Luxonen S.A.
Consolidated Annual Report
1 January - 31 December 2008 ______________________________
The Net Asset Value was USD 11.12 (SEK 87.12) per share as at
31 December 2008.
26, rue Philippe II L-2340 Luxembourg
Reg. N°: R.C.S. Luxembourg B 30.541
Luxonen S.A.
Index to the Consolidated Annual Report
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Consolidated Annual Financial Statements
Page
Management report 3
Director’s declaration 19
Corporate Governance report 20
Independent auditor’s report 25
Consolidated balance sheet 27
Consolidated income statement 28
Consolidated statement of changes in shareholders’ equity 29
Consolidated cash flow statement 29
Notes to the consolidated annual financial statements:
1. General information 30
2. Summary of significant accounting policies:
2.1 Basis of preparation 30
2.2 Consolidation 36
2.3 Segment reporting 38
2.4 Foreign currency translation 38
2.5 Financial assets at fair value through profit or loss 39
2.6 Derivative financial instruments 40
2.7 Cash and cash equivalents 40
2.8 Share capital 40
2.9 Income tax and deferred tax 40
2.10 Employee benefits 40
2.11 Revenue recognition 40
3. Financial risk management 41
3.1 Financial risk factors 41
3.2 Capital risk management 44
3.3 Fair value estimation 44
3.4 Investments in Funds 44
4. Critical accounting estimates and judgments 45 4.1 Fair value of derivative financial instruments 45
4.2 Functional currency 45
5. Financial assets at fair value through profit or loss 45
6. Investments in associates 46
7. Description of the investments 47
8. Derivative financial instruments 48
8.1 Total return swaps 48
8.2 Foreign exchange contracts 52
9. Dividends income 52
10. Share capital and Legal Reserve 53
11. Related party transactions 54
12. Taxation 57
13. Earnings per share 57
14. Dividend per share 58
15. Commitment 58
16. Subsequent events 58
Facts about Luxonen S.A.
59Luxonen S.A.
Management Report
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The net asset value per share in SEK decreased by 30.47% (adjusted for the interim dividend) during 2008.
The net asset value per share decreased from SEK 139.69 to SEK 87.12.
The loss for 2008 was 98.3 MUSD.
The loss per share for 2008 was USD 9.2.
In the fourth quarter 2008 the net asset value per share in SEK decreased by 12.5%.
The loss for the fourth quarter 2008 was 39.2 MUSD or USD 3.7 per share.
In December 2008 Luxonen has distributed an interim dividend amounting to SEK 10 per share.
Tables 3 show the total exposure by 31 December 2008.
The total assets are 118.5 MUSD (see table 3) and the net asset value is 118.2 MUSD.
The equity ratio is 118.2 MUSD / 118.5 MUSD = 99.7%.
The largest holdings were:
1) Nordic Absolute Return Fund 50.1 MUSD with negative return of 12.5%
2) Swedish t-bill 32.5 MUSD
3) Nordic Fund for Emerging Market Debts 29.3 MUSD with negative return of 45.0%
Table 2 shows the return and movements during 2008. The total negative return of all assets was 98.3 MUSD.
Luxonen S.A.
Management Report
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Table 1 Analysis of portfolio over one year.
Investments are expressed according to Market/Director’s valuation
(In MUSD)
31.12.2007 31.03.2008 30.06.2008 30.09.2008 31.12.2008
Alpha Mena Fund 0.0 0.0 15.9 0.0 0.0
Carlson Fund Equity Asian Small Cap 0.0 0.0 0.0 0.1 0.1
Mass Mutual CVP 2.9 1.9 1.8 1.8 1.8
Nordic Absolute Return Fund 69.4 77.6 66.5 56.9 50.1 Nordic Fund for Emerging Market Debt 54.0 54.5 55.6 51.3 29.3
Swedish T-bill 0.0 0.0 0.0 43.0 32.5
Total return swap Banks (see note A below) 29.1 22.2 5.6 7.0 0.0 Total return swaps Carlson Fund Asian
Small Cap (see note A below) 35.8 34.6 12.4 10.0 0.0 Total return swaps DJ Stoxx 50 index (see note A below) 6.6 0.0 0.0 0.0 0.0
Forward exchange contracts 0.0 5.4 0.0 0.0 0.7
Nordic Fund Management Limited 1.0 1.0 0.1 0.3 0.3
Other assets 0.0 0.1 0.3 0.4 0.0
Cash 30.9 40.6 46.1 10.9 3.7
Total assets 229.7 237.9 204.3 181.7 118.5
Total return swaps DJ Stoxx 50 index (see note A below) 0.0 (1.8) (2.6) (3.3) 0.0
Forward exchange contracts 0.0 0.0 0.0 (7.9) 0.0 OMX Stockholm 30 future 0.0 (1.4) 0.0 0.0 0.0
Other liabilities (0.1) (0.1) 0.0 0.0 (0.3)
Net asset value 229.6 234.6 201.7 170.5 118.2
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Note A In October 2008, Luxonen has earlier terminated all the positions in the “Total return swap Banks”, “Total return swaps Carlson Fund Asian Small Cap” and in the “Total return swaps DJ Stoxx 50 Index”.
Luxonen S.A.
Management Report
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Table 2 Net worth of Luxonen analyzed between different investments.
Investments are expressed according to Market/Directors’ valuation
(In MUSD)
Holding at Holding at
31.12.2007 Return Movement 31.12.2008
(See 1 below)
Carlson Fund Equity Asian Small Cap 0.0 0.2 (0.1) 0.1
Mass Mutual CVP 2.9 (0.1) (1.0) 1.8
Nordic Absolute Return Fund 69.4 (19.3) 0.0 50.1
Nordic Fund for Emerging Market Debt 54.0 (24.7) 0.0 29.3
Swedish T-bill 0.0 (4.9) 37.4 32.5
Total return swap Banks (see note A in page 4) 29.1 (15.4) (13.7) 0.0 Total return swaps Carlson Fund Asian
Small Cap (see note A in page 4) 35.8 (18.9) (16.9) 0.0 Total return swaps DJ
Stoxx 50 index (see note A in page 4) 6.6 (0.5) (6.1) 0.0
Forward exchange contracts 0.0 (2.6) 3.3 0.7
Nordic Fund Management Limited 1.0 0.2 (0.9) 0.3
Other Assets 0.0 (12.2) 25.2 13.0
Cash 30.9 0.0 (27.2) 3.7
Total assets 229.7 (98.2) 0.0 131.5
Other liabilities (0.1) (0.2) 0.0 (0.3) Net asset value (“N.A.V”) before
Extra dividend 229.6 (98.4) 0.0 131.2
Dividend to shareholders (13.0)
Net asset value (“N.A.V”) after
Extra dividend 118.2
Number of shares 10,629,760 10,629,760
N.A.V. per share USD 21.60 (SEK 139.69) USD 11.12 (SEK 87.12)
1. Movements include cash variations relating to purchases of investments, expenses (positive), sales of investments and dividends (negative).
Luxonen S.A.
Management Report
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Table 3 Assets by category as at 31
stof December 2008.
Investments are expressed according to Market/Directors’ valuation
(In MUSD)
Assets by Asset/
Category nav
USD million %
Shares 0.1 0
Hedge Fund 50.1 42
Interest bearing securities 64.3 55
Other assets 0.3 0
Cash 3.7 3
Total assets 118.5 100
Other liabilities (0.3) (0)
Net asset value 118.2 100
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Luxonen S.A.
Management Report
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Table 4 Net worth of Luxonen analyzed between different investments from 27 January 1995 to 31 December 2008.
Investments are expressed according to Market/Directors’ valuation
(In MUSD)
Holding at Holding at
27.01.95 Return Movement 31.12.2008
Carlson Fund Equity Asian Small Cap 0.0 12.0 (11.9) 0.1
Mass Mutual CVP 0.0 5.2 (3.4) 1.8
Nordic Absolute Return Fund 0.0 14.7 35.4 50.1
Nordic Fund for Emerging Market Debt 0.0 (10.3) 39.6 29.3
Swedish T-bill 0.0 (4.9) 37.4 32.5
Total return swap Banks (See note A in page 4) 0.0 17.7 (17.7) 0.0 Total return swap Carlson Fund Asian
Small Cap (See note A in page 4) 0.0 15.1 (15.1) 0.0 Total return swap DJ Stoxx
50 index (See note A in page 4) 0.0 5.6 (5.6) 0.0
Forward exchange contracts 0.0 5.8 (5.1) 0.7
Nordic Fund Management Limited 0.0 5.7 (5.4) 0.3
Other Assets 0.0 (10.1) 23.1 13.0
Other Investments (see 1 below) 212.9 66.2 (279.1) 0.0
Cash and other costs 0.0 0.1 3.6 3.7
Total assets 212.9 122.8 (204.2) 131.5
Debts (192.6) 3.9 188.7 0.0
Other liabilities 0.0 (15.8) 15.5 (0.3)
Net asset value before extra dividend 20.3 110.9 0.0 131.2
Net asset value after extra dividend (see 2 below) (13.0) 118.2
1) Other investments include all the investments sold or liquidated before 31 December 2006.
2) This corresponds to the amount paid out in December 2008 as Interim Dividend to the shareholders.
Luxonen S.A.
Management Report
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Table 5 Quarterly assets and net asset value
Total assets Net asset value Net asset value per MUSD MUSD share in SEK
27 January 1995 212.9 20.3 12.6
30 June 1995 223.1 27.6 16.8
30 September 1995 232.1 34.6 20.0
31 December 1995 228.3 32.0 17.8
31 March 1996 234.6 38.4 21.4
30 June 1996 247.7 51.2 28.3
30 September 1996 249.8 51.7 28.6
31 December 1996 247.9 52.6 30.2
31 March 1997 232.5 40.5 25.6
30 June 1997 247.7 53.6 34.6
30 September 1997 244.3 52.1 33.0
31 December 1997 176.4 39.0 25.8
31 March 1998 189.9 51.3 34.1
30 June 1998 178.1 40.1 26.7
30 September 1998 164.6 26.3 17.2
31 December 1998 152.3 43.5 29.4
31 March 1999 147.7 39.1 27.2
30 June 1999 159.9 52.4 36.0
30 September 1999 158.1 50.7 33.5
31 December 1999 164.4 67.0 46.2
31 March 2000 76.9 66.9 50.7
30 June 2000 65.8 65.8 51.2
30 September 2000 62.7 62.6 53.9
31 December 2000 57.4 57.0 50.0
31 March 2001 54.0 53.9 52.3
30 June 2001 54.0 53.9 55.2
30 September 2001 53.5 53.4 53.7
31 December 2001 54.5 54.4 53.7
31 March 2002 58.8 58.6 57.2
30 June 2002 62.9 62.8 54.3
30 September 2002 63.6 62.9 54.9
31 December 2002 62.7 62.6 51.3
31 March 2003 65.3 65.2 51.9
30 June 2003 71.1 71.0 53.4
30 September 2003 84.6 84.5 61.7
31 December 2003 97.8 97.7 66.1
31 March 2004 142.5 95.1 67.4
30 June 2004 145.2 97.7 69.1
Luxonen S.A.
Management Report
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Table 5 Quarterly assets and net asset value (continued)
Total assets Net asset value Net asset value per MUSD MUSD share in SEK
30 September 2004 153.7 104.3 71.3
31 December 2004 123.2 123.1 77.1
31 March 2005 119.9 118.2 78.6
30 June 2005 115.3 110.9 81.5
30 September 2005 122.9 121.9 88.7
31 December 2005 139.1 136.1 101.87
31 March 2006 156.7 156.2 114.54
30 June 2006 158.5 157.9 106.97
30 September 2006 166.7 166.5 114.84
31 December 2006 197.2 196.8 126.79
31 March 2007 203.9 203.8 133.90
30 June 2007 223.0 221.0 142.09
30 September 2007 236.4 233.4 141.36
31 December 2007 233.0 229.6 139.69
31 March 2008 237.9 234.6 131.15
30 June 2008 204.3 201.7 114.10
30 September 2008 181.7 170.5 110.98
31 December 2008 118.5 118.2 87.12
Until 31 December 2004 the above figures were the result of the application of the Luxembourg GAAP.
From 1 January 2005 the IFRS accounting policies were applied to calculate the above figures.
In December 2008 Luxonen has distribute an interim dividend amounting to SEK 10 per share.
Luxonen S.A.
Management Report
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Table 6 Earnings trend
(Amounts in USD/000)
3 months 3 months 12 months 12 months
Sept-Dec Sept-Dec Jan-Dec Jan-Dec
2008 2007 2008 2007
Income
Dividend income 115 1,369 2,053 3,905
Net gain / (loss) on financial assets at fair
value through profit or loss (28,855) 607 (49,451) 9,701 Net gain / (loss) on derivative financial instruments (3,275) (5,985) (40,680) 18,011
Interest income 780 249 1,812 697
Share of profit / (loss) of associates 165 110 (503) (663)
Other income 1 121 195 544
Net gain on foreign exchange 0 0 0 1,365 Total income (31,069) (3,529) (86,574) 33,560
Expenses
Administrative expenses (388) (209) (1,048) (840)
Net loss on foreign exchange (7,702) (118) (10,640) 0
Total expenses (8,090) (327) (11,688) (840)
Minority interest (0) (0) (0) (1) Total expenses and minority interest (8,090) (327) (11,688) (841)
Net Profit (Loss) (39,159) (3,856) (98,262) 32,719
Earnings per share (3.68) (0.36) (9.24) 3.08
Number of shares 10,629,760 10,629,760 10,629,760 10,629,760
The amount showed as Earnings per share is calculated dividing the Profit by the number of shares.
Luxonen S.A.
Management Report
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Nordic Fund for Emerging Market Debts
2008 was divided by the bankruptcy of Lehman Brothers. Up to September 17, the Nordic Fund for Emerging Market Debt (“Nordic”) turned in a satisfactory performance: at the end of August, Nordic was up 3.87% for the year (versus the EMBIG up 1.75%). The portfolio had an average maturity of less than 2 years and was only modestly leveraged.
The impact of the Lehman collapse was dramatic. Nordic’s NAV declined 19% in September, 17% in October, 7% in November, and 15% in December, for an annual net performance of approximately - 44%. In general, these declines were mark to market losses, not realized losses, but they were, nevertheless, declines. As the severe credit crunch moved into the wider economy during 4Q2008, emerging markets borrowers that reported impressive 1H2008 results, faced such a dramatic collapse of credit and markets that they failed to meet payment obligations in 4Q 2008. Thus, in addition to price declines, 4Q2008 witnessed significant deterioration in the creditworthiness of certain emerging markets issuers.
During the first eight months of 2008, our basic thesis was bearish, including concerns about inflation and stagnation in the US versus continued increase in reserves of commodity exporters, notably oil producers. The duration structure of the portfolio was intended to have the portfolio naturally go into cash as assets matured, permitting a choice to reinvest or to hold cash without having to sell into a market that was already significantly less liquid in 2008 than it had been the prior year. However, we did not anticipate the magnitude and speed of the crisis that unfolded following Lehman’s bankruptcy.
During the days and weeks after September 17, global capital markets ceased, in many ways, to function as efficient markets.
Specific Lehman Brothers Issues
The Fund held, through a sub-participation at Lehman Brothers UK (“LBUK”) a $3.5 million loan to a Russian borrower. The Fund had issued instructions to convert the sub-participation into an open assignment to Standard Bank, but the assignment from LBUK to Standard Bank was not complete when LBUK declared bankruptcy. The Fund’s position is governed by standard LMA documentation.
The Fund is still seeking to have the Russian loan assigned to Standard Bank, or its proceeds paid to the Fund if the loan matures prior to such assignment. However, it is impossible to be certain that the Fund will be able to recover in full, so it has written down the value of the $3.5 million position to that of general unsecured claims on LBUK.
Luxonen S.A.
Management Report
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Nordic Fund for Emerging Market Debts (continued)
The Global Context
Although we acknowledged, in June, that global liquidity was driving inflation and that high real interest rates could significantly reduce global leverage and liquidity, we did not predict the current collapse in liquidity and attempts to decrease leverage. Unavailability of capital is effectively an infinite interest rate, and the cost of capital has become extreme for all categories of borrowers (except the ever expanding set of institutions privileged enough to access subsidized government funding).
Looking back to the 1982 debt crisis in the emerging markets, a crucial catalyst was the relatively abrupt move from negative real interest rates during the 1970s to positive real rates under the Volcker Fed. Sadly, unlike the 1980s when the crisis was largely confined to the (then relatively peripheral) emerging markets, this deleveraging crisis is global.
The second half of 2008 has been defined by the events of September and October, which involved massive deleveraging which in turn produced further deleveraging. Investors have been selling what they can sell, not necessarily what they want to sell. Thus, the prices of good assets have declined along with the prices of bad assets. Moreover, funds in liquidation and banks selling off margin collateral have put further downward pressure on prices, which has created a negative cycle of further margin calls forcing further selling (the Russian equity market being a poster child for this negative feedback loop).
Declining equity prices and rising real rates have strained any corporation requiring additional capital.
The negative wealth effect from declining portfolio and real estate values, reduced availability of consumer credit, rising unemployment and fears of joblessness have sapped consumer demand. The paradox of thrift has been invoked. As the global economy slides into synchronized recession, revenues of corporations and governments are dwindling at a time when access to financing to bridge the recessionary times is scarce and costly for borrowers. Lower costs of inputs (falling commodity prices) seem likely, and will help some (Turkey, Asia) and hurt others (Latin America, Russia, Africa), as speculators exit the commodity (and other) arenas and demand slows. Estimates of the duration of the US recession range from 2 to 7 years.
What can turn the immediate crisis around? First, we must acknowledge steps that have been taken so far. With the striking exception of the Lehman failure, and some unjustified foot dragging and unwarranted faith in talk (versus action), we have witnessed increasingly pro-active central banking.
The preservation of the financial infrastructure will not create a recovery by itself, but no recovery is possible with a failed financial infrastructure.
Luxonen S.A.
Management Report
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Nordic Fund for Emerging Market Debts (continued)
However, recovery cannot be driven by the public sector. The Obama administration has announced its intent to initiate a $787 billion stimulus program, but it is dwarfed by the decline in US household wealth (down an estimated $13 trillion in 2008) and the rise in US household savings rates. Moreover, the infrastructure portion of the stimulus package will have an impact with a significant delay: the Congressional Budget Office estimates that a mere $18 billion of transportation projects can start by the end of 1Q 2009.
The longer term impact of additional deficit spending will eventually cause its own pain, through inflation and higher rates paid by the US government as it tries to place massive amounts of US Treasury debt ($6.3 trillion in 2009 of which only $4.3 trillion represents rollover) with lenders, notably China, that are allocating resources to their own domestic stimulus programs. The demographic impact of aging and retiring baby boomers who are funding college for the echo baby boom, will retard consumption as well as a recovery in housing and equity markets. We see no near term catalyst for economic recovery.
Looking beyond the immediate crisis, global central banks have injected massive cash into their respective national economies, but have avoided inflation as the velocity of money has collapsed along with leverage. For the moment, wealth destruction, recession and deleveraging trump government sponsored creation of liquidity but, at some future time, growth and stability along with financing and leverage, will return and the huge increase in money supply will be inflationary.
Although the current crisis started in the US, its impact has reached the emerging markets through declining commodity prices, declining demand for all kinds of manufactures, and through a sudden transition to a dramatically positive real cost of borrowing. We, therefore, expect to see more defaults, both sovereign and corporate, in the coming years than was the case during the great moderation that recently came to a close.
Nevertheless, some fixed income sectors have improved from their worst (immediately post Lehman) levels, albeit remaining far from the levels of more halcyon days. That would include the TED spread (3 month LIBOR minus 3 month Treasury) which indicates banks’ willingness to extend credit to one another, as well as the spread on high grade and high yield debt in the developed and emerging markets and the short term commercial paper market. Emerging markets fixed income funds and US high yield bond funds recorded significant inflows in December, while EM credit funds suffered significantly slowing outflows.
Luxonen S.A.
Management Report
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Nordic Fund for Emerging Market Debts (continued)
Implications for the Fund
Nordic’s highest priorities for 2009 will be to eliminate leverage. A secondary goal will be to adjust the portfolio to exit credits that are relatively overvalued or in which Nordic has a large position as a result of declining fund NAV.
In our view, the fundamentals of emerging markets debt issuers have deteriorated, but they have deteriorated less than the prices of the debt, which reflect illiquidity and deleveraging as well as fundamentals. Thus, we believe that (a) the Fund’s mark to market valuation includes significant value which will be realized over time (the weighted average life of the performing assets in the portfolio is less than two years and (b) attractive opportunities exist in the EM fixed income market as a result of illiquidity and market dislocations.
Nordic Absolute Return Fund
The stock market year of 2008 will go to the records as one of the worst ever. The worst fears with regards to the economic development did not only prove right but were also exceeded! Even if the beginning to the year was not too alarming, more negative statistics and information started to drop in thereafter.
The concerns at the onset of the year were mainly related to raw material prices and inflation at the same time as the US economy weakened and the problems in the financial sector continued to increase.
European central banks seemed to live in another world, raising interest rates despite the fact that all economic indicators were pointing in the wrong direction. FED, already in the beginning of the year, cut rates even in between scheduled meetings.
When Bear Sterns was saved from bankruptcy, in March, markets took a sigh of relief, and held up quite well until summer. Commodity price rises, with oil at an all time high, and even more signs of a recession spreading outside of the USD made markets turn heavily down in June.
Fundamentals, which for long had been prevailing as the valuation tool, suddenly seemed to disappear.
Too highly indebted enterprises and large scale problems with refinancing of maturing debt, combined with accelerating house price falls in the US and parts of Europe, caused demand to drop off a cliff for more or less all products and services.
Luxonen S.A.
Management Report
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Nordic Absolute Return Fund (continued)
The catalyst for the collapse was the Lehman Brothers bankruptcy in mid September. After that decision, the whole banking sector became paralysed. Nobody trusted another anymore and and counter party risks were highlighted. The massive leverage that had been built all over the financial world came in a different light and trying to find out who owned what and who was indebted to whom became almost impossible. The consequences were an unprecedented financial crisis and suddenly the situation was compared to the worst crisis of them all, the one in the 1930´s.
Banks could no longer refinance and large corporate transactions carried out with heavy debt financing are nowadays history. Government ownership, rescue packages and guarantees to the worst hit companies are just part of all action programmes undertaken. The rapid increase in unemployment, falling private consumption, lower capital expenditure programmes combined with higher private savings, have forced the public sector to increase its efforts. All these measures will make budget deficits explode, for 2009.
Global economies just collapsed during the final quarter and even the most robust companies will show large earning declines in their fourth quarter reports. Starting in the US, in 2007, the contracting economy eventually spread all over the world and not even the strong growth economies in Asia will manage to show growth for the latter part of 2008.
Global equity markets also had to suffer heavy declines. The forced deleveraging amongst institutions and other investors caused substantial sales of all kinds of risk perceived assets. It was only government guaranteed interest bearing papers that seemed to suffice, leading to a negative yield on short term US treasuries at the end of the year.
The Stockholm Stock Exchange index was down by 38.1 % for 2008, whilst S&P 500 was down by 37.2 % and the Eurostoxx 600 index by 43.4 %. We will have to go back to the 1930´s to find as bad a performance.
Portfolio strategy
The Fund ended the year with a negative return of 12.5 %. We started out having a negative net exposure based on our belief of a considerably worse economic environment than the consensus view.
In connection with rapid global falls in equity markets, we closed our short positions and stated buying a defensive long portfolio with options written on the underlying holdings.
Luxonen S.A.
Management Report
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Nordic Absolute Return Fund (continued)
When the credit market turmoil increased, but Bear Stearns in the final end was saved from collapse, we thought that the worst was behind us and that the historical patterns would be repeated. We believed that the troughs in equity markets would coincide with peak earnings and the final interest rate cuts in this economic cycle. We also expected large earnings declines, but key ratios still seemed attractive.
Therefore, we increased our net exposure all the way until summer, when it almost reached 90 %.
This decision, in hindsight, would turn out to be a mistake. We had been talking about a deep US recession, but it never seemed the most likely scenario. New highs in commodity prices, combined with US mortgage banks’ problems, consumers’ lower propensity to spend and ECB’s unwillingness to cut rates, all led to a substantial fall in world stock markets. The Fund was hit hard and we lost 13.6 % of net assets in June. Despite us not grasping the full extent of the global demise, we quickly retrenched and reduced risks to almost zero in early July.
The rest of the year could be summed up by the word ‘meltdown’. Lehman Brothers’ bankruptcy was the catalyst for the plunge in world equity markets, and it will be long before we will go back to normalised circumstances in global financial markets. It was not much help that Freddie Mac and Fannie Mae were saved, that well reputed investment banks like Merrill Lynch, Goldman Sachs and Morgan Stanley either were taken over or became bank holding companies with state guarantees. Even in Europe, a number of large banks were more or less nationalised because of need for fresh capital injections.
During autumn, we thought psychology, rather than fundamentals, were steering the pricing mechanism of risk and we stayed away from all kinds of risky assets. In hindsight, one could ask why we did not make money during the time of significant falls in equity markets, when we were spot on in our analysis of the macro development? The answer lies in the fact that the fall came too rapidly and forcefully. We were waiting for bounces, which timing wise would give better opportunities to go short stocks we thought had the best reward potential. Any such opportunities did not appear until the correction more or less was over.
Apart from the dreadful month of June, the Fund managed to give a positive return during the rest of the year. We ended 2008 with a negative return of 12.5 %. In spite of this, we can highlight that since the inception of the Fund in April, 2003, the total return, less of all fees, has been 41 %. During the same time, our benchmark, the Swedish 90 days treasury bills, has returned 17 %.
Luxonen S.A.
Management Report
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Total return swaps Banks
In the first quarter of 2004, Luxonen took a position in four Nordic Banks through total return swaps.
Luxonen will get the return from shares in Svenska Handelsbanken, Föreningssparbanken AB, Nordea Bank AB and Den Danske Bank. The total value of the banks’ shares was 352 MSEK in equal weight.
To get this Luxonen will pay a fixed interest of 4.6% for five years. The Company is entitled to receive the dividends paid by the Banks. During the first nine months in 2008, the Company has reversed these operations and in October 2008 the Company has earlier terminated all the bank swaps. For 2008 the total return on the swaps was minus 15.4 MUSD.
Total return swaps Carlson Fund Equity Asian Small Cap
In 2005, Luxonen bought 20.0 MUSD in Carlson Fund Equity Asian Small Cap through total return swaps. In 2007, Luxonen has covered all the positions in the “Total return swaps Carlson Fund Asian Small Cap” with two transactions having termination date May 2008. In October 2008 the Company has earlier terminated all these swaps. For 2008 the total return on the swaps was minus 22.2 MUSD.
Total return swaps DJ Stoxx 50 Index
In 2005, Luxonen took a position in 50 largest companies in Europe through total return swaps.
Luxonen pays a fixed interest rate yearly and it will get the return from the DJ Stoxx index in 2010. In 2007, Luxonen has covered all the positions in the “Total return swaps DJ Stoxx 50 Index” with one transaction having termination date May 2008. In October 2008 the Company has earlier terminated all these swaps. For 2008 the total return on the swaps was minus 0.5 MUSD.
Interim Dividend
In October 2008 the Board of Directors has decided to distribute a one time dividend amounting to SEK 10 per share.
The above dividend has been paid out on the 9th of December 2008.
Board meetings during 2008
There were three ordinary board meetings during 2008. The first meeting was held in February when the financial statements for the year ending 2007 were approved. The other two meetings were in May and September. Telephone board meetings were held between the main board meetings as necessary.
All major changes in the assets of the Company are decided by the Board of Directors. All investments made by Exotica Management Limited are also approved by the Board of Luxonen S.A.
Luxonen S.A.
Management Report
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Material events that have occurred during the second 6 months of the year
All the Financial Markets worldwide have experienced very difficult time during the second six months of 2008 with large decreases in the major indexes. For this reason, the investments of Luxonen have suffered and the Net Asset Value was recorded with a drastic decrease.
Principal risks and uncertainties for the first 6 months of the next financial year
With the continuous increase of the crises the world’s economic environment does not look promising.
Subsequent events
According to the law of 22 December 2006, the benefits from the holding 1929 regime will cease by the end of 2010. For this reasons the Board has decided to propose to the Extraordinary General Meeting of the shareholders on 17 April 2009, to transfer Luxonen S.A. from the legal status of holding 1929 to the legal status of Ordinary Commercial Company. This operation will be effective before the end of the second quarter 2009.
In the same time Luxonen S.A. will take the following actions:
1) Incorporate a new company in Malta with name Luxonen Malta Topco Limited. This company will be held by Luxonen at 99.99%.
2) Transfer Exotica Management Limited from the B.V.I. to Malta, change it name into Luxonen Malta Holdco Limited and in same time incorporate the company under the Malta Law. This company will be held by Luxonen Malta Topco Limited at 99.99%. As soon as Luxonen Malta Holdco Limited will be incorporated in Malta, Luxonen S.A. will transfer to Luxonen Malta Holdco Limited its investments in The Nordic Absolute Return Fund and in the Nordic Fund for Emerging Market Debt as contribution to the share capital.
18 February 2009
Björn Carlson Rickard Björklund Eric Hermann Michael Horsburgh
Chairman Director Director Director
Märtha Josefsson Johan Kuylenstierna Bo Lehander Claude Niedner
Director Managing Director Director Director
Luxonen S.A.
Director’s Declaration
The Directors of Luxonen S.A. declare:
- These 31 December 2008 consolidated annual report of Luxonen S.A. and its consolidated subsidiaries and associates (“the Group”) are for the twelve months ended 31 December 2008; they have been prepared in accordance with International Financial Reporting Standard as adopted by the European Union.
- These 31 December 2008 consolidated annual report of Luxonen S.A give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole.
- The management report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
The Directors of Luxonen S.A.:
Björn Carlson, Chairman (1935), Board member since 1989 Managing Director of Carlson Investment Management (1990-2000) Managing Director of Activ Placering AB (1974 – 1989)
Shares in Luxonen S.A.:
81,100 directly
3,078,780 via an investment bond (beneficiaries are members of Björn Carlsons’ family)
Rickard Björklund (1961), Board member since 2005 Owner of several small companies in Sweden Shares in Luxonen S.A.: 0
Eric Hermann, (1953), Board member since 2007 President of FH International Asset Management, LLC Shares in Luxonen S.A.: 100,000
Michael Horsburgh (1945), Board member since 2007 Alternative Investment Manager
Shares in Luxonen S.A.: 0
Märtha Josefsson (1947), Board member since 2001 Independent investment consultant
Other Board membership: Fabege, Anoto, Investment AB Öresund, Upssala Nya Tidningar, AP2, Skandia fonder, Svenska Lärarfonder Shares in Luxonen S.A.: 458,772
Johan Kuylenstierna (1959), Board member since 2007 Partner in Kuylenstierna & Skog SA.
Shares in Luxonen S.A.: 0
Bo Lehander (1959), Board member since 2007 Chairman of Alsback Förvaltning AB
Shares in Luxonen S.A.: 1,167,895 (including family)
Claude Niedner (1966), Board member since 2008 Partner at Arendt & Medernach
Shares in Luxonen S.A.: 0
Corporate Governance Report
Corporate governance practices define the decision making system through which owners, directly or indirectly, control a company.
Luxonen is a Luxemburg company with shares listed on the Stockholm Stock Exchange. The Corporate Governance Report describes how the work of corporate governance has been conducted in Luxonen during the 2008 financial year. The report has not been reviewed by the auditors.
For Luxonen´s Article of Association, see www.luxonen.com
Overall structure of governance at Luxonen
Luxonen S.A.
Exotica Management Limited Nordic Fund Management Ltd
100 % 33.6 %
Managing Director Board of Directors Shareholders Nomination committee
Auditors Audit committee
Remuneration committee
In Exotica Management Limited the derivatives are transaction conducted. Nordic Fund Management Ltd is the management company for Nordic Absolute Return Fund and Nordic Fund for Emerging Market Debt.
Structure and Business idea
The business idea of Luxonen is to maximize return with a controlled risk and without any other limitation then what the board of directors decided. Investments can be made in a wide range of financial products. Some of the investments could have a high risk profile but the overall risk should be limited.
Annual General Meeting
Luxonen’s AGM is held in Luxemburg the third Friday of April. The AGM 2009 will take place on April 17 at the head office 26 rue Philippe II in Luxemburg.
All shareholders wishing to have business taken up at the meeting shall send a written proposal to the chairman of the board, or alternatively, to the Nomination Committee.
There were three ordinary board meetings and one telephone board meeting during 2008. The first meeting was held in February when the financial statements for the year ending 2007 were approved. The other two meetings were in May and September. The Telephone board meeting was held in December.
Nomination Committee
Mrs. Märtha Josefsson Director Luxonen Chairman Mrs. Eva Fahlman Nominated by a shareholder Ms. Elisabeth Skog Independent
Märtha Josefsson was elected as Chairman as she is the most experienced even if this is against the recommendations from the Swedish Corporate Code of Governance.
The role of the Nomination Committee is to prepare and present proposals for submission to the 2009 AGM:
AGM Chairman
Board Chairman
Board of Directors
Board remuneration
Audit company
Audit fees
Board of Directors
Board member Position Born Nationality Independent Shares
Mr. Björn Carlson Chairman 1935 Swedish No 3.159,880 Mr. Rickard Björklund Director 1961 Swedish Yes 0 Mr. Eric Hermann Director 1953 U.S. Citizen Yes 100,000 Mr. Michael Horsburgh Director 1945 British Yes 0 Mrs. Märtha Josefsson Director 1947 Swedish Yes 458,772 Mr. Johan Kuylenstierna Man. Director 1959 Swedish No 0 Mr. Bo Lehander Director 1959 Swedish No 1,167,895 Mr. Claude Niedner Director 1966 Luxembourg Yes 0
Björn Carlson owns 3,078,780 shares via an investment bond (beneficiaries are members of Björn Carlson’s family)
Facts about the Board of Directors
Björn Carlson, Chairman (1935), Board member since 1989
Managing Director of Carlson Investment Management (1990-2000) Managing Director of Aktiv Placering AB (1974 – 1989)
MBA Stockholm School of Economics 1958 Ekon Lic. Stockholm school of Economics 1964 Attended 4 out of 4 board meetings 2008 Shares in Luxonen S.A.:
81,100 directly
3,078,780 via an investment bond (beneficiaries are members of Björn Carlson’s family)
Rickard Björklund (1961), Board member since 2005 Managing Director of Skebo Estates
Managing Director of Matteus Fondkommission (1990 – 2000) Attended 2 out of 4 meetings 2008
Shares in Luxonen S.A.: 0
Eric Hermann, (1953), Board member since 2007 President of FH International Asset Management, LLC Bear Stearns (1981 -1986)
Chase Manhattan Bank (1981 – 1986)
Masters of Arts in Law and Diplomacy Flethcer School of Law and Diplomacy Attended 4 out of 4 meetings 2008
Shares in Luxonen S.A.: 100,000
Michael Horsburgh (1945), Board member since 2007 Executive Director Arden Asset Management
Managing Director ABN Amro New York (1999 – 2007)
Executive Vice President Hannuri Investment & Securities Co Ltd (1997 – 1999) Managing Director Carlson Investment Management New York (1991 -1997) Royal Military Academy Sandhurst 1965
Attended 0 meetings 2008 Shares in Luxonen S.A.: 0
Märtha Josefsson (1947), Board member since 2001 Independent investment consultant
CIO DnB Asset Management (2002)
CIO Skandia Asset Management (2000 – 2002) CIO Carlson Investment Management (1990 – 2000)
Other Board membership: Fabege, Anoto, Investment AB Öresund, Upsala Nya Tidningar, AP2, Skandia fonder, Svenska Lärarfonder
B.A. – Economics University of Uppsala 1971 Attended 3 out of 4 meetings 2008
Shares in Luxonen S.A.: 458,772
Johan Kuylenstierna (1959), Board member since 2007 Partner in Kuylenstierna & Skog S.A.
Head of Private Banking Skandinviska Enskilda Banken Luxembourg S.A.(1994 – 2000) B.A. – Economics University of Lund (1981)
Attended 4 out of 4 meetings 2008 Shares in Luxonen S.A.: 0
Bo Lehander (1959), Board member since 2007 Chairman of Alsback Förvaltning AB
Skandia Asset Management (2000 – 2001) Carlson Investment Management (1990 – 2000) B.A. – Economics University of Uppsala Attended 4 out of 4 meetings 2008
Shares in Luxonen S.A.: 1,167,895 (including family)
Claude Niedner (1966), Board member since 2008 Partner at Arendt & Medernach
Member of the Luxembourg Bar since 1993
Master in law Univesity of Robert Schuman Strasbourg Master in B.A Hautes Etudes Commerciales Paris Attended 2 out of 4 meetings 2008
Shares in Luxonen S.A.: 0
Managing Director
Johan Kuylenstierna (1959)
Partner in Kuylenstierna & Skog SA
Head of Private Banking Skandinviska Enskilda Banken Luxembourg S.A.(1994 – 2000) B.A. – Economics University of Lund (1981)
Attended 4 out of 4 meetings 2008 Shares in Luxonen S.A.: 0
Remuneration Committee
The Remuneration Committee consists of the board.
Audit Committee
The Audit Committee consists of the board.
Report on internal control in respect of financial reporting
Internal control is the process that is run by the Board of Directors, company management and other staff for the purpose of building confidence that the company
• has an appropriate and efficient organisation for its business operations
• produces reliable financial reports, and
• complies with applicable laws and regulations
This report has been prepared in accordance with the Swedish Corporate Governance Code (Sections 3.7.2 and 3.7.3). The report, which is limited to internal control in
respect of financial reporting, does not constitute a part of the formal annual report and has not been examined by the
Control environment
Luxonen is a holding company with two major investments. Business and the legal structure is very straight forward.
The Managing Director is in charge of the daily management but all major changes in the assets of the Company are decided by the Board of Directors. The Board of Directors evaluate all investments during the board meetings.
The NAV are published on a monthly basis and are controlled by the Managing Director and by one of the Directors from the Board. Overall responsibility for ensuring good internal control and efficient risk management rests with the Board of Directors.
Risk assessment
Luxonen conducts annual reviews and evaluations of risk areas for the purpose of identifying and managing risks through consultation between management, the Audit Committee, the company’s auditors and other parties.
Information and communication
Company management consists of the Managing Director and the Company Secretary who have an almost daily contact Follow-up
The company’s management reports regularly to the Board in accordance with the instructions for financial reporting, which are designed to ensure that the information provided is relevant, sufficient, up-to-date and appropriate.
Internal auditing
In view of that Luxonen is a holding company and has a simple structure and organisation, the Board has not found it necessary to set up an internal audit unit, based on the view that the monitoring and examination described above are sufficient to maintain, in accord with the external auditors, effective internal controls in respect of financial reporting.
AUDITING
The company’s auditors are appointed by the AGM.
Luxonen’s auditor:
PriceWaterhouseCoopers
Auditor in Charge:
Mr. Philippe Duren, born in 1960, he his auditor of Luxonen since 2005
DIFFERENCES IN RELATION TO THE CODE
The Code is based on the principle of ‘comply or explain’, which means that it is not always necessary to follow all rules and that departures from one or several individual
rules do not constitute a breach of the Code if there are reasons for and explanations are provided for the departures.
.
Luxonen S.A.
Consolidated balance sheet as at 31 December 2008
(Expressed in USD)
Note 31.12.2008 31.12.2007
Assets
Current assets
Financial assets at fair value through profit or loss 5 32,526,264 0 Derivative financial instruments 8 722,240 74,878,153
Other assets 49,812 20,478
Cash and cash equivalents 3,701,744 30,872,699 37,000,060 105,771,330 Non-Current assets
Investments in associates 6 301,399 960,226
Financial assets at fair value through profit or loss 5 81,191,729 126,237,783 81,493,128 127,198,009
Total assets 118,493,188 232,969,339
========= ==========
Shareholders’ equity and liabilities Shareholders’ equity
Share capital 10 20,807,082 20,807,082
Legal reserve 10 2,080,708 2,080,708
Share Premium 516,142 516,142
Currency translation adjustment 6 (5,221) 149,890
Retained earnings 94,771,819 206,012,495
Total shareholders’ equity 118,170,530 229,566,317
Current liabilities
Derivative financial instruments 8 0 3,278,762
Other liabilities 322,658 124,260
Total liabilities 322,658 3,403,022
Total equity and liabilities 118,493,188 232,969,339
========= ==========
The accompanying notes on pages 30 to 58 form an integral part of these financial statements
Luxonen S.A.
Consolidated income statement for the year ended 31 December 2008
(Expressed in USD)
Note 31.12.2008 31.12.2007 Income
Dividend income 9 2,053,344 3,905,370
Net gain / (loss) on financial assets at
fair value through profit or loss 5 (49,451,005) 9,701,211 Net gain / (loss) on derivative financial instruments (40,679,556) 18,010,895
Interest income 1,812,158 697,646
Share of loss of associates 6 (503,716) (662,914)
Other income 194,642 543,721
Net gain on foreign exchange 0 1,364,757
Total income (86,574,133) 33,560,686
Expenses
Administrative expenses 11 1,048,039 840,124
Net loss on foreign exchange 10,640,030 0 Total expenses 11,688,069 840,124
Profit for the year before minority interest (98,262,202) 32,720,562
Attributable to minority interest 0 (1,365)
Profit for the year (98,262,202) 32,719,197
========== ==========
Earnings per share before and after dilution 13 (9.24) 3.08
Number of shares 10,629,760 10,629,760
The accompanying notes on pages 30 to 58 form an integral part of these financial statements
Luxonen S.A.
Consolidated statement of changes in shareholders’ equity
Note Share Legal Share Retained Other Minority Total Capital Reserve Premium Earnings Reserves interest Equity
USD USD USD USD USD USD USD
Balance at 31 December 2006 20,807,082 2,051,528 516,142 173,322,478 78,952 19,137 196,795,319
Allocation to the Legal Reserve 0 29,180 0 (29,180) 0 0 0
Profit of the year 0 0 0 32,719,197 0 0 32,719,197
Decrease in minority 0 0 0 0 0 (19,137) (19,137)
Currency translation adjustment 6 0 0 0 0 70,938 0 70,938 Balance at 31 December 2007 20,807,082 2,080,708 516,142 206,012,495 149,890 0 229,566,317
Balance at 31 December 2007 20,807,082 2,080,708 516,142 206,012,495 149,890 0 229,566,317
Interim dividend declared 0 0 0 (12,978,475) 0 0 (12,978,475)
Loss of the period 0 0 0 (98,262,202) 0 0 (98,262,202)
Currency translation adjustment 6 0 0 0 0 (155,111) 0 (155,111) Balance at 31 December 2008 20,807,082 2,080,708 516,142 94,771,819 (5,221) 0 118,170,530
Consolidated cash-flow statement for the year ended 31 December 2008
(Expressed in USD)
31.12.2008 31.12.2007
Cash flows from operating activities Purchases of financial assets at fair
value though profit or loss (118,493,258) (10,123,706)
Proceeds from financial assets at fair
value through profit or loss 75,762,445 11,688,052 Cash flows generated from financial assets
at fair value through profit or loss 3.080.214 4,438,535
Bank interest received 1,027,756 690,736
Other income 2,952 5,289
Administrative expenses (800,705) (1,134,660)
Net cash flows from derivative financial instruments 30,197,595 5,509,894 Net cash inflow (outflow) from operating activities (9,223,001) 11,074,140
Cash flows from financing activities
Interim dividend paid to company’s shareholders (12,761,736) 0 Net cash (outflow) from financing activities (12,761,736) 0
Net (decrease) increase in cash and cash equivalents (21,984,737) 11,074,140
Cash and cash equivalents:
Beginning of the year 30,872,699 18,448,821
Effect of foreign exchange rate changes (5,186,218) 1,349,738
End of the year 3,701,744 30,872,699
========= ==========
Luxonen S.A.
Notes to the consolidated annual financial statements
1. General information
1.1 Luxonen S.A. (the “Company”) and its subsidiaries and associate together the “Group”
takes participations in other Luxembourg or foreign enterprises and acquires any securities and rights through participations. As at 31 December 2008, the main investments are in USA, in Sweden and in the Euro zone.
1.2 The Company is a Luxembourg holding company incorporated on 23 May 1989 as a
“Société Anonyme” and subject to the law of 31 July 1929. The company is listed at the Stockholm’s Stock Exchange.
1.3 These consolidated annual financial statements have been approved for issue by the Board of Directors on 18 February 2009.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.
2.1 Basis of preparation
These 31 December 2008 consolidated annual financial statements of Luxonen S.A. and its consolidated subsidiaries and associate are for the year ended 31 December 2008. They have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union.
These consolidated annual financial statements have been prepared under the historical cost convention, as modified by the revaluation of the financial assets and liabilities (including derivative financial instruments) at fair value through profit and loss.
The preparation of financial statements in conformity with IFRS as adopted by the European Union requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.
Luxonen S.A.
Notes to the consolidated annual financial statements (continued)
2. Summary of significant accounting policies (continued) 2.1 Basis of preparation (continued)
A) Standards, amendment and interpretations effective in 2008 but not relevant
The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1st January 2008 but they are not relevant to the Group’s operations:
IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’;
IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’;
IFRIC 12, ‘Service concession arrangements’;
IFRIC 13, ‘Customer loyalty programmes’; and
IFRIC 16, ‘Hedges of a net investment in a foreign operation’.
B) Standards amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the group
The following standards, amendments and interpretations to existing standards have been published and are mandatory for the group’s accounting periods beginning on or after 1 January 2008 or later periods, but the Group has not early adopted them:
- IFRS 8, “Operating segments” (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131,
“Disclosures about segments of an enterprise and related information”. The new standard requires a “management approach”, under which segment information is presented on the same basis as that used for internal reporting purposes. The expected impact is still being assessed in detail by management, but it appears likely that impact will be limited, as the Group doesn’t identify internal segment provided to the chief operating decision maker as the Group is only involved in the investment management of financial assets.
