Arctic Funds Plc Annual Report 2016

110 Pages·2017·1.6 MB·English

Arctic Funds Plc

Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016

Registered Number: 487003
Arctic Funds Plc
Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016

Contents Page

Directors and Other Information 2
Directors’ Report 4
Investment Manager’s Report 7
Report from the Depositary to the Shareholders 11
Portfolio of Investments 12
Independent Auditor’s Report 37
Statement of Financial Position 39
Statement of Comprehensive Income 45
Statement of Changes in Net Assets attributable to Redeemable Participating Shareholders 48
Notes to the Financial Statements 51
Statement of Portfolio Changes (Unaudited) 93

Appendix 1: UCITS V Remuneration Policy (Unaudited) 109

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Arctic Funds Plc
Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016
Directors and Other Information
Registered Office Irish Legal Advisers
2nd Floor Maples and Calder
Beaux Lane House 75 St. Stephen's Green
Mercer Street Lower Dublin 2
Dublin 2 Ireland
Ireland
Norwegian Legal Advisers
Directors
Bugge, Arentz-Hansen and Rasmussen
John Fitzpatrick (Irish)* Stranden 1
Bengt Arve Rem (Norwegian) (resigned 11 July 2016) P.O. Box 1524
Fiona Mulhall (Irish)* Vika, N-0117
Samuel Haile (Norwegian) (appointed 11 July 2016) Oslo
Kjetil Bakken (Norwegian) (appointed 14 July 2016) Norway

*Independent Director Secretary
All Directors are Non Executive
MFD Secretaries Limited
2nd Floor
Investment Manager and Distributor
Beaux Lane House
Arctic Fund Management AS Mercer Street Lower
Haakon VIIs gate 5 Dublin 2
7th Floor, NO-0161 Ireland
Oslo
Norway Promoter
Arctic Securities AS
Custodian (until 17 March 2016) and
P.O. Box 1833
Depositary (from 18 March 2016)
Vika
BNY Mellon Trust Company (Ireland) Limited N-0123
Guild House Oslo
Guild Street Norway
IFSC
Distributor
Dublin 1
Ireland Arctic Fund Management AS
Haakon VIIs gate 5
Administrator 7th Floor, NO-0161
BNY Mellon Fund Services (Ireland) Designated Oslo
Activity Company** Norway
Riverside Two
Sub-Distributors
Sir John Rogerson’s Quay
Grand Canal Dock Fundsettle EOC Nominees Ltd
Dublin 2 2 Lambs Passage
Ireland ECIY 8BB London
England
Independent Auditor
Nordnet Bank AB
Deloitte
Gustavslundsvägen 141
Chartered Accountants and Statutory Audit Firm
SE-167 14 Bromma
Deloitte & Touche House
Sweden
Earlsfort Terrace

Dublin 2
UBS AG
Ireland
Bahnhofstrasse 45
Swedish Paying Agent CH-8098 Zurich
Switzerland
Skandinaviska Enskilda Banken AB
Sergels Torg 2 MFEX Mutual Funds Exchange AB
SE-106 40 Stockholm Linnégatan 9-11
Sweden SE-114 47 Stockholm
Sweden

Skandiabanken Norge

Folke Bernadottes vei 38
5020 Bergen
Norway

**Please refer to Note 16 of the financial statements.
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Arctic Funds Plc
Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016
Directors and Other Information (Continued)
UK Representative
Maples Fiduciary Services (UK) Limited
11th Floor, 200 Aldersgate Street
London EC1A 4HD
United Kingdom

Luxembourg Representative
Société Générale Bank & Trust
11, Avenue Emile Reuter
L- 2420 Luxembourg
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Arctic Funds Plc
Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016
Directors’ Report
The Board of Directors (the “Directors”) present their annual report together with the audited financial statements for
the financial year ended 31 December 2016. Arctic Funds Plc (the “Company”) is an open-ended umbrella
investment company with registration number 487003.
The Company is a public limited liability investment company with variable capital and segregated liability between
its sub-funds. The Company was authorised by the Central Bank of Ireland (the “Central Bank”) on 5 November
2010 as an undertaking for collective investment in transferable securities pursuant to the European Communities
(Undertakings for Collective Investment in Transferable Securities) Regulations, 2011 (the “UCITS Regulations”)
and the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective
Investment in Transferable Securities) Regulations 2015, as amended (the “Central Bank UCITS Regulations”).

As at 31 December 2016, there are eight active sub-funds, Arctic Return, Arctic Global Equities, Arctic High Return,
Arctic Investment Grade, Arctic Norwegian Equities, Arctic Norwegian Equities II, Arctic Nordic Equities and Arctic
Aurora LifeScience (each a “Fund” and collectively the “Funds”). Arctic Return has four classes of share in issue
designated as Class A NOK Shares, Class B NOK Shares, Class I NOK Shares and Class R NOK Shares. Arctic
Global Equities has four classes of share in issue designated as Class A NOK Shares, Class B NOK Shares, Class
H Hedged NOK Shares and Class I NOK Shares. Arctic High Return has four classes of share in issue designated
as Class A NOK Shares, Class B NOK Shares, Class C NOK Shares and Class D NOK Shares. Arctic Investment
Grade has three classes of share in issue designated as Class B NOK Shares, Class B SEK Shares and Class D
NOK Shares. Arctic Norwegian Equities has five classes of share in issue designated as Class A NOK Shares,
Class B NOK Shares, Class D NOK Shares, Class E NOK Shares and Class I NOK Shares. Arctic Norwegian
Equities II has four classes of share in issue designated as Class A NOK Shares, Class C NOK Shares, Class D
NOK Shares and Class R NOK Shares. Arctic Nordic Equities has six classes of share in issue designated as Class
A EUR Shares, Class A NOK Shares, Class B USD Shares, Class B2 NOK Shares, Class C NOK Shares and
Class R NOK Shares. Arctic Aurora LifeScience has four classes of share in issue designated as Class A NOK
Shares, Class H NOK Shares, Class I NOK Shares and Class I USD Shares.
Directors’ Responsibilities Statement
The Directors’ are responsible for preparing the Directors’ report and the financial statements in accordance with
the Companies Act 2014 and the applicable regulations.

Irish company law requires the Directors to prepare financial statements for each financial year. Under the law, the
Directors have elected to prepare the financial statements in accordance with Financial Reporting Standard (“FRS”)
102: The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland (“relevant financial
reporting framework”). Under company law, the Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the assets, liabilities and financial position of the Company as at the
financial year end date and of the profit or loss of the Company for the financial year and otherwise comply with the
Companies Act 2014.

In preparing those financial statements, the Directors are required to:

 select suitable accounting policies for the Company Financial Statements and then apply them
consistently;

 make judgements and estimates that are reasonable and prudent;

 state whether the financial statements have been prepared in accordance with the applicable accounting
standards, identify those standards, and note the effect and the reasons for any material departure from
those standards; and

 prepare the financial statements on the going concern basis unless it is inappropriate to presume that the
Company will continue in business.

The Directors are responsible for ensuring that the Company keeps or causes to be kept adequate accounting
records which correctly explain and record the transactions of the Company, enable at any time the assets,
liabilities, financial position and profit or loss of the Company to be determined with reasonable accuracy, enable
them to ensure that the financial statements and Directors’ report comply with the Companies Act 2014 and enable
the financial statements to be audited. They are also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
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Arctic Funds Plc
Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016
Directors’ Report (Continued)
Statement of Directors’ Compliance
The Directors acknowledge that they are responsible for securing the Company’s compliance with the relevant
obligations as set out in Section 225 of the Companies Act 2014.

The Directors confirm that:
 a compliance policy document has been drawn up that sets out policies, that in our opinion are appropriate
to the Company, respecting compliance by the Company with its relevant obligations;
 appropriate arrangements or structures are in place that are, in our opinion, designed to secure material
compliance with the Company's relevant obligations; and
 during the financial year, the arrangements or structures referred to above have been reviewed.
Review of Business and Future Developments
The Investment Manager’s Report contains a review of the factors which contributed to the performance for the
financial year.
Arctic Aurora Lifescience was launched on 25 May 2016.
On 19 August 2016, Arctic Norwegian Equities II and Arctic Nordic Equities were created. On 1 November 2016,
Solsten Norwegian Equities Fund and Solsten Nordic Equities Fund (the “Merging Funds”), sub-funds of Solsten
Investment Funds plc (an open-ended investment company with variable capital established under the laws of
Ireland), were merged with Arctic Norwegian Equities II and Arctic Nordic Equities (the “Receiving Funds”),
respectively, sub-funds of the Company. The Merging Funds and the Receiving Funds are both managed by Arctic
Fund Management AS (the “Investment Manager”) and have investment objectives as follows: Arctic Nordic
Equities is to achieve attractive long-term investment returns relative to the VINX Benchmark Next Index NOK, and
Arctic Norwegian Equities II is to achieve attractive long-term investment returns relative to the Oslo Stock
Exchange Mutual Fund Index. The merger, which was approved by the Central Bank on 1 November 2016, resulted
in operational efficiencies and synergies as a result of operating one umbrella platform rather than two.
The Directors do not anticipate any other changes in the structure of the Company or investment objectives of the
Funds in the immediate future.
Risk Management Objectives and Policies
Information in relation to the Company’s risk management objectives and policies are included in Note 10 to the
financial statements.
Significant Events
See Note 16 for details of significant events during the financial year.
Post Balance Sheet Events
There were no significant events affecting the Company since the financial year end.
Results and Dividends
The results and distributions for the financial year are set out in the Statement of Comprehensive Income. See Note
5 for details of distributions made during the financial year.
Directors
The names of the persons who are Directors of the Company for the financial year ended 31 December 2016 are
listed below. All Directors served for the entire year unless otherwise stated.
John Fitzpatrick
Bengt Arve Rem (up to 11 July 2016)
Fiona Mulhall
Samuel Haile (from 11 July 2016)
Kjetil Bakken (from 14 July 2016)
Directors’ and Secretary’s Interests
Samuel Haile and Kjetil Bakken are Directors of the Company with private holdings in the Company’s sub-funds.
Samuel Haile held 61 shares of the Class B NOK of Arctic Norwegian Equities as at 31 December 2016, valued at
NOK 118,960. Samuel Haile and his daughter, held 18 shares and Kjetil Bakken held 200 shares of the Class I
NOK of Arctic Aurora LifeScience as at 31 December 2016, valued at NOK 18,766 and NOK 206,738, respectively.
The Directors are not aware of any other shareholdings in the Company by any Director, the Secretary or their
families during the financial year ended and as at 31 December 2016 and 31 December 2015.

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Arctic Funds Plc
Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016
Investment Manager’s Report
Arctic Return
Arctic Return (the “Fund”) gave a return of 4.05% for the year 2016 and the 3-month Government Certificate Index
(ST1X) returned 0.54% in the same period.
Despite the market turmoil in the beginning of the year, the Fund managed to perform well during 2016 and ended
the year as the best performing Fund within its peer group according to both Norwegian financial newspapers,
Dagens Næringsliv and Finansavisen. The performance came from general spread tightening across the market
during the first quarter, but was particularly helped by strong demand for short dated high yield bonds in the second
half of the year.
The running yield of the Fund is now 2.8%.
Arctic Global Equities
Arctic Global Equities (the “Fund”) yielded 1.42% in 2016, which was 3.82% weaker than its benchmark (MSCI All
Country World Index). Energy, industrials and financials were the best sectors, while healthcare, consumer
discretionary and consumer staples were those who contributed least to the Fund's performance.
Global equities started the year down, partly due to falling commodity prices and concerns around the European
banking sector. Brent crude prices bottomed at USD 27 in January. Subsequently the markets turned. Higher
commodity prices and rising sovereign interest rates resulted in gains for cyclical and interest rate sensitive stocks.
Shares in the energy, financial and mining sectors outperformed. The stock markets in Russia, Argentina and Brazil
were among those with highest returns in 2016.
Even with a slight slowdown in December, the global equity markets were strong during 2016. The capital markets
are highly liquid as a result of the major Central Banks' monetary policies and low interest rates. Global companies
continue to deliver strong earnings and high return on capital. During 2016, the referendum on British membership
of the European Union (“EU”) and the US presidential election contributed to expectations of higher inflation and
somewhat rising long-term rates. British withdrawal from the EU and the election of Donald Trump was also
interpreted as the expression of large voter groups desire to shelter certain domestic industries against foreign
competition by means of protectionist measures. In the United States, there are expectations of increased public
investment in infrastructure, reduced corporate taxes and increased public borrowing. Nevertheless, it is striking
that reported macroeconomic data gives a mixed picture of progress while various confidence indicators points
upwards. It is also worth noting that economic commentators and spokespersons now consistently label inflation as
"reflation" and deflation as "disinflation". And, surprisingly many commentators now equate higher economic activity
with so-called "reflation." Do we have an international situation where the “unsolved” problems of the financial crisis
in 2008 - regarding both banks and indebted private/public borrowers - will be "solved" by means of inflation?
After the election of Donald Trump, US financial stocks rose markedly following expectations of higher interest
rates, lower taxes and less strict regulation. Also in Europe, the financial sector had a strong end to the year. In
addition to higher interest rates, government support in Italy and generally less strict regulations is expected. The
believed weakest banks had the biggest price fluctuations. There are still huge volumes of non-performing loans in
both Europe and the US, limiting the potential for rate hikes. Several commodity prices rose sharply towards the
end of the year albeit from very low levels in anticipation of increased infrastructure investment and inflationary
pressure. This affected mining companies positively. Oil-related shares received additionally positive effect of
announced production curtailments in the Organization of the Petroleum Exporting Countries (“OPEC”). On the
other hand, internationally oriented trade- and transportation stocks fell on fears of increased protectionism.
Companies in certain so-called "Emerging Markets" not least companies in Mexico were affected by this. In
connection with the US election, the healthcare sector was adversely affected by fears of stricter price regulation.
This spurred volatility, and resulted in negative return for the biotechnology sector in general.
In 2016, the Fund's best single investments were Cirrus Logic Inc, EOG Resources Inc and BHP Billiton Ltd. Cirrus
Logic Inc provides audio and amplifier chips to Apple and Samsung for smartphones and devices, with revenue
driven by increased content in smartphones. EOG Resources Inc developed favorably with the rest of the energy
sector on rising oil prices. The Australian resource company, BHP Billiton Ltd, benefitted from the cyclical upswing
during the year.
Weakest performers were Bayer AG and Palo Alto Networks. Bayer AG had a setback early in 2016 following weak
quarterly results and expressing a cautious future outlook. After a good year for IT security stocks in 2015, the
sentiment turned negative in 2016 also hitting Palo Alto Networks Inc. IT security is receiving increasing attention
these days, and the stocks have performed well at the start of 2017.
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Arctic Funds Plc
Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016
Investment Manager’s Report (Continued)
Arctic High Return
Arctic High Return (the “Fund”) gave a return of 7.42% for the year 2016. The 3-month Government Certificate
Index (ST1X) has returned 0.54% in the same period.
2016 was a volatile year for the high yield (“HY”) markets. After a weak start the markets turned stronger from the
end of February. European and American HY indices returned 8.5% and 15.3% in 2016. Margins for the European
HY index, iTraxx Crossover, tightened by 55 basis points (bps) from 345 bps to 290 bps.
After an initial lower oil price, the market changed course and the Nordic HY market showed a healthy pick-up in
risk appetite and a strong performance for 2016 overall. The Fund has also benefited from low interest rate duration
in a period of rising interest rates in the fourth quarter.
The running yield of the Fund is now 7.15% (down from 11.7% a year ago).
Arctic Investment Grade
Arctic Investment Grade (the “Fund”) returned 3.31% for the year 2016. The 3-month Government Certificate Index
(ST1X) returned 0.54% in the same period.
2016 turned out to be a good year for the Fund. Except for February, when concerns around European banks lead
to a sell-off that also affected Nordic investment grade market, the Fund was able to deliver very stable returns at
very low volatility. Starting from July we were able to profit from the very low interest rate duration in the Fund, as
yields around the world rose and high interest rate duration lead to negative returns. Unexpected events like Brexit
or the election of Donald Trump had very little effect on the performance.
10 year NOK interest rate swaps started the year at 1.84% and ended at 1.92%, the 5 years went from 1.23% to
1.53%, while the 3 months NIBOR increased from 1.13% to 1.17%. The US 10 years interest rate swaps widened
from 2.14% to 2.30% and the EUR 10 years interest swaps tightened from 0.87% to 0.52%.
Arctic Norwegian Equities
2016 was a solid year for the Norwegian equity market, as the Oslo Stock Exchange Mutual Fund Index (OSEFX)
rose by 11.50%, driven by energy, financials and cyclical stocks. Among the largest shares oil major Statoil rose by
28%, while media house Schibsted fell by 35%. The winner on the Oslo stock exchange in 2016 was biotechnology
company Nordic Nanovector with a gain of 586%. The Norwegian Krone strengthened against the US Dollar and
against the Euro in 2016. Norwegian 10 year sovereign bond yields rose to 18 bps to 1.64%.
The Fund gave a return of 11.85% in 2016, compared to 11.50% for the OSEFX benchmark index. The Fund’s
overweight in salmon farmer Grieg Seafood ASA was its best position relative to the benchmark index in 2016,
contributing to consumer staples becoming the best relative sector for the Fund. Also contributing positively to
relative returns were underweights in media company Schibsted ASA and accommodation vessel provider Prosafe,
and overweight in debt collector Axactor.
The Fund’s weakest exposure relative to the benchmark was underweight in the oil services company Subsea 7 SA
and oil major Statoil ASA, and overweight in hydrogen infrastructure company NEL ASA. Healthcare was the
Fund’s weakest relative sector in 2016, due to overweight in biotech company Strongbridge Biopharma Plc and
underweight in Nordic Nanovector ASA.

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Arctic Funds Plc
Annual Report and Audited Financial Statements
For the financial year ended 31 December 2016
Investment Manager’s Report (continued)
Arctic Norwegian Equities II
Return from launch on 1 November 2016 to 31 December 2016 was 5.7% for Arctic Norwegian Equities II (the
“Fund”), 0.08% points ahead of the Oslo Stock Exchange Mutual Fund Index (OSEFX) benchmark. Aker BP,
Borregaard ASA and Austevoll Seafood ASA were the largest positive contributors to performance in 2016. The
merger between DETNOR and BP’s North Sea operations derisked Aker BP. Moreover, the oil price recovered
during 2016. Borregaard has been rerated on the back of solid operational performance. Austevoll Seafood ASA
benefited from strong salmon prices. Schibsted ASA, NextGenTel Holding ASA and Petroleum Geo-Services ASA
had the largest negative impacts on return last year. Schibsted ASA was derated due to fear of increased
competition. NextGenTel Holding ASA skipped dividend for 2015 and financial performance was on the weak side.
Petroleum Geo-Services ASA suffered from weak seismic demand and raised equity in December. Last year
Bonheur ASA, Storebrand ASA, Wilh Wilhelmsen Holding ASA and Q-Free ASA were added to our Fund. We sold
our shares in Golden Ocean. At the end of 2016 our portfolio was valued at 14.3 times earnings (12 months
forward) and 1.7 times book value. Corresponding figures for the market were 16.3 and 1.7, respectively. Volatility
continued to be significantly lower than that of the market, contributing to a strong performance measured by
Sharpe and information ratios.
Arctic Nordic Equities
Return from launch on 1 November 2016 to 31 December 2016 was 6.4% for the Arctic Nordic Equities (the
“Fund”), -1.27% points compared to the VINX Nordic Net benchmark. Aker BP, Borregaard ASA and Austevoll
Seafood ASA were the largest positive contributors to performance in 2016. The merger between DETNOR and
BP’s North Sea operations derisked Aker BP. Moreover, the oil price recovered during 2016. Borregaard ASA was
rerated on the back of solid operational performance. Austevoll benefited from strong salmon prices. Novo Nordisk
A/S, Schibsted ASA and Autoliv have had the largest negative impacts on return in 2016. Novo fell on lower long-
term growth prospects due to increased price pressure in the USA. Schibsted ASA was derated due to fear of
increased competition from Facebook. Autoliv had a bumpy share price development last year after a strong
performance in 2015. In 2016, AP Moller - Maersk A/S, H&M, Stora Enso Oyj, Leo Vegas, DNA Oyj, and Dustin
Group AB were added to our portfolio. We divested our shares in Norsk Hydro ASA, ABB, Kesko, Autoliv, DSV and
Norwegian Air Shuttle ASA during last year. At the end of the year, our portfolio was valued at 16.4 times earnings
(12 months forward) and 2.0 times book value. Corresponding figures for the market were 16.6 and 2.3,
respectively. Risk, as measured by standard deviation, continued to be significantly lower than that of the market,
contributing to a strong performance measured by Sharpe and information ratios.
Arctic Aurora LifeScience
Return from launch on 25 May 2016 to 31 December 2016 was 3.97% for Arctic Aurora LifeScience (the “Fund”),
5.56% points ahead of the MSCI World Pharma/Biotech/Life Science NOK Index benchmark. When we in the Fund
team look back on 2016, there are several important themes that emerge. The active management of the Fund is
an important element. Both the outperformance relative to its benchmark, and the positive total return achieved in
the Fund NOK and Hedges share classes. At the same time, the broad knowledge we have on the team related to
the biotechnology and life science sector, is essential for selecting the companies we think have the best
opportunities for success.
Shortly after the Fund's launch on 25 May 2016, the world stock markets were surprised by a much unexpected
Brexit electoral decision. This had a clear impact on the health sector, and was the first positive test of our
investment strategy and portfolio composition in the Fund. The portfolio consists of a balanced proportion of larger
pharmaceutical companies and smaller biotechnology companies. This composition proved to be good even in
challenging times.
The election in the United States was one of the biggest themes in 2016 for the health sector as a whole. It was
from both presidential candidates a strong focus on medicine prices in the United States, and the need for
regulation. This made for a strong decline in the share prices of all companies in the health sector. Our view is that
this pressure will subside when Trump gets to clarify his standpoint on his own health policy during the second
quarter of 2017.
We also believe a new tax policy will have a positive impact on the consolidation of companies in healthcare,
pharmaceuticals and biotechnology. The big pharmaceutical companies will buy several biotechnology companies
to get new innovative products to patients. Among our investments in 2016, we saw a takeover of Vitae
Pharmaceuticals Inc at a premium of 160%, which generated a good positive return to our unit holders. We expect
more acquisitions of this kind among our investments in 2017.

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