeting held on April 14, 2016, the Board of Trustees of the PowerShares Actively Managed Exchange-Traded Fund Trust (the “Trust”), including the Independent Trustees, approved the continuation of the following agreements on behalf of PowerShares Active U.S. Real Estate Fund, PowerShares S&P 500® Downside Hedged Portfolio, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio (each, a “Fund” and together, the “Funds”):
| ● | the Investment Advisory Agreement between Invesco PowerShares Capital Management LLC (the “Adviser”) and the Trust for each Fund; and |
| ● | the Investment Sub-Advisory Agreement between the Adviser and the following seven affiliated sub-advisers for each of PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio (the “Sub-Advisory Agreement”): Invesco Advisers, Inc.; Invesco Asset Management Deutschland, GmbH; Invesco Asset Management Limited; Invesco Asset Management (Japan) Limited; Invesco Hong Kong Limited; Invesco Senior Secured Management, Inc.; and Invesco Canada Ltd. (each, a “Sub-Adviser” and collectively, the “Sub-Advisers”). |
Investment Advisory Agreement
The Trustees reviewed information from the Adviser describing: (i) the nature, extent and quality of services provided, (ii) the investment performance of the Funds and the Adviser, (iii) the costs of services provided and estimated profits realized by the Adviser, (iv) the extent to which economies of scale are realized as a Fund grows, (v) whether fee levels reflect any possible economies of scale for the benefit of Fund shareholders, (vi) comparisons of services rendered to and amounts paid by other registered investment companies and (vii) any benefits realized by the Adviser from its relationship with each Fund.
Nature, Extent and Quality of Services. In evaluating the nature, extent and quality of the Adviser’s services, the Trustees reviewed information concerning the functions performed by the Adviser for the Funds, information describing the Adviser’s current organization and staffing, including operational support provided by the Adviser’s parent organization, Invesco Ltd., and the background and experience of the persons responsible for the day-to-day management of the Funds.
The Trustees also reviewed information on the performance of PowerShares Active U.S. Real Estate Fund, its benchmark index (FTSE NAREIT All Equity REITs Index) and the Fund’s Lipper Inc. (“Lipper”) peer group rankings (the 1st quartile being the best performers and the 4th quartile being the worst performers) for the one-year, three-year, five-year and since-inception (November 20, 2008) periods ended December 31, 2015. Based on the information provided, the Board noted that the Fund underperformed its benchmark for the one-year, three-year, five-year and since-inception periods. The Board also noted that the Fund ranked in the 3rd quartile of its Lipper peer group for the one-year, three-year and since-inception periods and in the 2nd quartile of its Lipper peer group for the five-year period.
The Trustees also reviewed information on the performance of PowerShares S&P 500® Downside Hedged Portfolio, its benchmark index (S&P 500 Dynamic VEQTOR Index) and the Fund’s Lipper peer group rankings for the one-year, three-year and since-inception (December 6, 2012) periods ended December 31, 2015. Based on the information provided, the Board noted that the Fund underperformed its benchmark for each period and ranked in the 4th quartile of its Lipper peer group for the one-year period and the 2nd quartile of its Lipper peer group for the three-year and since-inception periods.
The Trustees also reviewed information on the performance of PowerShares Multi-Strategy Alternative Portfolio, its benchmark index (Morgan Stanley Multi-Strategy Alternative Index) and the Fund’s Lipper peer group rankings for the one-year and since-inception (May 24, 2014) periods ended December 31, 2015. Based on the information provided, the Board noted that the Fund outperformed its benchmark for each period and ranked in the 4th quartile of its Lipper peer group for each period. The Board noted the short operating history of the Fund in evaluating the performance of the Adviser.
The Board did not review the performance of PowerShares Variable Investment Grade Portfolio because the Fund had not commenced operations as of April 14, 2016. In response to questions from the Independent Trustees, the Adviser provided supplemental explanations for the performance for PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares S&P 500 Downside Hedged Portfolio.
The Trustees also considered the services provided by the Adviser in its oversight of the Funds’ administrator, custodian and transfer agent and, for PowerShares Active U.S. Real Estate Fund and PowerShares Multi-Strategy Alternative Portfolio, their Sub-Advisers. They noted the significant amount of time, effort and resources that had been devoted to structuring the Trust, obtaining the necessary exemptive relief from the Securities and Exchange Commission and arranging for service providers for the Funds. They noted that, unlike most of the other exchange-traded funds (“ETFs”) for which the Adviser serves as investment adviser, the Funds are not
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Board Considerations Regarding Continuation of Investment Advisory Agreement and Sub-Advisory Agreement (continued)
designed to track the performance of an index, and investment decisions are the primary responsibility of the Adviser or Sub-Advisers, as applicable. The Trustees also noted that the Adviser is responsible for overseeing each Fund’s operations and management, including trade execution.
Based on their review, the Trustees concluded that the nature, extent and quality of services provided or to be provided by the Adviser to the Funds under the Investment Advisory Agreement were or were expected to be appropriate and reasonable, as applicable.
Fees, Expenses and Profitability. The Trustees reviewed and discussed the information provided by the Adviser on each Fund’s net expense ratio and unitary advisory fee, as compared to information compiled by the Adviser from Lipper databases on the net expense ratios of comparable ETFs, open-end (non-ETF) index funds (except for PowerShares Multi-Strategy Alternative Portfolio) and open-end (non-ETF) actively-managed funds. The Trustees noted that the annual unitary advisory fee is 0.80% for PowerShares Active U.S. Real Estate Fund, 0.39% for PowerShares S&P 500® Downside Hedged Portfolio, 0.95% for PowerShares Multi-Strategy Alternative Portfolio and 0.30% for PowerShares Variable Rate Investment Grade Portfolio, and that the Adviser pays all other operating expenses of each Fund, including the fees payable to the Sub-Advisers, except that each Fund pays its brokerage expenses, taxes, interest, litigation expenses and other extraordinary expenses.
The Trustees noted that the Adviser represented that it does not serve as the investment adviser to any clients, other than other ETFs also overseen by the Trustees, with comparable investment objectives and strategies as the Funds. The Trustees noted that:
| ● | the net expense ratio of PowerShares Active U.S. Real Estate Fund was higher than the median net expense ratios of its ETF peer funds and its open-end index peer funds, but was lower than the median net expense ratio of its open-end actively-managed peer funds; |
| ● | the net expense ratio of PowerShares S&P 500® Downside Hedged Portfolio was lower than the median net expense ratios of its ETF peer funds, its open-end index peer funds and its open-end actively-managed peer funds; |
| ● | the net expense ratio of PowerShares Multi-Strategy Alternative Portfolio was higher than the median net expense ratio of its ETF peer funds, but lower than the median net expense ratio of its open-end actively-managed peer funds; and |
| ● | the net expense ratio of PowerShares Variable Rate Investment Grade Portfolio was higher than the median net expense ratio of its ETF peer funds and its open-end index funds, but lower than the median net expense ratio of its open-end actively-managed peer funds. |
In response to questions from the Independent Trustees, the Adviser provided supplemental information comparing each of PowerShares Active US Real Estate Fund’s and PowerShares Multi-Strategy Alternative Portfolio’s advisory fee and total expenses to an alternative peer group that the Adviser believes is more comparable than the Lipper peer group. The Adviser stated that, after reviewing the results of the alternative peer group analysis for these Funds, it believes that the advisory fees and total expenses for these Funds are competitive and generally in line with other comparable funds in the marketplace, particularly in light of the level and nature of services provided and the investment management style of the Adviser.
The Board concluded that the unitary advisory fee charged to each Fund was reasonable and appropriate in light of the services provided.
In conjunction with their review of the unitary advisory fee, the Trustees also considered information provided by the Adviser on the revenues received by the Adviser under the Investment Advisory Agreement. The Trustees reviewed information provided by the Adviser on its overall profitability, as well as the estimated profitability to the Adviser from its relationship to each Fund, other than PowerShares Variable Rate Investment Grade Portfolio. (The Trustees did not consider the estimated profitability of the Adviser in managing PowerShares Variable Rate Investment Grade Portfolio because the Fund had not yet commenced operations as of April 14, 2016.) The Trustees concluded that the overall and estimated profitability to the Adviser was not unreasonable.
Economies of Scale and Whether Fee Levels Reflect These Economies of Scale. The Trustees reviewed the information provided by the Adviser as to the extent to which economies of scale are realized as each Fund grows and whether fee levels reflect economies of scale for the benefit of shareholders. The Trustees reviewed each Fund’s asset size and expense ratio. The Trustees noted that any reduction in fixed costs associated with the management of the Funds would be enjoyed by the Adviser, but a unitary fee provides a level of certainty in expenses for the Funds. The Trustees considered whether the advisory fee rate for each Fund was reasonable in relation to the asset size of that Fund, and concluded that the flat advisory fee was reasonable and appropriate.
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Board Considerations Regarding Continuation of Investment Advisory Agreement and Sub-Advisory Agreement (continued)
The Trustees noted that the Adviser had not identified any further benefits that it derived from its relationships with the Funds and had noted that it does not have any soft-dollar arrangements.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, determined to approve the continuation of the Investment Advisory Agreement for each Fund. No single factor was determinative in the Board’s analysis.
Investment Sub-Advisory Agreement
As noted above, the Board of Trustees of the Trust, including the Independent Trustees, approved the continuation of the Sub-Advisory Agreement for each of PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio at a meeting held on April 14, 2016. The review process followed by the Board is described in detail above. In connection with the review of the Sub-Advisory Agreement, the Board considered the factors described below, among others.
Nature, Extent and Quality of Services. The Trustees considered the nature, extent and quality of services provided under the Sub-Advisory Agreement. The Board also considered the benefits described by the Adviser in having multiple affiliated Sub-Advisers. The Board reviewed the qualifications and background of each Sub-Adviser, the investment approach of the Sub-Adviser whose investment personnel manage PowerShares Active U.S. Real Estate Fund’s, PowerShares Multi-Strategy Alternative Portfolio’s and PowerShares Variable Rate Investment Grade Portfolio’s assets, the experience and skills of the investment personnel responsible for the day-to-day management of each Fund, and the resources made available to such personnel.
Based on their review, the Trustees concluded that the nature, extent and quality of services provided by the Sub-Advisers to PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio under the Sub-Advisory Agreement were appropriate and reasonable.
Fees, Expenses and Profitability. The Trustees reviewed and discussed the information provided by the Adviser and the Sub-Advisers on the sub-advisory fee rate under the Sub-Advisory Agreement. The Trustees noted that the sub-advisory fees charged by the Sub-Advisers under the Sub-Advisory Agreement are consistent with the compensation structure used throughout Invesco when Invesco’s affiliates provide sub-advisory services for funds managed by other Invesco affiliates. The Board considered how the sub-advisory fees relate to the overall advisory fee for each of PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio and noted that the Adviser compensates the Sub-Advisers from its fee.
The Trustees also considered information provided by Invesco Advisers, Inc. on the revenues it receives under the Sub-Advisory Agreement, as well as any profits or losses realized by the Sub-Adviser from its relationship to PowerShares Active U.S. Real Estate Fund and PowerShares Multi-Strategy Alternative Portfolio. The Trustees concluded that the estimated profitability to the Sub-Adviser of the sub-advisory services provided to PowerShares Active U.S. Real Estate Fund and PowerShares Multi-Strategy Alternative Portfolio was not unreasonable.
Economies of Scale and Whether Fee Levels Reflect These Economies of Scale. As part of their review of the Investment Advisory Agreement for PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio, the Trustees considered the extent to which economies of scale are realized as the Funds grow and whether fee levels reflect economies of scale for the benefit of shareholders. The Trustees considered whether the sub-advisory fee rate for PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio was reasonable in relation to the asset size of the Funds, and concluded that the flat sub-advisory fee was reasonable and appropriate.
The Trustees noted that the Sub-Advisers had not identified any further benefits that they derived from their relationships with PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, determined to approve the continuation of the Sub-Advisory Agreement for PowerShares Active U.S. Real Estate Fund, PowerShares Multi-Strategy Alternative Portfolio and PowerShares Variable Rate Investment Grade Portfolio. No single factor was determinative in the Board’s analysis.
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Proxy Voting Policies and Procedures
A description of the Trust’s proxy voting policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities is available, without charge and upon request, by calling (800) 983-0903. This information is also available on the Securities and Exchange Commission’s (the “Commission”) website at www.sec.gov.
Information regarding how each Fund voted proxies for portfolio securities, if applicable, during the most recent 12-month period ended June 30, is available, without charge and upon request, by (i) calling (800) 983-0903; or (ii) accessing the Trust’s Form N-PX on the Commission’s website at www.sec.gov.
Quarterly Portfolios
The Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. The Form N-Qs will be available on the Commission’s website at www.sec.gov. The Trust’s Form N-Qs may also be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.
Frequency Distribution of Discounts and Premiums
A table showing the number of days the market price of each Fund’s shares was greater than the Fund’s net asset value, and the number of days it was less than the Fund’s net asset value (i.e., premium or discount) for the most recently completed calendar year, and the calendar quarters since that year end (or the life of the Fund, if shorter) may be found at the Fund’s website: www.invescopowershares.com.
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Item 2. Code of Ethics.
Not required for semi-annual report.
Item 3. Audit Committee Financial Expert.
Not required for semi-annual report.
Item 4. Principal Accountant Fees and Services.
PricewaterhouseCoopers LLP (“PwC”), the Independent Accountant to the Registrant, has advised the Audit Committee of the Board of Trustees of the Registrant (the “Audit Committee”) that it identified an issue related to its independence under Rule 2-01(c)(1)(ii)(A) of Regulation S-X (referred to as the “Loan Rule”). The Loan Rule prohibits accounting firms, such as PwC, from being deemed independent if they have certain financial relationships with their audit clients or certain affiliates of those clients.
Specifically, the Loan Rule provides, in relevant part, that an accounting firm is not independent if it receives a loan from an audit client or it receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” Pursuant to the SEC’s interpretation of the Loan Rule, some of PwC’s relationships with lenders who also own shares of one or more funds within the Invesco investment company complex may implicate the Loan Rule.
However, after evaluating the facts and circumstances related to its lending relationships, PwC informed the Audit Committee that (1) PwC’s ability to exercise objective and impartial judgment with respect to its audits of the Registrant’s financial statements was not, and will not be, impaired; (2) a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion; and (3) PwC’s independence was not impaired and that it remained independent in conducting its audit of the Registrant’s financial statements. PwC informed the Audit Committee that its conclusion was based on a number of factors, including, among others, PwC’s belief that the lenders have no influence over the investment adviser to the Registrant, or the Registrant, and that the individuals at PwC who arranged the lending relationships have no oversight of, or ability to influence, the individuals at PwC who conducted the audit of the Registrant’s financial statements.
On June 20, 2016, the Staff of the Securities and Exchange Commission (the “SEC”) issued a “no-action” letter confirming that it would not recommend that the SEC commence enforcement action against a fund that relied on audit services performed by an audit firm that was not in compliance with the Loan Rule in certain specified circumstances. The circumstances described in the no-action letter were substantially similar to the circumstances that called into question PwC’s independence under the Loan Rule with respect to the Registrant. PwC has confirmed that it meets the conditions of the no-action relief. The Adviser and the Registrant believe that the Registrant can rely on the relief granted in the no-action letter and continue to issue financial statements that are audited by PwC.
If, in the future, the independence of PwC is called into question under the Loan Rule by circumstances that are not addressed in the no-action letter, the Registrant will need to take other actions for the Registrant’s filings containing financial statements to be compliant with applicable securities laws.
Item 5. Audit Committee of Listed Registrants.
Not required for semi-annual report.
Item 6. Schedule of Investments.
| (a) | The Schedules of Investments are included as a part of the report to shareholders filed under Item 1 of this Form N-CSR. |
| (b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Trustees that would require disclosure herein.
Item 11. Controls and Procedures.
| (a) | Based on their evaluation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing date of this report, the Registrant’s President (principal executive officer) and Treasurer (principal financial officer) have concluded that such disclosure controls and procedures are effective. |
| (b) | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
Item 12. Exhibits.
| (a)(1) | Code of Ethics | |
| Not required for semi-annual report. | ||
| (a)(2) | Certifications of the Registrant’s President and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached as Exhibit 99.CERT. | |
| (a)(3) | Not applicable. | |
| (b) | Certifications of the Registrant’s President and Treasurer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibit 99.906CERT. | |
SIGNATURES
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.
(Registrant) PowerShares Actively Managed Exchange-Traded Fund Trust
| By: | /s/ Daniel E. Draper |
| Name: | Daniel E. Draper | |
| Title: | President | |
| Date: | July 8, 2016 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| By: | /s/ Daniel E. Draper |
| Name: | Daniel E. Draper | |
| Title: | President | |
| Date: | July 8, 2016 | |
| By: | /s/ Steven Hill | |
| Name: | Steven Hill | |
| Title: | Treasurer | |
| Date: | July 8, 2016 | |