UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2008
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File
Number: 001-33236
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POWERSHARES DB BASE METALS FUND
(A Series of PowerShares DB Multi-Sector Commodity Trust)
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(Exact name of Registrant as specified in its charter)
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Delaware
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87-0778075
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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c/o DB Commodity Services LLC
60 Wall Street
New York, New York
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10005
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(Address of Principal Executive Offices)
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(Zip Code)
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DB BASE METALS MASTER FUND
(A Series of DB Multi-Sector Commodity Master Trust)
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(Exact name of Rule 140 Co-Registrant as specified in its charter)
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Delaware
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87-0778076
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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c/o DB Commodity Services LLC
60 Wall Street
New York, New York
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10005
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
(212) 250-5883
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
ü
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer
¨
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Accelerated Filer
¨
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Non-Accelerated Filer
x
(Do not check if a smaller reporting company)
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Smaller reporting company
¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
No
ü
Indicate the number of outstanding Limited Shares as of September 30, 2008: 4,000,000 Limited Shares.
POWERSHARES DB BASE METALS FUND
(A SERIES OF POWERSHARES DB MULTI-SECTOR COMMODITY TRUST)
QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF
CONTENTS
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Page
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PART I.
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FINANCIAL INFORMATION
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1
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ITEM 1.
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FINANCIAL STATEMENTS.
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1
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Consolidated Statements of Financial Condition September 30, 2008 (unaudited) and December 31,
2007
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1
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Unaudited Consolidated Schedule of Investments September 30, 2008
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2
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Consolidated Schedule of Investments December 31, 2007
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3
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Unaudited Consolidated Statements of Income and Expenses For the Three Months Ended September
30, 2008 and 2007 and Nine Months Ended September 30, 2008 and Period Ended September 30, 2007
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4
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Unaudited Consolidated Statement of Changes in Shareholders’ Equity For the Three Months Ended September
30, 2008
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5
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Unaudited Consolidated Statement of Changes in Shareholders’ Equity For the Three Months Ended September
30, 2007
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6
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Unaudited Consolidated Statement of Changes in Shareholders’ Equity For the Nine Months Ended September
30, 2008
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7
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Unaudited Consolidated Statement of Changes in Shareholders’ Equity For the Period Ended September 30, 2007
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8
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Unaudited Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2008 and the Period Ended September
30, 2007
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9
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Notes to Unaudited Consolidated Financial Statements
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10
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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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19
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ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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30
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ITEM 4.
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CONTROLS AND PROCEDURES
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32
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PART II.
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OTHER INFORMATION
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33
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Item 1.
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Legal Proceedings
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33
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Item 1A.
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Risk Factors
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33
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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33
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Item 3.
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Defaults Upon Senior Securities
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34
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Item 4.
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Submission of Matters to a Vote of Security Holders
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34
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Item 5.
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Other Information
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34
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Item 6.
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Exhibits
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34
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SIGNATURES
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35
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EXHIBIT INDEX
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E-1
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Exhibit 31.1
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Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14
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E-2
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Exhibit 31.2
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Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14
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E-3
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Exhibit 32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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E-4
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Exhibit 32.2
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Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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E-5
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i
PART
I. FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS.
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PowerShares DB Base Metals Fund and Subsidiary
Consolidated Statements of Financial
Condition
September 30, 2008 (unaudited) and December 31, 2007
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September 30,
2008
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December 31, 2007
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Assets
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Equity in broker trading accounts:
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United States Treasury Obligations, at fair value (cost $78,821,284 and $44,839,134 respectively)
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$
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78,931,987
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$
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44,861,139
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Cash held by broker (restricted $1,354,519 and $0, respectively)
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19,669,543
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11,051,488
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Net unrealized depreciation on futures contracts
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(19,340,381)
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(7,470,862)
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Deposits with broker
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79,261,149
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48,441,765
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Total Assets
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$
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79,261,149
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$
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48,441,765
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Liabilities and shareholders’ equity
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Management fee payable
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$
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112,150
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$
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30,794
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Brokerage fees payable
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6,437
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8,251
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Non controlling interest in consolidated subsidiary - related party
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791
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1,000
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Total liabilities
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119,378
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40,045
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Commitments and Contingencies (Note 9)
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Shareholders’ equity
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General shares:
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Paid in capital - 40 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively
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1,000
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1,000
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Accumulated deficit
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(209)
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(120)
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Total General shares
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791
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880
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Limited shares:
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Paid in capital – 4,000,000 and 2,200,000 redeemable shares issued and outstanding as of September 30, 2008 and December 31,
2007, respectively
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114,782,530
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67,214,352
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Accumulated deficit
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(35,641,550)
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(18,813,512)
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Total Limited shares
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79,140,980
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48,400,840
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Total shareholders’ equity
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79,141,771
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48,401,720
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Total liabilities and shareholders’ equity
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$
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79,261,149
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$
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48,441,765
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Net asset value per share
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General shares
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$
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19.78
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$
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22.00
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Limited shares
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$
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19.79
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$
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22.00
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See accompanying notes to unaudited consolidated financial statements.
PowerShares DB Base Metals Fund and Subsidiary
Unaudited Consolidated Schedule of Investments
September 30, 2008
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Description
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Percentage of
Net Assets
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Fair Value
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Face Value
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United States Treasury Obligations
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U.S. Treasury Bills, 0.05% due October 2, 2008
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0.63
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%
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$
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499,999
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$
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500,000
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U.S. Treasury Bills, 0.35% due October 23, 2008
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2.53
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1,999,732
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2,000,000
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U.S. Treasury Bills, 1.01% due October 30, 2008
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0.63
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499,811
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500,000
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U.S. Treasury Bills, 1.80% due November 6, 2008
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36.61
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28,981,730
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29,000,000
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U.S. Treasury Bills, 1.10% due November 13, 2008
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0.63
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499,536
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500,000
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U.S. Treasury Bills, 1.99% due November 20, 2008
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11.37
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8,998,272
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9,000,000
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U.S. Treasury Bills, 0.77% due November 28, 2008
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23.98
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18,976,421
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19,000,000
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U.S. Treasury Bills, 0.25% due December 4, 2008
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23.35
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18,476,486
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18,500,000
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Total United States Treasury Obligations (cost $78,821,284)
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99.73
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%
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$
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78,931,987
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A portion of the above United States Treasury Obligations are held as initial margin against
open futures contracts, as noted in Note 4(e).
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Description
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Percentage of
Net Assets
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Fair Value
|
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Unrealized Depreciation on Futures Contracts
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Aluminum (479 contracts, settlement date November 17, 2008)
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(7.63)
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%
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$
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(6,037,031)
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Copper (186 contracts, settlement date March 16, 2009)
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(8.23)
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(6,512,950)
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Zinc (467 contracts, settlement date May 18, 2009)
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(8.58)
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(6,790,400)
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Net Unrealized Depreciation on Futures Contracts
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(24.44)
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%
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$
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(19,340,381)
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|
|
|
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|
See accompanying notes to unaudited consolidated financial statements.
2
PowerShares DB Base Metals Fund and Subsidiary
Consolidated Schedule of Investments
December 31, 2007
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|
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Description
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Percentage of
Net Assets
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Fair Value
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Face Value
|
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United States Treasury Obligations
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U.S. Treasury Bills, 3.10% due January 3, 2008
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3.10
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%
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$
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1,499,904
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$
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1,500,000
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U.S. Treasury Bills, 2.89% due January 10, 2008
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1.03
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499,729
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500,000
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U.S. Treasury Bills, 3.04% due January 24, 2008
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10.31
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4,991,970
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5,000,000
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U.S. Treasury Bills, 3.92% due January 31, 2008
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11.34
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5,487,108
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5,500,000
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U.S. Treasury Bills, 3.55% due February 7, 2008
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41.20
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19,942,000
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20,000,000
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U.S. Treasury Bills, 3.39% due February 21, 2008
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8.23
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3,983,596
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4,000,000
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U.S. Treasury Bills, 3.18% due February 28, 2008
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8.22
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3,981,096
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4,000,000
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U.S. Treasury Bills, 3.03% due March 6, 2008
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9.25
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4,475,736
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4,500,000
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Total United States Treasury Obligations (cost $44,839,134)
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92.68
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%
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$
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44,861,139
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|
|
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|
|
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|
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A portion of the above United States Treasury Obligations are held as initial margin against
open futures contracts, as noted in Note 4(e).
|
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|
|
|
|
|
|
|
Description
|
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Percentage of
Net Assets
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|
|
Fair Value
|
|
Unrealized Depreciation on Futures Contracts
|
|
|
|
|
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Aluminum (263 contracts, settlement date November 17, 2008)
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(0.41)
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%
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$
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(198,325)
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Copper (100 contracts, settlement date March 17, 2008)
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(5.13)
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$
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(2,483,912)
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Zinc (259 contracts, settlement date May 19, 2008)
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(9.89)
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$
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(4,788,625)
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|
|
|
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Net Unrealized Depreciation on Futures Contracts
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(15.43)
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%
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|
$
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(7,470,862)
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|
|
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|
See accompanying notes to unaudited consolidated financial statements.
3
PowerShares DB Base Metals Fund and Subsidiary
Unaudited Consolidated Statements of Income and Expenses
For the Three Months Ended September 30, 2008 and 2007 and Nine Months Ended
September 30, 2008 and Period Ended September 30, 2007(i)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September 30,
2008
|
|
Three
Months
Ended
September 30,
2007
|
|
Nine Months
Ended
September 30,
2008
|
|
Period Ended
September 30,
2007
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
415,178
|
|
$
|
1,007,637
|
|
$
|
1,365,542
|
|
$
|
1,892,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fee
|
|
|
177,657
|
|
|
158,807
|
|
|
530,818
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|
293,232
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|
Brokerage Commissions and Fees
|
|
|
(7,893)
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|
|
6,352
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|
|
6,233
|
|
|
11,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
169,764
|
|
|
165,159
|
|
|
537,051
|
|
|
304,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
245,414
|
|
|
842,478
|
|
|
828,491
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|
|
1,587,541
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Net Change in Unrealized Gain (Loss) on United States Treasury Obligations and Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Gain (Loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Treasury Obligations
|
|
|
10,238
|
|
|
15,905
|
|
|
20,087
|
|
|
20,132
|
|
Futures
|
|
|
(958,626)
|
|
|
-
|
|
|
(5,895,884)
|
|
|
(668,375)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Gain (Loss)
|
|
|
(948,388)
|
|
|
15,905
|
|
|
(5,875,797)
|
|
|
(648,243)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Unrealized Gain (Loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Treasury Obligations
|
|
|
106,423
|
|
|
55,542
|
|
|
88,698
|
|
|
80,210
|
|
Futures
|
|
|
(21,068,312)
|
|
|
(2,729,587)
|
|
|
(11,869,519)
|
|
|
(5,356,538)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Unrealized Loss
|
|
|
(20,961,889)
|
|
|
(2,674,045)
|
|
|
(11,780,821)
|
|
|
(5,276,328)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and net change in Unrealized Loss on United States Treasury Obligations and Futures
|
|
|
(21,910,277)
|
|
|
(2,658,140)
|
|
|
(17,656,618)
|
|
|
(5,924,571)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(21,664,863)
|
|
$
|
(1,815,662)
|
|
$
|
(16,828,127)
|
|
$
|
(4,337,030)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
(i) The Period Ended September 30, 2007 reflects operating results since January 3, 2007, the date of commencement of investment operations.
4
PowerShares DB Base Metals Fund and Subsidiary
Unaudited Consolidated Statement of Changes in Shareholders’ Equity
For the Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Shares
|
|
Limited Shares
|
|
Total
|
|
|
|
General Shares
|
|
|
|
Total
General
|
|
Limited Shares
|
|
|
|
Total
Limited
|
|
Total
|
|
|
|
Shares
|
|
Paid in
Capital
|
|
Accumulated
Deficit
|
|
Shareholder’s
Equity
|
|
Shares
|
|
Paid in
Capital
|
|
Accumulated
Deficit
|
|
Shareholders’
Equity
|
|
Shareholders’
Equity
|
|
Balance at July 1, 2008
|
|
40
|
|
$
|
1,000
|
|
$
|
(3)
|
|
$
|
997
|
|
4,200,000
|
|
$
|
118,674,792
|
|
$
|
(13,976,893)
|
|
$
|
104,697,899
|
|
$
|
104,698,896
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Limited Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
|
13,551,730
|
|
|
|
|
|
13,551,730
|
|
|
13,551,730
|
|
Redemption of Limited Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
(800,000)
|
|
|
(17,443,992)
|
|
|
|
|
|
(17,443,992)
|
|
|
(17,443,992)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
|
|
|
|
|
3
|
|
|
3
|
|
|
|
|
|
|
|
245,411
|
|
|
245,411
|
|
|
245,414
|
|
Net Realized Loss on United States Treasury Obligations and Futures
|
|
|
|
|
|
|
|
(10)
|
|
|
(10)
|
|
|
|
|
|
|
|
(948,378)
|
|
|
(948,378)
|
|
|
(948,388)
|
|
Net Change in Unrealized Loss on United States Treasury Obligations and Futures
|
|
|
|
|
|
|
|
(199)
|
|
|
(199)
|
|
|
|
|
|
|
|
(20,961,690)
|
|
|
(20,961,690)
|
|
|
(20,961,889)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
(206)
|
|
|
(206)
|
|
|
|
|
|
|
|
(21,664,657)
|
|
|
(21,664,657)
|
|
|
(21,664,863)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
2008
|
|
40
|
|
$
|
1,000
|
|
$
|
(209)
|
|
$
|
791
|
|
4,000,000
|
|
$
|
114,782,530
|
|
$
|
(35,641,550)
|
|
$
|
79,140,980
|
|
$
|
79,141,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
5
PowerShares DB Base Metals Fund and Subsidiary
Unaudited Consolidated Statement of Changes in Shareholders’ Equity
For the Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Shares
|
|
Limited Shares
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
Total
|
|
|
|
General Shares
|
|
|
|
General
|
|
Limited Shares
|
|
|
|
Limited
|
|
Shareholders’
|
|
|
|
|
|
Paid in
|
|
Accumulated
|
|
Shareholder’s
|
|
|
|
Paid in
|
|
Accumulated
|
|
Shareholders’
|
|
Equity
|
|
|
|
Shares
|
|
Capital
|
|
Earnings
|
|
Equity
|
|
Shares
|
|
Capital
|
|
Deficit
|
|
Equity
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2007
|
|
40
|
|
$
|
1,000
|
|
$
|
63
|
|
$
|
1,063
|
|
2,600,000
|
|
$
|
71,587,820
|
|
$
|
(2,521,431)
|
|
$
|
69,066,389
|
|
$
|
69,067,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Limited Shares
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
800,000
|
|
|
22,305,618
|
|
|
-
|
|
|
22,305,618
|
|
|
22,305,618
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
-
|
|
|
-
|
|
|
11
|
|
|
11
|
|
-
|
|
|
-
|
|
|
842,467
|
|
|
842,467
|
|
|
842,478
|
|
Net Realized Gain on United States Treasury Obligations and Futures
|
|
-
|
|
|
-
|
|
|
1
|
|
|
1
|
|
-
|
|
|
-
|
|
|
15,904
|
|
|
15,904
|
|
|
15,905
|
|
Net Change in Unrealized Loss on United States Treasury Obligations and Futures
|
|
-
|
|
|
-
|
|
|
(21)
|
|
|
(21)
|
|
-
|
|
|
-
|
|
|
(2,674,024)
|
|
|
(2,674,024)
|
|
|
(2,674,045)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
-
|
|
|
-
|
|
|
(9)
|
|
|
(9)
|
|
-
|
|
|
-
|
|
|
(1,815,653)
|
|
|
(1,815,653)
|
|
|
(1,815,662)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
40
|
|
$
|
1,000
|
|
$
|
54
|
|
$
|
1,054
|
|
3,400,000
|
|
$
|
93,893,438
|
|
$
|
(4,337,084)
|
|
$
|
89,556,354
|
|
$
|
89,557,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
PowerShares DB Base Metals Fund and Subsidiary
Unaudited Consolidated Statement of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Shares
|
|
Limited Shares
|
|
Total
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
General Shares
|
|
Accumulated
|
|
General
|
|
Limited Shares
|
|
Accumulated
|
|
Limited
|
|
Total
|
|
|
|
Shares
|
|
Paid in
Capital
|
|
Earnings
(Deficit)
|
|
Shareholder’s
Equity
|
|
Shares
|
|
Paid in
Capital
|
|
Earnings
(Deficit)
|
|
Shareholders’
Equity
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008
|
|
40
|
|
$
|
1,000
|
|
|
(120)
|
|
$
|
880
|
|
2,200,000
|
|
$
|
67,214,352
|
|
|
(18,813,512)
|
|
$
|
48,400,840
|
|
$
|
48,401,720
|
|
Sale of Limited Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
3,600,000
|
|
|
89,803,186
|
|
|
|
|
|
89,803,186
|
|
|
89,803,186
|
|
Redemption of Limited Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,800,000)
|
|
|
(42,235,008)
|
|
|
|
|
|
(42,235,008)
|
|
|
(42,235,008)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
|
|
|
|
|
9
|
|
|
9
|
|
|
|
|
|
|
|
828,482
|
|
|
828,482
|
|
|
828,491
|
|
Net Realized Loss on United States Treasury Obligations and Futures
|
|
|
|
|
|
|
|
(112)
|
|
|
(112)
|
|
|
|
|
|
|
|
(5,875,685)
|
|
|
(5,875,685)
|
|
|
(5,875,797)
|
|
Net Change in Unrealized Gain (Loss) on United States Treasury Obligations and Futures
|
|
|
|
|
|
|
|
14
|
|
|
14
|
|
|
|
|
|
|
|
(11,780,835)
|
|
|
(11,780,835)
|
|
|
(11,780,821)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
(89)
|
|
|
(89)
|
|
|
|
|
|
|
|
(16,828,038)
|
|
|
(16,828,038)
|
|
|
(16,828,127)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
40
|
|
$
|
1,000
|
|
$
|
(209)
|
|
|
791
|
|
4,000,000
|
|
$
|
114,782,530
|
|
$
|
(35,641,550)
|
|
$
|
79,140,980
|
|
$
|
79,141,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
7
PowerShares DB Base Metals Fund and Subsidiary
Unaudited Consolidated Statement of Changes in Shareholders’ Equity
For the Period Ended September 30, 2007(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Shares
|
|
Limited Shares
|
|
Total
|
|
|
|
General Shares
|
|
|
|
Total
General
|
|
Limited Shares
|
|
|
|
Total
Limited
|
|
Total
|
|
|
|
Shares
|
|
Paid in
Capital
|
|
Accumulated
Earnings
|
|
Shareholder’s
Equity
|
|
Shares
|
|
Paid in
Capital
|
|
Accumulated
Deficit
|
|
Shareholders’
Equity
|
|
Shareholders’
Equity
|
|
Balance at January 3, 2007
|
|
40
|
|
$
|
1,000
|
|
$
|
-
|
|
$
|
1,000
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Limited Shares
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
3,800,000
|
|
|
104,558,466
|
|
|
-
|
|
|
104,558,466
|
|
|
104,558,466
|
|
Redemption of Limited Shares
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(400,000)
|
|
|
(10,665,028)
|
|
|
-
|
|
|
(10,665,028)
|
|
|
(10,665,028)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
-
|
|
|
-
|
|
|
32
|
|
|
32
|
|
-
|
|
|
-
|
|
|
1,587,509
|
|
|
1,587,509
|
|
|
1,587,541
|
|
Net Realized Loss on United States Treasury Obligations and Futures
|
|
-
|
|
|
-
|
|
|
(1)
|
|
|
(1)
|
|
-
|
|
|
-
|
|
|
(648,242)
|
|
|
(648,242)
|
|
|
(648,243)
|
|
Net Change in Unrealized Gain/(Loss) on United States Treasury Obligations and Futures
|
|
-
|
|
|
-
|
|
|
23
|
|
|
23
|
|
-
|
|
|
-
|
|
|
(5,276,351)
|
|
|
(5,276,351)
|
|
|
(5,276,328)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
-
|
|
|
-
|
|
|
54
|
|
|
54
|
|
-
|
|
|
-
|
|
|
(4,337,084)
|
|
|
(4,337,084)
|
|
|
(4,337,030)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
40
|
|
$
|
1,000
|
|
$
|
54
|
|
$
|
1,054
|
|
3,400,000
|
|
$
|
93,893,438
|
|
$
|
(4,337,084)
|
|
$
|
89,556,354
|
|
$
|
89,557,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
(i) The Period Ended September 30, 2007 reflects operating results since January 3, 2007, the date of commencement of investment operations.
8
PowerShares DB Base Metals Fund and Subsidiary
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2008 and the Period Ended
September 30, 2007(i)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
2008
|
|
Period Ended
September 30,
2007
|
|
Cash Flow provided by operating activities:
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(16,828,127)
|
|
$
|
(4,337,030)
|
|
Adjustments to reconcile net loss to net cash used for operating activities:
|
|
|
|
|
|
|
|
Cost of securities purchased
|
|
|
(306,613,363)
|
|
|
(185,733,879)
|
|
Proceeds from securities sold
|
|
|
273,926,732
|
|
|
107,336,136
|
|
Accretion of discount on United States Treasury Obligations
|
|
|
(1,275,432)
|
|
|
(1,802,517)
|
|
Net realized gain on United Stated Treasury Obligations
|
|
|
(20,087)
|
|
|
(20,132)
|
|
Net change in unrealized loss on United States Treasury Obligations and Futures
|
|
|
11,780,821
|
|
|
5,276,328
|
|
Increase in restricted cash
|
|
|
(1,354,519)
|
|
|
(1,344,589)
|
|
Change in operating receivables and liabilities:
|
|
|
|
|
|
|
|
Management fee payable
|
|
|
81,356
|
|
|
52,987
|
|
Brokerage fee payable
|
|
|
(1,814)
|
|
|
7,589
|
|
Non controlling interest in consolidated subsidiary - related party
|
|
|
(209)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(40,304,642)
|
|
|
(80,564,107)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from sale of Limited Shares
|
|
|
89,803,186
|
|
|
104,558,466
|
|
Redemption of Limited Shares
|
|
|
(42,235,008)
|
|
|
(10,665,028)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
47,568,178
|
|
|
93,893,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash held by broker
|
|
|
7,263,536
|
|
|
13,329,331
|
|
|
|
|
|
Unrestricted cash held by broker at beginning of period
|
|
|
11,051,488
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Unrestricted cash held by broker at end of period
|
|
$
|
18,315,024
|
|
$
|
13,330,331
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
(i) The Period Ended September 30, 2007 reflects operating results since January 3, 2007, the date of commencement of investment operations.
9
PowerShares DB Base Metals Fund and Subsidiary
Notes to Unaudited Consolidated Financial Statements
September 30, 2008
PowerShares DB Base
Metals Fund (the “Fund”; “Fund” may also refer to the Fund and the Master Fund, collectively, as the context requires), a separate series of PowerShares DB Multi-Sector Commodity Trust (the “Trust”), a Delaware
statutory trust organized in seven separate series, and its subsidiary, DB Base Metals Master Fund (the “Master Fund”), a separate series of DB Multi-Sector Commodity Master Trust (the “Master Trust”), a Delaware statutory trust
organized in seven separate series were formed on August 3, 2006. DB Commodity Services LLC, a Delaware limited liability company (“DBCS” or the “Managing Owner”), funded both the Fund and the Master Fund with a capital
contribution of $1,000 in exchange for 40 General Shares of the Fund and the Master Fund. The fiscal year end of the Fund is December 31st. The term of the Fund is perpetual (unless terminated earlier in certain circumstances) as provided in
the Amended and Restated Declaration of Trust and Trust Agreement of the Trust and the Master Trust (each a “Trust Agreement” and collectively the “Trust Agreements”).
The Fund offers common units of beneficial interest (the “Limited Shares”) only to certain eligible financial institutions
(“Authorized Participants”) in one or more blocks of 200,000 Limited Shares, called a Basket. The proceeds from the offering of Limited Shares are invested in the Master Fund. The Fund and the Master Fund commenced investment operations on
January 3, 2007 with the initial offering of 1,000,000 Limited Shares to Deutsche Bank Securities Inc. as initial purchaser of the Fund in exchange for $25,000,000. The Fund commenced trading on the American Stock Exchange (now known as the
NYSE Alternext US LLC) on January 5, 2007.
This report covers the Three Months Ended September 30, 2008 and
2007, the Nine Months Ended September 30, 2008 and the period from January 3, 2007 (commencement of investment operations) through September 30, 2007 (hereinafter referred to as the “Period Ended September 30, 2007”).
|
(2)
|
Fund Investment Overview
|
The
Master Fund invests with a view to tracking the changes, whether positive or negative, in the level of the Deutsche Bank Liquid Commodity Index–Optimum Yield Industrial Metals Excess Return™ (DBLCI-OY Industrial Metals ER™, or
“Index”) plus the excess, if any, of the Master Fund’s income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund and the Master Fund.
The Index is intended to reflect the change in market value of the base metals sector. The commodities comprising the
Index, or the Index Commodities, are aluminum, zinc and copper. The Commodity Futures Trading Commission and commodity exchanges impose position limits on market participants trading in certain commodities included in the Index. The Index is
comprised of futures contracts on the Index Commodities that expire in a specific month and trade on a specific exchange (the “Index Contracts”). As disclosed in the Fund’s Prospectus, if the Managing Owner determines in its
commercially reasonable judgment that it has become impracticable or inefficient for any reason for the Master Fund to gain full or partial exposure to any Index Commodity by investing in a specific Index Contract, the Master Fund may invest in a
futures contract referencing the particular Index Commodity other than the Index Contract or, in the alternative, invest in other futures contracts not based on the particular Index Commodity if, in the commercially reasonable judgment of the
Managing Owner, such futures contracts tend to exhibit trading prices that correlate with such Index Commodity.
The Master
Fund also holds United States Treasury Obligations and other high credit quality short-term fixed income securities for deposit with the Master Fund’s commodities brokers as margin and for investment.
The Fund does not employ leverage. As of September 30, 2008 and December 31, 2007, the Fund had $79,261,149 (or 100%) and
$48,441,765 (or 100%) of its holdings of cash, United States Treasury Obligations and unrealized appreciation/depreciation on futures contracts on deposit with its Commodity Broker. Of this, $7,457,397 (or 9.40%) and $3,724,600 (or 7.69%) of the
Fund’s holdings of cash and United States Treasury Obligations are required to be deposited as margin in support of the Fund’s long futures positions. For additional information, please see the unaudited Consolidated
10
Schedule of Investments dated September 30, 2008 and the audited Consolidated Schedule of Investments dated December 31, 2007 for a breakdown of
the Fund’s portfolio holdings.
DBLCI™ and Deutsche Bank Liquid Commodity Index™ are trademarks of Deutsche
Bank AG London (the “Index Sponsor”). The Index Sponsor is an affiliate of the Fund, the Master Fund and the Managing Owner.
|
(3)
|
Service Providers and Related Party Agreements
|
The Trustee
Under the Trust Agreements of each of the Trust
and the Master Trust, Wilmington Trust Company (the “Trustee”), has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Trust, the Fund and the Master Trust and Master Fund. The
Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner.
The Managing Owner
The Managing Owner serves the Fund and Master Fund as commodity pool operator, commodity trading advisor and managing owner, and is an indirect wholly-owned subsidiary of Deutsche Bank AG. During the Three Months
Ended September 30, 2008 and 2007, the Fund and Master Fund incurred Management Fees of $177,657 and $158,807, respectively. Management Fees incurred during the Nine Months Ended September 30, 2008 and the Period Ended September 30,
2007, by the Fund and Master Fund were $530,818 and $293,232, respectively. As of September 30, 2008 and December 31, 2007, Management Fees payable to the Managing Owner were $112,150 and $30,794, respectively.
The Commodity Broker
Deutsche Bank Securities Inc., a Delaware corporation, serves as the Master Fund’s clearing broker (the “Commodity Broker”). The Commodity Broker is an indirect wholly-owned subsidiary of Deutsche Bank
AG. In its capacity as clearing broker, the Commodity Broker executes and clears each of the Master Fund’s futures transactions and performs certain administrative services for the Master Fund. The Commodity Broker is an affiliate of the
Managing Owner. During the Three Months Ended September 30, 2008 and 2007, the Fund and the Master Fund had brokerage fees net credit of $7,893 and incurred brokerage fees of $6,352, respectively. Brokerage fees incurred during the Nine Months
Ended September 30, 2008 and the Period Ended September 30, 2007, by the Fund and the Master Fund were $6,233 and $11,729, respectively. As of September 30, 2008 and December 31, 2007, brokerage fees payable were $6,437 and
$8,251, respectively.
The Administrator
The Bank of New York Mellon (the “Administrator”) has been appointed by the Managing Owner as the administrator, custodian and transfer agent of the Master Fund and the Fund, and has
entered into separate administrative, custodian, transfer agency and service agreements (collectively referred to as the “Administration Agreement”).
Pursuant to the Administration Agreement, the Administrator performs or supervises the performance of services necessary for the operation and administration of the Fund and the Master Fund
(other than making investment decisions), including receiving and processing orders from Authorized Participants to create and redeem Baskets, net asset value calculations, accounting and other fund administrative services. The Administrator retains
certain financial books and records, including: Basket creation and redemption books and records, fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related
details and trading and related documents received from futures commission merchants.
The Administration Agreement will
continue in effect from the commencement of trading operations unless terminated on at least 90 days’ prior written notice by either party to the other party. Notwithstanding the foregoing, the Administrator may terminate the administrative
portion of the Administration Agreement upon 30 days’ prior written notice if the Fund and/or Master Fund has materially failed to perform its obligations under the Administration Agreement.
11
The Distributor
ALPS Distributors, Inc. (the “Distributor”) provides certain distribution services to the Fund. Pursuant to the Distribution
Services Agreement between the Managing Owner in its capacity as managing owner of the Fund and the Distributor, the Distributor assists the Managing Owner and the Administrator with certain functions and duties relating to distribution and
marketing services to the Fund including reviewing and approving marketing materials.
The Distribution Services Agreement
is terminable without penalty on sixty days’ written notice by the Managing Owner or by the Distributor. The Distribution Services Agreement will automatically terminate in the event of its assignment.
Invesco Powershares Capital Management LLC
Under the License Agreement among Invesco Powershares Capital Management LLC
(formerly known as PowerShares Capital Management LLC) (the “Licensor”) and the Managing Owner in its own capacity and in its capacity as managing owner of the Fund (the Fund and the Managing Owner, collectively, the
“Licensees”), the Licensor granted to each Licensee a non-exclusive license to use the “PowerShares
®
” trademark (the “Trademark”) anywhere in the world, solely
in connection with the marketing and promotion of the Fund and to use or refer to the Trademark in connection with the issuance and trading of the Fund as necessary.
Invesco Aim Distributors, Inc.
Through a marketing agreement
between the Managing Owner and Invesco Aim Distributors, Inc. (formerly known as A I M Distributors, Inc.), or Invesco Aim Distributors, an affiliate of Invesco PowerShares Capital Management LLC, or Invesco PowerShares, the Managing
Owner, on behalf of the Fund and the Master Fund, has appointed Invesco Aim Distributors as a marketing agent. Invesco Aim Distributors assists the Managing Owner and the Administrator with certain functions and duties such as providing various
educational and marketing activities regarding the Fund, primarily in the secondary trading market, which activities include, but are not limited to, communicating the Fund’s name, characteristics, uses, benefits, and risks, consistent with the
prospectus. Invesco Aim Distributors will not open or maintain customer accounts or handle orders for the Fund. Invesco Aim Distributors engages in public seminars, road shows, conferences, media interviews, and distributes sales literature and
other communications (including electronic media) regarding the Fund.
|
(4)
|
Summary of Significant Accounting Policies
|
|
|
(a)
|
Basis of Presentation and Consolidation
|
The consolidated financial statements of the Fund have been prepared using U.S. generally accepted accounting principles, and they include the consolidated financial statement balances of the Fund and the Master Fund.
Upon the initial offering of the Limited Shares on January 3, 2007, the capital raised by the Fund was used to purchase 100% of the common units of beneficial interest of the Master Fund (“Master Fund Limited Units”) (excluding common
units of beneficial interest of the Master Fund held by the Managing Owner (“Master Fund General Units”)). The Master Fund Limited Units owned by the Fund provide the Fund and its investors certain controlling rights and abilities over the
Master Fund. Consequently, the financial statement balances of the Master Fund have been consolidated with the Fund’s financial statement balances beginning January 3, 2007 (commencement of investment operations), and all significant
inter-company balances and transactions have been eliminated. Certain amounts in the 2007 financial statements have been reclassified to conform to the 2008 presentation.
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
revenue and expense and related disclosure of contingent assets and liabilities during the reporting period of the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
12
|
|
(c)
|
Financial Instruments and Fair Value
|
United States Treasury Obligations and commodity futures contracts are recorded in the consolidated statements of financial condition on a trade date basis at fair value with changes in fair value recognized in
earnings in each period. The fair value of a financial instrument is the amount 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 (the exit price).
The Fund adopted FASB Statement No. 157, “Fair Value Measurements” (Statement No. 157), effective
January 1, 2008. Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under Statement No. 157 are described below:
Basis of Fair Value Measurement
|
|
Level 1:
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
Level 2:
|
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
|
|
|
Level 3:
|
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the
fair value measurement.
In determining fair value of United States Treasury Obligations and commodity futures contracts,
the Fund uses unadjusted quoted market prices in active markets. United States Treasury Obligations and commodity futures contracts are classified within Level 1 of the fair value hierarchy. The Fund does not adjust the quoted prices for United
States Treasury Obligations and commodity futures contracts.
The Fund deposits cash and United States Treasury Obligations with its Commodity Broker subject to Commodity Futures Trading Commission (CFTC) regulations and various exchange and broker requirements. The combination
of the Fund’s deposits with its Commodity Broker of cash and United States Treasury Obligations and the unrealized profit or loss on open futures contracts (variation margin) represents the Fund’s overall equity in its broker trading
account. To meet the Fund’s initial margin requirements, the Fund holds United States Treasury Obligations. The Fund uses its cash held by the Commodity Broker to satisfy variation margin requirements. The Fund earns interest on its cash
deposited with the Commodity Broker.
|
|
(e)
|
United States Treasury Obligations
|
The Fund records purchases and sales of United States Treasury Obligations on a trade date basis. These holdings are marked to market based on quoted market closing prices. The Fund holds United States Treasury
Obligations for deposit with the Master Fund’s Commodity Broker to meet margin requirements and for trading purposes. Included in the United States Treasury Obligations as of September 30, 2008 and December 31, 2007 are $7,457,397 and
$3,724,600, respectively, which is restricted and held against initial margin of the open futures contracts. Interest income is recognized on an accrual basis when earned. Premiums and discounts are amortized or accreted over the life of the United
States Treasury Obligations.
The Fund’s arrangement with the Commodity Broker requires the Fund to meet its variation margin requirement related to the price movements, both positive and negative, on futures contracts held by the Fund by
keeping cash on deposit
13
with the Commodity Broker. The Fund defines cash and cash equivalents held by the Commodity Broker to be highly liquid investments with original maturities
of three months or less when purchased. As of September 30, 2008 and December 31, 2007, the Fund held cash of $19,669,543 and $11,051,488, respectively of which $1,354,519 and $0 was restricted. Restrictions on cash held by broker pertain
to the settlement of closed futures contracts traded on the London Metals Exchange. There were no cash equivalents held by the Fund as of September 30, 2008 and December 31, 2007.
The Fund and the Master Fund are classified as partnerships for U.S. federal income tax purposes. Accordingly, neither the Fund nor the Master Fund will incur U.S. federal income taxes. No provision for federal, state, and local income
taxes has been made in the accompanying consolidated financial statements, as investors are individually liable for income taxes, if any, on their allocable share of the Fund’s share of the Master Fund’s income, gain, loss, deductions and
other items.
The following are the major tax jurisdictions for the Fund and the earliest tax year subject to examination:
|
|
|
|
|
Jurisdiction
|
|
Tax Year
|
|
US Federal
|
|
2007
|
|
State of New York
|
|
2007
|
|
New York City
|
|
2007
|
|
State of Florida
|
|
2007
|
|
State of Georgia
|
|
2007
|
|
State of Maine
|
|
2007
|
|
State of Oregon
|
|
2007
|
|
State of Utah
|
|
2007
|
|
State of West Virginia
|
|
2007
|
All commodity futures contracts are held and used for trading purposes. The commodity futures are recorded on a trade date basis and open contracts are recorded in the consolidated statement of financial condition at fair value on the last
business day of the period, which represents market value for those commodity futures for which market quotes are readily available. However, when market closing prices are not available, the Managing Owner may value an asset of the Master Fund
pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards. Realized gains (losses) and changes in unrealized gains (losses) on open positions are determined on a specific identification basis and
recognized in the consolidated statement of income and expenses in the period in which the contract is closed or the changes occur, respectively. As of September 30, 2008 and December 31, 2007, the futures contracts held by the Fund were
in a net unrealized depreciation position of $19,340,381 and $7,470,862, respectively.
The Master Fund currently pays the Managing Owner a management fee (“Management Fee”), monthly in arrears, in an amount equal to 0.75% per annum of the daily net asset value of the Master Fund. No separate Management Fee is
paid by the Fund. The Management Fee is paid in consideration of the Managing Owner’s commodity futures trading advisory services.
|
|
(j)
|
Brokerage Commissions and Fees
|
The Master Fund incurs all brokerage commissions, including applicable exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading
activities by the Commodity Broker. These costs are recorded as brokerage commissions and fees in the consolidated statement of income and expenses as incurred. The Commodity Broker’s brokerage commissions and trading fees are determined on a
contract-by-contract basis. On average, total charges paid to the Commodity Broker were less than $10.00 per round-turn trade for the Three Months Ended September 30, 2008 and 2007 and for the Nine Months Ended September 30, 2008 and the
Period Ended September 30, 2007.
14
|
|
(k)
|
Routine Operational, Administrative and Other Ordinary Expenses
|
The Managing Owner assumes all routine operational, administrative and other ordinary expenses of the Fund and the Master Fund, including, but not limited to, computer services, the fees and
expenses of the Trustee, legal and accounting fees and expenses, tax preparation expenses, filing fees and printing, mailing and duplication costs. Accordingly, all such expenses are not reflected in the consolidated statement of income and expenses
of the Fund.
|
|
(l)
|
Organizational and Offering Costs
|
All organizing and offering expenses of the Fund and its Master Fund are incurred and assumed by the Managing Owner. Expenses incurred in connection with the continuous offering of Limited Shares also will be paid by
the Managing Owner.
|
|
(m)
|
Non-Recurring and Unusual Fees and Expenses
|
The Master Fund pays all fees and expenses, if any, of the Fund and the Master Fund, which are non-recurring and unusual in nature. Such expenses include legal claims and liabilities, litigation
costs or indemnification or other unanticipated expenses. Such fees and expenses, by their nature, are unpredictable in terms of timing and amount. For the Three Months Ended September 30, 2008 and 2007, the Fund and the Master Fund did not
incur such expenses. For the Nine Months Ended September 30, 2008 and for the Period Ended September 30, 2007, the Fund and the Master Fund did not incur such expenses.
|
(5)
|
Fair Value Measurements
|
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with Statement No. 157. See Note 4(c) for discussion of the Fund’s policies
regarding this hierarchy.
Assets and Liabilities Measured at Fair Value as of September 30, 2008:
|
|
|
|
|
|
|
United States Treasury Obligations (Level 1)
|
|
$
|
78,931,987
|
|
|
|
|
|
Commodity Futures Contracts (Level 1)
|
|
$
|
(19,340,381
|
)
|
There were no Level 2 or Level 3 holdings as of September 30, 2008.
|
(6)
|
Financial Instrument Risk
|
In the normal course of its business, the Master Fund is party to financial instruments with off-balance sheet risk. The term “off-balance sheet risk” refers to an unrecorded potential liability that, even
though it does not appear on the balance sheet, may result in a future obligation or loss. The financial instruments used by the Master Fund are commodity futures, whose values are based upon an underlying asset and generally represent future
commitments that have a reasonable possibility of being settled in cash or through physical delivery. The financial instruments are traded on an exchange and are standardized contracts.
Market risk is the potential for changes in the value of the financial instruments traded by the Master Fund due to market changes,
including fluctuations in commodity prices. In entering into these futures contracts, there exists a market risk that such futures contracts may be significantly influenced by adverse market conditions, resulting in such futures contracts being less
valuable. If the markets should move against all of the futures contracts at the same time, the Master Fund could experience substantial losses.
Credit risk is the possibility that a loss may occur due to the failure of an exchange clearinghouse to perform according to the terms of a futures contract. Credit risk with respect to exchange-traded instruments is
reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Master Fund’s risk of loss in the event of counterparty default is typically limited to the amounts recognized in the consolidated
statement of financial condition and not represented by the futures contract or notional amounts of the instruments.
15
The Fund and the Master Fund have not utilized, nor do they expect to utilize in the
future, special purpose entities to facilitate off-balance sheet financing arrangements and have no loan guarantee arrangements or off-balance sheet arrangements of any kind, other than agreements entered into in the normal course of business noted
above.
|
(7)
|
Share Purchases and Redemptions
|
Limited Shares may be purchased from the Fund only by Authorized Participants in one or more blocks of 200,000 Shares, called a Basket. The Fund issues Limited Shares in Baskets only to Authorized Participants continuously as of noon, New
York time, on the business day immediately following the date on which a valid order to create a Basket is accepted by the Fund, at the net asset value of 200,000 Limited Shares as of the closing time of the NYSE Alternext US LLC or the last to
close of the exchanges on which the Master Fund’s assets are traded, whichever is later, on the date that a valid order to create a Basket is accepted by the Fund.
On any business day, an Authorized Participant may place an order with the Managing Owner to redeem one or more Baskets. Redemption orders must be placed by 10:00 a.m., New York time. The day on which the Managing Owner receives a valid
redemption order is the redemption order date. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Baskets. Individual shareholders may not redeem directly from the Fund.
By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through The Depository Trust
Company’s (“DTC”) book-entry system to the Fund not later than noon, New York time, on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds,
an Authorized Participant’s DTC account is charged the non-refundable transaction fee due for the redemption order.
The redemption proceeds from the Fund consist of the cash redemption amount. The cash redemption amount is equal to the net asset value of the number of Basket(s) requested in the Authorized Participant’s redemption order as of the
closing time of the NYSE Alternext US LLC or the last to close of the exchanges on which the Master Fund’s assets are traded, whichever is later, on the redemption order date. The Fund will distribute the cash redemption amount at noon, New
York time, on the business day immediately following the redemption order date through DTC to the account of the Authorized Participant as recorded on DTC’s book-entry system.
The redemption proceeds due from the Fund are delivered to the Authorized Participant at noon, New York time, on the business day
immediately following the redemption order date if, by such time on such business day immediately following the redemption order date, the Fund’s DTC account has been credited with the Baskets to be redeemed. If the Fund’s DTC account has
not been credited with all of the Baskets to be redeemed by such time, the redemption proceeds are delivered to the extent of whole Baskets received. Any remainder of the redemption proceeds are delivered on the next business day to the extent of
remaining whole Baskets received if the Managing Owner receives the fee applicable to the extension of the redemption distribution date which the Managing Owner may, from time-to-time, determine and the remaining Baskets to be redeemed are credited
to the Fund’s DTC account by noon, New York time, on such next business day. Any further outstanding amount of the redemption order will be canceled. The Managing Owner is also authorized to deliver the redemption proceeds notwithstanding that
the Baskets to be redeemed are not credited to the Fund’s DTC account by noon, New York time, on the business day immediately following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the
Baskets through DTC’s book-entry system on such terms as the Managing Owner may from time-to-time agree upon.
|
|
(c)
|
Limited Share Transactions
|
The Fund and the Master Fund commenced investment operations on January 3, 2007 with the initial offering of 1,000,000 Limited Shares to Deutsche Bank Securities Inc. as the initial purchaser of the Fund in
exchange for $25,000,000. The Fund commenced trading on the American Stock Exchange (now known as the NYSE Alternext US LLC) on January 5, 2007.
16
Summary of Limited Share Transactions for the Three Months Ended September 30, 2008 and 2007 and
Nine Months Ended
September 30, 2008 and Period Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Shares
|
|
Paid in Capital
|
|
Limited Shares
|
|
Paid in Capital
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
Nine Months
Ended
|
|
Period
Ended
|
|
Nine Months
Ended
|
|
Period
Ended
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
September 30,
2008
|
|
September 30,
2007
|
|
September 30,
2008
|
|
September 30,
2007
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Limited Shares Sold
|
|
600,000
|
|
800,000
|
|
$13,551,730
|
|
$22,305,618
|
|
3,600,000
|
|
3,800,000
|
|
$89,803,186
|
|
$104,558,466
|
|
Limited Shares Redeemed
|
|
(800,000)
|
|
-
|
|
$(17,443,992)
|
|
-
|
|
(1,800,000)
|
|
(400,000)
|
|
$(42,235,008)
|
|
$(10,665,028)
|
|
Net Increase/ (Decrease)
|
|
(200,000)
|
|
800,000
|
|
$(3,892,262)
|
|
$22,305,618
|
|
1,800,000
|
|
3,400,000
|
|
$47,568,178
|
|
$93,893,438
|
|
(8)
|
Profit and Loss Allocations and Distributions
|
Pursuant to the Trust Agreement of the Master Trust, income and expenses are allocated pro rata to the General and Limited shareholders monthly based on their respective percentage interests as
of the close of the last trading day of the preceding month. Any losses allocated to the Managing Owner (the owner of the General Shares) which are in excess of the Managing Owner’s capital balance are allocated to the Limited shareholders in
accordance with their respective interest in the Master Fund as a percentage of total shareholders’ equity. Distributions (other than redemption of units) may be made at the sole discretion of the Managing Owner on a pro rata basis in
accordance with the respective capital balances of the shareholders.
|
(9)
|
Commitments and Contingencies
|
The Managing Owner, either in its own capacity or in its capacity as the Managing Owner and on behalf of the Fund and the Master Fund, has entered into various service agreements that contain a variety of
representations, or provide indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Funds. As of September 30, 2008, no claims had been received by the Fund
or the Master Fund and it was therefore not possible to estimate the Fund’s and the Master Fund’s potential future exposure under such indemnification provisions.
|
(10)
|
Net Asset Value and Financial Highlights
|
The Fund is presenting the following net asset value and financial highlights related to investment performance and operations for a Limited Share outstanding for the Three Months Ended September 30, 2008 and
2007 and for the Nine Months Ended September 30, 2008 and the Period Ended September 30, 2007. The net investment income and total expense ratios are calculated using average net asset value. The net asset value presentation is calculated
using daily Limited Shares outstanding. The net investment income and total expense ratios have been annualized. The total return is based on the change in net asset value of the Limited Shares during the period. An individual investor’s return
and ratios may vary based on the timing of capital transactions.
The Fund invests substantially all of its assets in the
Master Fund in a master-feeder structure. The Fund holds no investment assets other than Master Fund Limited Units. The Fund is the majority Master Fund Limited Unit owner and the Managing Owner holds a minority interest in the Master Fund. Each
Limited Share issued by the Fund correlates with the Master Fund Limited Unit issued by the Master Fund and held by the Fund.
Net asset value per Master Fund Limited Unit and Master Fund General Unit (collectively, “Master Fund Units”) is the net asset value of the Master Fund divided by the number of outstanding Master Fund Units. Because there is a
one-to-one correlation between Limited Shares and the Master Fund Limited Units, the net asset value per Limited Share and the net asset value per Master Fund Unit are equal.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months
Ended
|
|
|
|
Period
Ended
|
|
|
|
September 30,
2008
|
|
|
|
September 30,
2007
|
|
|
|
September 30,
2008
|
|
|
|
September 30,
2007
|
|
Net Asset Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Offering Price per Limited Share
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
$
|
25.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and change in unrealized gain (loss) on United States Treasury Obligations and Futures
|
|
$
|
(5.20)
|
|
|
|
$
|
(0.48)
|
|
|
|
$
|
(2.42)
|
|
|
|
$
|
0.57
|
|
Net investment income
|
|
|
0.06
|
|
|
|
|
0.26
|
|
|
|
|
0.21
|
|
|
|
|
0.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets from operations
|
|
|
(5.14)
|
|
|
|
|
(0.22)
|
|
|
|
|
(2.21)
|
|
|
|
|
1.34
|
|
Net asset value per Limited Share, beginning of period
|
|
|
24.93
|
|
|
|
|
26.56
|
|
|
|
|
22.00
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per Limited Share, end of period
|
|
$
|
19.79
|
|
|
|
$
|
26.34
|
|
|
|
$
|
19.79
|
|
|
|
$
|
26.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value per Limited Share, beginning of period
|
|
$
|
25.01
|
|
|
|
$
|
26.58
|
|
|
|
$
|
21.90
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value per Limited Share, end of period
|
|
$
|
19.67
|
|
|
|
$
|
26.39
|
|
|
|
$
|
19.67
|
|
|
|
$
|
26.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio to average Limited Shares*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
1.04
|
|
%
|
|
|
3.95
|
|
%
|
|
|
1.17
|
|
%
|
|
|
3.99%
|
|
Total expenses
|
|
|
0.72
|
|
%
|
|
|
0.77
|
|
%
|
|
|
0.76
|
|
%
|
|
|
0.77%
|
|
|
|
|
|
|
|
|
|
|
Total Return, at net asset value **
|
|
|
(20.62)
|
|
%
|
|
|
(0.83)
|
|
%
|
|
|
(10.05)
|
|
%
|
|
|
5.36%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return, at market value **
|
|
|
(21.35)
|
|
%
|
|
|
(0.71)
|
|
%
|
|
|
(10.18)
|
|
%
|
|
|
5.56%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Percentages are annualized.
|
|
**
|
Percentages are not annualized and, for the Period Ended September 30, 2007, are calculated based on the initial offering price upon commencement of
investment operations of $25.00.
|
|
(11)
|
Recently Issued Accounting Standards
|
In December 2007, the Financial Accounting Standards Board released FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment to ARB No. 51 (Statement 160).
Statement 160 requires noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Statement 160 is effective
for periods beginning on or after December 15, 2008 and earlier adoption is prohibited. Statement 160 will be applied prospectively to all noncontrolling interests including any that arose before the effective date and presentation and
disclosure requirements shall be applied retrospectively for all periods presented.
On March 19, 2008, the Financial
Accounting Standards Board released FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (Statement 161). Statement 161 requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The application of Statement 161 is required for fiscal
years beginning after November 15, 2008 and interim periods within those fiscal years.
At this time, management is
evaluating the implications of these Statements and their impact on the financial statements has not yet been determined.
18
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
This information should be read in conjunction with the consolidated financial statements and notes included in Item 1 of Part I of this Quarterly Report, or Report. The discussion and
analysis which follows may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results.
Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “outlook” and “estimate” as well as similar words and phrases signify forward-looking
statements. PowerShares DB Base Metals Fund’s forward-looking statements are not guarantees of future results and conditions and important factors, risks and uncertainties may cause our actual results to differ materially from those expressed
in our forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as expressly
required by the Federal securities laws, DB Commodity Services LLC, or the Managing Owner, undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as
a result of new information, future events or changed circumstances or for any other reason after the date of this Report.
Overview/Introduction
The Fund and the Master Fund seek to track changes, whether positive or negative, in the level of the Deutsche Bank
Liquid Commodity Index–Optimum Yield Industrial Metals Excess Return™ (DBLCI-OY Industrial Metals ER™), or the Index, over time, plus the excess, if any, of the Master Fund’s interest income from its holdings of United States
Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund and the Master Fund. The Limited Shares are designed for investors who want a cost-effective and convenient way to invest in a group
of commodity futures on U.S. and non-U.S. markets.
The Fund pursues its investment objective by investing substantially
all of its assets in the Master Fund. The Master Fund pursues its investment objective by investing in a portfolio of exchange-traded futures contracts, or the Index Contracts, on the commodities comprising the Index, or the Index Commodities. The
Index Commodities are aluminum, zinc and copper. The Index is composed of notional amounts of each of the Index Commodities. The Master Fund’s portfolio also includes United States Treasury Obligations and other high credit quality short-term
fixed income securities for deposit with the Master Fund’s Commodity Broker as margin.
The notional amount of each
Index Commodity included in the Index is intended to reflect the changes in market value of each such Index Commodity within the Index. The closing level of the Index is calculated on each business day by the Index Sponsor based on the closing price
of the futures contracts for each of the underlying Index Commodities and the notional amounts of such Index Commodities.
The Index is rebalanced annually in November to ensure that each of the Index Commodities is weighted in the same proportion that such Index Commodities were weighted on September 3, 1997, or the Base Date. The following table reflects the
index base weights, or Index Base Weights, of each Index Commodity on the Base Date:
|
|
|
|
|
Index Commodity
|
|
Index Base Weight (%)
|
|
Aluminum
|
|
33.33
|
|
Zinc
|
|
33.33
|
|
Copper-Grade A
|
|
33.33
|
|
Closing Level on Base
Date:
|
|
100.00
|
The composition of the Index may be adjusted in the event that the Index Sponsor
is not able to calculate the closing prices of the Index Commodities.
The Index includes provisions for the replacement of
futures contracts as they approach maturity. This replacement takes place over a period of time in order to lessen the impact on the market for the futures contracts being replaced. With respect to each Index Commodity, the Master Fund employs a
rule-based approach when it ‘rolls’ from one futures contract to another. Rather than select a new futures contract based on a predetermined schedule (e.g., monthly), each Index Commodity rolls to the futures contract which generates the
best possible ‘implied roll yield.’ The futures contract with a delivery month within the next thirteen months which generates the best possible implied roll yield will be included in each Index. As a result, each Index Commodity is able
to potentially maximize the roll benefits in backwardated markets and minimize the losses from rolling in contangoed markets.
In general, as a futures contract approaches its expiration date, its price will move towards the spot price in a contangoed market. Assuming the spot price does not change, this would result in the futures contract price decreasing and a
negative implied roll yield. The opposite is true in a backwardated market. Rolling in a contangoed market will tend to cause a drag on an Index Commodity’s contribution to the Fund’s return while rolling in a backwardated market will tend
to cause a push on an Index Commodity’s contribution to the Fund’s return.
19
The Deutsche Bank Liquid Commodity Index–Optimum Yield Industrial Metals is
calculated in USD on both an excess return (unfunded) and total return (funded) basis.
The futures contract price for each
Index Commodity will be the exchange closing price for such Index Commodity on each weekday when banks in New York, New York are open, or Index Business Days. If a weekday is not an Exchange Business Day (as defined in the following sentence) but is
an Index Business Day, the exchange closing price from the previous Index Business Day will be used for each Index Commodity. “Exchange Business Day” means, in respect of an Index Commodity, a day that is a trading day for such Index
Commodity on the relevant exchange (unless either an Index disruption event or force majeure event has occurred).
On the
first New York business day, or Verification Date, of each month, each Index Commodity futures contract will be tested in order to determine whether to continue including it in the Index. If the Index Commodity futures contract requires delivery of
the underlying commodity in the next month, known as the Delivery Month, a new Index Commodity futures contract will be selected for inclusion in the Index. For example, if the first New York business day is May 1, 2009, and the Delivery Month
of the Index Commodity futures contract currently in such Index is June 2009, a new Index Commodity futures contract with a later Delivery Month will be selected.
For each underlying Index Commodity of the Index, the new Index Commodity futures contract selected will be the Index Commodity futures contract with the best possible “implied roll
yield” based on the closing price for each eligible Index Commodity futures contract. Eligible Index Commodity futures contracts are any Index Commodity futures contracts having a Delivery Month (i) no sooner than the month after the
Delivery Month of the Index Commodity futures contract currently in such Index, and (ii) no later than the 13th month after the Verification Date. For example, if the first New York business day is May 1, 2009 and the Delivery Month of an
Index Commodity futures contract currently in the Index is therefore June 2009, the Delivery Month of an eligible new Index Commodity futures contract must be between July 2009 and July 2010. The implied roll yield is then calculated and the futures
contract on the Index Commodity with the best possible implied roll yield is then selected. If two futures contracts have the same implied roll yield, the futures contract with the minimum number of months prior to the Delivery Month is selected.
After the futures contract selection, the monthly roll for each Index Commodity subject to a roll in that particular month
unwinds the old futures contract and enters a position in the new futures contract. This takes place between the 2nd and 6th Index Business Day of the month.
On each day during the roll period, new notional holdings are calculated. The calculations for the old Index Commodities that are leaving the Index and the new Index Commodities are then
calculated.
On all days that are not monthly index roll days, the notional holdings of each Index Commodity future remains
constant.
The Index is re-weighted on an annual basis on the 6th Index Business Day of each November.
The Commodity Futures Trading Commission and commodity exchanges impose position limits on market participants trading in certain
commodities included in the Index. As disclosed in the Fund’s Prospectus, if the Managing Owner determines in its commercially reasonable judgment that it has become impracticable or inefficient for any reason for the Master Fund to gain full
or partial exposure to any Index Commodity by investing in a specific Index Contract, the Master Fund may invest in a futures contract referencing the particular Index Commodity other than the Index Contract or, in the alternative, invest in other
futures contracts not based on the particular Index Commodity if, in the commercially reasonable judgment of the Managing Owner, such futures contracts tend to exhibit trading prices that correlate with such Index Commodity.
Under the Amended and Restated Declaration of Trust and Trust Agreement of each of the Trust and the Master Trust (the “Trust
Agreements”), Wilmington Trust Company, the Trustee of the Trust and the Master Trust, has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Trust, the Fund and the Master Trust and
Master Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner.
20
The Index Sponsor obtains information for inclusion in, or for use in the calculation of,
the Index from sources the Index Sponsor considers reliable. None of the Index Sponsor, the Managing Owner, the Trust, the Fund, the Master Trust, the Master Fund or any of their respective affiliates accepts responsibility for or guarantees the
accuracy and/or completeness of the Index or any data included in the Index.
The Limited Shares are intended to provide
investment results that generally correspond to the changes, positive or negative, in the levels of the Index over time. The value of the Limited Shares is expected to fluctuate in relation to changes in the value of the Master Fund’s
portfolio. The market price of the Limited Shares may not be identical to the net asset value per Limited Share, but these two valuations are expected to be very close.
Performance Summary
This report covers the Three Months Ended September 30,
2008 and 2007, the Nine Months Ended September 30, 2008 and the period from January 3, 2007 (commencement of investment operations) through September 30, 2007 (hereinafter referred to as the “Period Ended September 30,
2007”).
Performance of the Fund and the exchange traded Limited Shares are detailed below in “Results of
Operations”. Past performance of the Fund is not necessarily indicative of future performance.
The Index is intended
to reflect the change in market value of the Index Commodities. In turn, the Index is intended to reflect the base metals sector. The Deutsche Bank Liquid Commodity Index-Optimum Yield Industrial Metals Total Return™, or DBLCI-OY Industrial
Metals TR™, consists of the Index plus 3 month United States Treasury Obligations returns. Past Index results are not necessarily indicative of future changes, positive or negative, in the Index closing levels.
The section “Summary of DBLCI-OY Industrial Metals TR™ and Underlying Index Commodity Returns for the Three Months Ended
September 30, 2008 and 2007 and the Nine Months Ended September 30, 2008 and the Period Ended September 30, 2007” below provides an overview of the changes in the closing levels of DBLCI-OY Industrial Metals TR™ by
disclosing the change in market value of each underlying component Index Commodity through a “surrogate” (and analogous) index plus 3 month United States Treasury Obligations returns. Please note also that the Fund’s objective is to
track the Index (not DBLCI-OY Industrial Metals TR™) and the Fund does not attempt to outperform or underperform the Index. The Index employs the optimum yield rolls method with the objective of mitigating the negative effects of contango, the
condition in which distant delivery prices for futures exceed spot prices, and maximizing the positive effects of backwardation, a condition opposite of contango.
Summary of DBLCI-OY Industrial Metals TR™ and Underlying Index Commodity
Returns for the
Three Months Ended September 30, 2008 and 2007 and the Nine Months Ended September 30, 2008
and the Period Ended
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
Total returns for indexes in the DBLCI-OY Industrial Metals TR™
|
|
|
|
Three Months
Ended September 30,
2008
|
|
Three Months
Ended September 30,
2007
|
|
Nine Months
Ended September 30,
2008
|
|
Period Ended
September 30,
2007
|
|
DB Aluminum Indices
|
|
(23.08)%
|
|
(7.84)%
|
|
(3.06)%
|
|
7.17%
|
|
DB Zinc Indices
|
|
(13.08)%
|
|
(5.85)%
|
|
(27.61)%
|
|
(13.83)%
|
|
DB Copper Indices
|
|
(23.05)%
|
|
10.05%
|
|
(0.55)%
|
|
31.98%
|
|
TOTAL RETURN
|
|
(20.74)%
|
|
(0.84)%
|
|
(9.99)%
|
|
7.19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the current interest rate environment, the total return on an investment in the
Fund is expected to outperform the Index and underperform the DBLCI-OY Industrial Metals TR™. The only difference between the Index and the DBLCI-OY Industrial Metals TR™ is that the Index does not include interest income from a
hypothetical basket of fixed income securities while the DBLCI-OY Industrial Metals TR™ does include such a component. The difference between the Index
21
and the DBLCI-OY Industrial Metals TR™ is attributable entirely to the hypothetical interest income from this hypothetical basket of fixed income
securities. The Fund’s interest income from its holdings of fixed-income securities is expected to exceed the Fund’s fees and expenses, and the amount of such excess is expected to be distributed periodically. The market price of the
Limited Shares is expected to closely track the Index. The total return on an investment in the Fund over any period is the sum of the capital appreciation or depreciation of the Limited Shares over the period, plus the amount of any distributions
during the period. Consequently, in the current interest rate environment, the Fund’s total return is expected to outperform the Index by the amount of the excess of its interest income over its fees and expenses but, as a result of the
Fund’s fees and expenses, the total return on the Fund is expected to underperform the DBLCI-OY Industrial Metals TR™. If the Fund’s fees and expenses were to exceed the Fund’s interest income from its holdings of fixed income
securities, the Fund would underperform the Index.
Net Asset Value
Net asset value means the total assets of the Master Fund, including, but not limited to, all futures, cash and investments less total liabilities of the Master Fund, each determined on the basis
of U.S. generally accepted accounting principles, consistently applied under the accrual method of accounting. In particular, net asset value includes any unrealized appreciation or depreciation on open commodity futures contracts, and any other
credit or debit accruing to the Master Fund but unpaid or not received by the Master Fund. All open commodity futures contracts will be calculated at their then current market value, which will be based upon the settlement price for that particular
commodity futures contract traded on the applicable exchange on the date with respect to which net asset value is being determined; provided, that if a commodity futures contract could not be liquidated on such day, due to the operation of daily
limits or other rules of the exchange upon which that position is traded or otherwise, the settlement price on the most recent day on which the position could have been liquidated will be the basis for determining the market value of such position
for such day. The Managing Owner may in its discretion (and only under extraordinary circumstances, including, but not limited to, periods during which a settlement price of a futures contract is not available due to exchange limit orders or force
majeure type events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance) value any asset of the Master Fund pursuant to such other
principles as the Managing Owner deems fair and equitable so long as such principles are consistent with normal industry standards. Interest earned on the Master Fund’s brokerage account is accrued monthly. The amount of any distribution is a
liability of the Master Fund from the day when the distribution is declared until it is paid.
The Fund invests
substantially all of its assets in the Master Fund in a master-feeder structure. The Fund holds no investment assets other than Master Fund Limited Units. The Fund is the majority Master Fund Limited Unit owner and the Managing Owner holds a
minority interest in the Master Fund. Each Limited Share issued by the Fund correlates with the Master Fund Limited Unit issued by the Master Fund and held by the Fund.
Net asset value per Master Fund Limited Unit and Master Fund General Unit (collectively, “Master Fund Units”) is the net asset value of the Master Fund divided by the number of
outstanding Master Fund Units. Because there is a one-to-one correlation between Limited Shares and the Master Fund Limited Units, the net asset value per Limited Share and the net asset value per Master Fund Limited Unit are equal.
Critical Accounting Policies
The Fund’s and Master Fund’s critical accounting policies are as follows:
Preparation of the financial
statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the application of appropriate accounting rules and guidance, as well as the use of estimates, and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenue and expense and related disclosure of contingent assets and liabilities during the reporting period of the consolidated financial statements and accompanying notes. Both
the Fund’s and the Master Fund’s application of these policies involve judgments and actual results may differ from the estimates used.
The Master Fund holds a significant portion of its assets in futures contracts and United States Treasury Obligations, both of which are recorded on a trade date basis and at fair value in the consolidated financial
statements, with changes in fair value reported in the consolidated statement of income and expenses.
22
The use of fair value to measure financial instruments, with related unrealized gains or
losses recognized in earnings in each period is fundamental to the Fund’s financial statements. The fair value of a financial instrument is the amount 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 (the exit price).
In determining fair value of United
States Treasury Obligations and commodity futures contracts, the Fund uses unadjusted quoted market prices in active markets. Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The objective of a fair value measurement is to determine 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 (an exit
price). The hierarchy gives the highest priority to unadjusted quoted prices for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 4(c) within the financial statements in Item I for further information regarding Statement No. 157.
When market closing prices are not available, the Managing Owner may value an asset of the Master Fund pursuant to policies the Managing
Owner has adopted, which are consistent with normal industry standards.
Realized gains (losses) and changes in unrealized
gain (loss) on open positions are determined on a specific identification basis and recognized in the consolidated statement of income and expenses in the period in which the contract is closed or the changes occur, respectively.
Interest income on United States Treasury Obligations is recognized on an accrual basis when earned. Premiums and discounts are amortized
or accreted over the life of the United States Treasury Obligations.
Market Risk
Trading in futures contracts involves the Master Fund entering into contractual commitments to purchase a particular commodity at a
specified date and price. The market risk associated with the Master Fund’s commitments to purchase commodities is limited to the gross or face amount of the contracts held.
The Master Fund’s exposure to market risk is also influenced by a number of factors including the volatility of interest rates and
foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of the Master Fund’s trading as well as the development of drastic market
occurrences could ultimately lead to a loss of all or substantially all of the investors’ capital.
Credit Risk
When the Master Fund enters into futures contracts, the Master Fund will be exposed to credit risk that the counterparty to the contract
will not meet its obligations. The counterparty for futures contracts traded on United States and on most foreign futures exchanges is the clearing house associated with the particular exchange. In general, clearing houses are backed by their
corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearing house is not backed by the
clearing members (
i.e
., some foreign exchanges), it may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the
Master Fund.
The Commodity Broker, when acting as the Master Fund’s futures commission merchant in accepting orders
for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Master Fund all assets of the Master Fund relating to domestic futures trading and the Commodity
Broker is not allowed to commingle such assets with other assets of the Commodity Broker. In addition, CFTC regulations also require the Commodity Broker to hold in a secure account assets of the Master Fund related to foreign futures trading.
Liquidity
All of the
Master Fund’s source of capital is derived from the Fund through the Fund’s offering of Limited Shares to Authorized Participants. (Authorized Participants may then subsequently redeem such Limited Shares). The Master Fund in turn
allocates its net assets to commodities trading. A significant portion of the net asset value is held in United States
23
Treasury Obligations and cash, which is used as margin for the Master Fund’s trading in commodities. The percentage that United States Treasury
Obligations bear to the total net assets will vary from period to period as the market values of the Master Fund’s commodity interests change. The balance of the net assets is held in the Master Fund’s commodity trading account. Interest
earned on the Master Fund’s interest-bearing funds is paid to the Master Fund.
The Master Fund’s commodity
contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges generally have the ability to limit fluctuations in certain commodity futures contract
prices during a single day by regulations referred to as “daily limits.”
During a single day, no trades may be
executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless the
traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Master Fund from promptly
liquidating its commodity futures positions.
Because the Master Fund trades futures contracts, its capital is at risk due
to changes in the value of future contracts (market risk) or the inability of counterparties (including exchange clearinghouses) to perform under the terms of the contracts (credit risk).
On any business day, an Authorized Participant may place an order with the Managing Owner to redeem one or more Baskets. Redemption
orders must be placed by 10:00 a.m., New York time. The day on which the Managing Owner receives a valid redemption order is the redemption order date. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to
redeem Baskets. Individual Shareholders may not redeem directly from the Fund. By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTC’s book-entry system to the Fund no later than noon,
New York time, on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant’s DTC account is charged the non-refundable
transaction fee due for the redemption order.
Cash Flows
The primary cash flow activities of the Fund are to raise capital from Authorized Participants through the issuance of Limited Shares in the Fund. This cash is invested into the Master Fund where
it is used to invest in United States Treasury Obligations and to meet margin requirements as a result of the positions taken in futures contracts to match the fluctuations of the Index the Fund is tracking.
Operating Activities
Net
cash flow used for operating activities was $40.3 million and $80.6 million during the Nine Months Ended September 30, 2008 and Period Ended September 30, 2007, respectively. These amounts primarily include net purchases and sales of
United States Treasury Obligations which are held at fair value on the statement of financial condition. During the Nine Months Ended September 30, 2008, $306.6 million was paid to purchase United States Treasury Obligations and $273.9 million
was received from sales of maturing contracts. During the Period Ended September 30, 2007, $185.7 million was paid to purchase United States Treasury Obligations and $107.3 million was received from the sales of maturing contracts. Unrealized
depreciation on futures increased by $11.8 million and $5.3 million during the Nine Months Ended September 30, 2008 and Period Ended September 30, 2007, respectively.
Financing Activities
The Fund’s net cash flow provided by financing
activities was $47.6 million and $93.9 million during the Nine Months Ended September 30, 2008 and the Period Ended September 30, 2007, respectively. This included $89.8 million and $104.6 million from the sale of Limited Shares to
Authorized Participants during the Nine Months Ended September 30, 2008 and the Period Ended September 30, 2007, respectively.
24
Results of Operations
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007, THE NINE MONTHS ENDED
SEPTEMBER 30, 2008
AND FOR THE PERIOD ENDED SEPTEMBER 30, 2007
The Fund was launched on January 3, 2007 at $25.00 per share and
listed for trading on the American Stock Exchange (now known as the NYSE Alternext US LLC) on January 5, 2007.
The
Fund and the Master Fund seek to track changes in the closing levels of the Deutsche Bank Liquid Commodity Index–Optimum Yield Industrial Metals Excess Return™ (DBLCI-OY Industrial Metals ER™), or the Index, over time, plus the
excess, if any, of the Master Fund’s interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund and the Master Fund. The following
graphs illustrate changes in (i) the price of the Limited Shares (as reflected by the graph “DBB”), (ii) the Fund’s NAV (as reflected by the graph “DBBNAV”), and (iii) the closing levels of the Index (as
reflected by the graph “DBBMIX”). The price of the Limited Shares generally has exceeded the levels of the Index primarily because the Limited Share price reflects interest income from the Master Fund’s collateral holdings whereas the
Index does not consider such interest income. There can be no assurances that the price of the Limited Shares will continue to exceed the Index levels.
25
COMPARISON OF DBB, DBBNAV AND DBBMIX FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007, THE NINE MONTHS ENDED SEPTEMBER 30, 2008
AND FOR THE PERIOD ENDED SEPTEMBER 30, 2007
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD
BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE PERFORMANCE.
See Additional Legends below.
26
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD
BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE PERFORMANCE.
See Additional Legends below.
27
Additional Legends
Deutsche Bank Liquid Commodity Index–Optimum Yield Industrial Metals Excess Return™ is an index and does not reflect (i) actual trading and (ii) any fees or expenses.
WHILE THE FUND’S OBJECTIVE IS NOT TO GENERATE PROFIT THROUGH ACTIVE PORTFOLIO MANAGEMENT, BUT IS TO TRACK THE INDEX, BECAUSE THE INDEX WAS
ESTABLISHED IN JULY 2006, CERTAIN INFORMATION RELATING TO THE INDEX CLOSING LEVELS MAY BE CONSIDERED TO BE “HYPOTHETICAL.” HYPOTHETICAL INFORMATION MAY HAVE CERTAIN INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.
WITH RESPECT TO INDEX DATA, NO REPRESENTATION IS BEING MADE THAT THE INDEX WILL OR IS LIKELY TO ACHIEVE ANNUAL OR CUMULATIVE CLOSING LEVELS
CONSISTENT WITH OR SIMILAR TO THOSE SET FORTH HEREIN. SIMILARLY, NO REPRESENTATION IS BEING MADE THAT THE FUND WILL GENERATE PROFITS OR LOSSES SIMILAR TO THE FUND’S PAST PERFORMANCE OR THE HISTORICAL ANNUAL OR CUMULATIVE CHANGES IN THE INDEX
CLOSING LEVELS. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY INVESTMENT METHODOLOGIES, WHETHER ACTIVE OR PASSIVE.
WITH RESPECT TO INDEX DATA, ONE OF THE LIMITATIONS OF HYPOTHETICAL INFORMATION IS THAT IT IS GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. TO THE
EXTENT THAT INFORMATION PRESENTED HEREIN RELATES TO THE PERIOD SEPTEMBER 1997 THROUGH JUNE 2006, THE INDEX CLOSING LEVELS REFLECT THE APPLICATION OF THE INDEX’S METHODOLOGY, AND SELECTION OF INDEX COMMODITIES, IN HINDSIGHT.
NO HYPOTHETICAL RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THERE ARE NUMEROUS FACTORS, INCLUDING
THOSE DESCRIBED UNDER ITEM 1A: -“RISK FACTORS” SET FORTH IN THE FUND’S ANNUAL REPORT OF FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2007, RELATED TO THE COMMODITIES MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF THE FUND’S
EFFORTS TO TRACK THE INDEX OVER TIME WHICH CANNOT BE, AND HAVE NOT BEEN, ACCOUNTED FOR IN THE PREPARATION OF THE INDEX INFORMATION SET FORTH ON THE FOLLOWING PAGES, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL PERFORMANCE RESULTS FOR THE FUND.
FURTHERMORE, THE INDEX INFORMATION DOES NOT INVOLVE FINANCIAL RISK OR ACCOUNT FOR THE IMPACT OF FEES AND COSTS ASSOCIATED WITH THE FUND.
THE MANAGING OWNER HAS HAD LIMITED EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CLIENTS. BECAUSE THERE ARE LIMITED ACTUAL TRADING RESULTS TO COMPARE TO THE INDEX CLOSING LEVELS SET FORTH HEREIN, PROSPECTIVE INVESTORS SHOULD BE
PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THE ANNUAL OR CUMULATIVE INDEX RESULTS.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2007
Fund Limited Share Price Performance
For the Three Months Ended September 30, 2008, the NYSE Alternext US LLC market value of Limited Shares decreased 21.35% from $25.01
per share to $19.67 per share. Limited Shares traded from a high of $25.61 per share (+2.40%) on July 11, 2008 to a low of $19.55 (-21.83%) per share on September 29, 2008.
For the Three Months Ended September 30, 2007, the NYSE Alternext US LLC market value of Limited Shares decreased 0.71% from $26.58
per share to $26.39 per share. Limited Shares traded from a high of $28.73 per share (+8.09%) on July 20, 2007 to a low of $24.12 (-9.26%) per share on August 16, 2007.
Fund Limited Share Net Asset Performance
For the Three Months Ended September 30, 2008, the net asset value of each Limited Share decreased 20.62% from $24.93 per share to $19.79 per share. Falling futures contract prices for aluminum, zinc and copper during the Three Months
Ended September 30, 2008 contributed to an overall 20.74% decrease in the level of the DBLCI-OY Industrial Metals TR™.
28
Net loss for the Three Months Ended September 30, 2008 was $21.7 million, resulting
from $0.4 million of interest income, realized and unrealized losses of $21.9 million and operating expenses of $0.2 million.
For the Three Months Ended September 30, 2007, the net asset value of each Limited Share decreased 0.83% from $26.56 per share to $26.34 per share. Strong appreciation in the price of copper futures contracts during the Three Months
Ended September 30, 2007 partially offset falling futures contract prices for aluminum and zinc during that same period, contributing to an overall 0.84% decrease in the level of the DBLCI-OY Industrial Metals TR™.
Net loss for the Three Months Ended September 30, 2007 was $1.8 million, resulting from $1.0 million of interest income, realized
and unrealized losses of $2.7 million and operating expenses of $0.1 million.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2008 COMPARED TO THE PERIOD ENDED SEPTEMBER 30, 2007
Fund Limited Share Price Performance
For the Nine Months Ended September 30, 2008, the NYSE Alternext US LLC market value of Limited Shares decreased 10.18% from $21.90
per share to $19.67 per share. Limited Shares traded from a high of $27.90 per share (+27.40%) on March 5, 2008 to a low of $19.55 (-10.73%) per share on September 29, 2008.
For the Period Ended September 30, 2007, the NYSE Alternext US LLC market value of Limited Shares increased 5.56% from $25.00 per
share to $26.39 per share. Limited Shares traded from a low of $22.29 (-10.84%) per share on February 7, 2007 to a high of $29.43 per share (+17.72%) on May 4, 2007.
Fund Limited Share Net Asset Performance
For the Nine Months Ended
September 30, 2008, the net asset value of each Limited Share decreased 10.05% from $22.00 per share to $19.79 per share. Falling futures contract prices for aluminum, zinc and copper during the Nine Months Ended September 30, 2008
contributed to an overall 9.99% decrease in the level of the DBLCI-OY Industrial Metals TR™.
Net loss for the Nine
Months Ended September 30, 2008 was $16.8 million, resulting from $1.4 million of interest income, realized and unrealized losses of $17.7 million and operating expenses of $0.5 million.
For the Period Ended September 30, 2007, the net asset value of each Limited Share increased 5.36% from $25.00 per share to $26.34
per share. Strong appreciation in futures contract prices for copper and aluminum, more than offset losses from falling futures contract prices for zinc during the Period Ended September 30, 2007 contributing to an overall 7.19% increase in the
level of the DBLCI-OY Industrial Metals TR™.
Net loss for the Period Ended September 30, 2007 was $4.3 million,
resulting from $1.9 million of interest income, realized and unrealized loss of $5.9 million and operating expenses of $0.3 million.
Off-Balance Sheet
Arrangements and Contractual Obligations
In the normal course of its business, the Master Fund is party to financial
instruments with off-balance sheet risk. The term “off-balance sheet risk” refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in a future obligation or loss. The financial
instruments used by the Master Fund are commodity futures, whose values are based upon an underlying asset and generally represent future commitments which have a reasonable possibility to be settled in cash or through physical delivery. The
financial instruments are traded on an exchange and are standardized contracts.
The Fund and the Master Fund have not
utilized, nor do they expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and have no loan guarantee arrangements or off-balance sheet arrangements of any kind, other than agreements
entered into in the normal course of business noted above, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund and the Master Fund.
While the Fund’s and the Master Fund’s exposure under such
29
indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on either the Fund’s
or the Master Fund’s financial position.
The Fund and Master Fund’s contractual obligations are with the
Managing Owner and the Commodity Broker. Management Fee payments made to the Managing Owner are calculated as a fixed percentage of the Master Fund’s net asset value. Commission payments to the Commodity Broker are on a contract-by-contract, or
round-turn, basis. As such, the Managing Owner cannot anticipate the amount of payments that will be required under these arrangements for future periods as net asset values are not known until a future date. These agreements are effective for one
year terms, renewable automatically for additional one year terms unless terminated. Additionally, these agreements may be terminated by either party for various reasons.
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ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
INTRODUCTION
The Fund is designed to replicate positions in a commodity index. The market
sensitive instruments held by it are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Fund’s main line of business.
Market movements can produce frequent changes in the fair market value of the Fund’s open positions and, consequently, in its
earnings and cash flow. The Fund’s market risk is primarily influenced by changes in the price of commodities.
Value
at Risk is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty in the markets in which the Fund trades and the recurrence in the markets traded by the Fund
of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Fund’s experience to date (i.e., “risk of ruin”). In light of this, as well as the risks
and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Fund’s losses in any market sector will be
limited to Value at Risk or by the Fund’s attempts to manage its market risk.
Standard of Materiality
Materiality as used in this section, “Quantitative and Qualitative Disclosures About Market Risk,” is based on an assessment of
reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, and multiplier features of the Fund’s market sensitive instruments.
QUANTIFYING THE FUND’S TRADING VALUE AT RISK
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Fund’s
market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical
fact (such as the dollar amount of maintenance margin required for market risk sensitive instruments held at the end of the reporting period).
The Fund’s risk exposure in the various market sectors traded by the Fund is quantified below in terms of Value at Risk. Exchange maintenance margin requirements have been used by the Fund as the measure of its
Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed 95-99% of the maximum one-day losses at fair value of any given contract incurred during the time period over which historical price fluctuations are researched
for purposes of establishing margin levels. The maintenance margin levels are established by exchanges using historical price studies as well as an assessment of current market volatility and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation.
30
THE FUND’S TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS
The following table indicates the trading Value at Risk associated with the Fund’s open positions by market category as of
September 30, 2008. There has been no material change in the trading Value at Risk information previously disclosed in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2007.
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|
|
|
|
|
|
|
|
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Market Sector
|
|
Delivery Month
|
|
Value at Risk (VaR)
$ Value*
|
|
Value at Risk (VaR)* %
of Net Assets
|
|
Number of times
VaR Exceeded
|
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Aluminum
|
|
November 2008
|
|
782,542
|
|
1.10%
|
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8
|
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Zinc
|
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May 2009
|
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977,393
|
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1.37%
|
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43
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Copper
|
|
March 2009
|
|
799,664
|
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1.12%
|
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24
|
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Aggregate/Total
|
|
|
|
2,265,247
|
|
3.19%
|
|
24
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The following table indicates the trading Value at Risk associated with the
Fund’s open positions by market category as of December 31, 2007.
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Market Sector
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Delivery Month
|
|
Value at Risk (VaR)
$ Value*
|
|
Value at Risk (VaR)* %
of Net
Assets
|
|
Number of times
VaR Exceeded
|
|
Aluminum
|
|
November 2008
|
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482,586
|
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1.00%
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|
10
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Zinc
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May 2008
|
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736,351
|
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1.93%
|
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8
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Copper
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March 2008
|
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932,688
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1.52%
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7
|
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Aggregate/Total
|
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|
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2,151,605
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3.92%
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4
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* The VaR for a contract represents the one day, downside risk, under normal market
conditions, with a 99% confidence level. It is calculated using historical market moves for the contract and uses a one year look-back. The aggregate VaR for the fund represents the VaR of the Fund’s open positions across all contracts, and is
less than the sum of VaRs for each individual contract due to the diversification benefit across the contracts.
NON-TRADING RISK
The Fund has non-trading market risk as a result of investing in short-term United States
Treasury Obligations. The market risk represented by these investments is expected to be immaterial.
QUALITATIVE
DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
The following qualitative disclosures regarding the Fund’s
market risk exposures — except for those disclosures that are statements of historical fact — constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Fund’s primary market risk exposures are subject to numerous uncertainties, contingencies and risks. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors,
political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures of the Fund. There
can be no assurance that the Fund’s current market exposure will not change materially. Investors may lose all or substantially all of their investment in the Fund.
The following were the primary trading risk exposures of the Fund as of September 30, 2008 by Index Commodities:
Aluminum
The
price of aluminum is volatile. The price movement of aluminum may be influenced by a variety of factors, including the level of global industrial activity and demands, especially relating to the transportation, packaging and building sectors, each
of which significantly influences the demand, and in turn, the price of aluminum. Prices for aluminum are influenced by a number of factors including the level of economic activity in large aluminum consuming markets, political uncertainties,
economic concerns and the rate of supply of new metal from producers. The production of aluminum is a power intensive process that requires large amounts of inexpensive power. Disruptions in the amount of energy available to aluminum producers could
affect the supply of aluminum.
31
Zinc
The price of zinc is volatile and is affected by numerous factors. The closing price of zinc is determined by reference to the official U.S. dollar cash settlement price per ton of the zinc
futures contract traded on the LME. The price of zinc is primarily affected by the global demand for and supply of zinc. Demand for zinc is significantly influenced by the level of global industrial economic activity. The galvanized steel industrial
sector is particularly important given that the use of zinc in the manufacture of galvanized steel accounts for approximately 50% of world-wide zinc demand. The galvanized steel sector is in turn heavily dependent on the automobile and construction
sectors. A relatively widespread increase in the demand for zinc by the galvanized steel sector, particularly in China and the United States, has been the primary cause of the recent rise in zinc prices. An additional, but highly volatile component
of demand, is adjustments to inventory in response to changes in economic activity and/or pricing levels. The supply of zinc concentrate (the raw material) is dominated by China, Australia, North America and Latin America. The supply of zinc is also
affected by current and previous price levels, which will influence investment decisions in new mines and smelters. It is not possible to predict the aggregate effect of all or any combination of these factors.
Copper
The
price of copper is volatile. The price of copper is primarily affected by the global demand for and supply of copper. Demand for copper is significantly influenced by the level of global industrial economic activity. Industrial sectors which are
particularly important include the electrical and construction sectors. In recent years demand has been supported by strong consumption from newly industrializing countries, which continue to be in a copper-intensive period of economic growth as
they develop their infrastructure (such as China). An additional, but highly volatile, component of demand is adjustments to inventory in response to changes in economic activity and/or pricing levels. Apart from the United States, Canada and
Australia, the majority of copper concentrate supply (the raw material) comes from outside the Organization for Economic Cooperation and Development countries. Chile is the largest producer of copper concentrate. In previous years, copper supply has
been affected by strikes, financial problems and terrorist activity. Output has fallen particularly sharply in the “African Copperbelt” and in Bougainville, Papua New Guinea. Any political turmoil in these countries may cause copper supply
to fall.
QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE
General
The Fund is unaware of any
(i) anticipated known demands, commitments or capital expenditures; (ii) material trends, favorable or unfavorable, in its capital resources; or (iii) trends or uncertainties that will have a material effect on operations.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
Under ordinary circumstances, the Managing Owner’s discretionary power is limited to determining whether the Fund will make a
distribution. Under emergency or extraordinary circumstances, the Managing Owner’s discretionary powers increase, but remain circumscribed. These special circumstances, for example, include the unavailability of the Index or certain natural or
man-made disasters. The Managing Owner does not apply risk management techniques. The Fund initiates positions only on the “long” side of the market and does not employ “stop-loss” techniques.
|
ITEM 4.
|
CONTROLS AND PROCEDURES.
|
Evaluation of Disclosure Controls and
Procedures
Under the supervision and with the participation of the management of the Managing Owner, including Kevin
Rich, its Chief Executive Officer and Michael Gilligan, its Principal Financial Officer, the Fund carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or
15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report, and, based upon that evaluation, Kevin Rich, the Chief Executive Officer and Michael Gilligan,
the Principal Financial Officer of the Managing Owner, concluded that the Fund’s disclosure controls and procedures were effective to ensure that information the Fund is required to disclose in the reports that it files or submits with the
Securities and Exchange Commission (the “SEC”) under the Exchange Act is recorded, processed, summarized and reported, within the
32
time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by the Fund in the reports that it files or
submits under the Exchange Act is accumulated and communicated to management of the Managing Owner, including its Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in internal control over financial reporting (as defined in the Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the Fund’s last fiscal quarter that has materially
affected or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.
PART II. OTHER INFORMATION
|
Item 1.
|
Legal Proceedings.
|
Not
Applicable.
There are no
material changes from risk factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2007, filed March 26, 2008.
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds.
|
(b) The Registrant’s Registration Statement on Form S-1 (Registration No. 333-135422-09) was declared effective on January 3, 2007 with information with respect to the use of proceeds from the sale of
Limited Shares being disclosed therein. A Registration Statement on Form S-1 was declared effective on May 15, 2007 (Registration No. 333-142163-10) and on January 15, 2008 (File No. 333-148613-14) with information with respect
to the use of proceeds from the sale of the Limited Shares being disclosed therein. A Registration Statement on Form S-1 was declared effective on July 14, 2008 (Registration No. 333-150501-10) with information with respect to the use of
proceeds from the sale of Limited Shares being disclosed therein. Accordingly, upon effectiveness, the Registrant’s Registration Statement on Form S-1 (Registration No. 333-150501-10) also acts as Post-Effective Amendment No. 1 to
File No. 333-148613-14, Post-Effective Amendment No. 2 to File No. 333-142163-10 and acts as Post-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 File No. 333-135422-09, which also
contained this information. Trading on the American Stock Exchange (now known as the NYSE Alternext US LLC) commenced on January 5, 2007.
The proceeds from the sale of the Limited Shares are used to purchase Master Fund Limited Units. The Master Fund uses the proceeds from the sale of the Master Fund Limited Units for general corporate purposes in
accordance with its investment objectives and policies.
For the Three Months Ended September 30, 2008,
0.6 million Limited Shares were created for $13.6 million and 0.8 million Limited Shares were redeemed for $17.4 million. On September 30, 2008, 4.0 million Limited Shares of the Fund were outstanding for a market capitalization
of $78.7 million
(c) The following table summarizes the redemptions by Authorized Participants
during the Three Months Ended September 30, 2008 and 2007.
|
|
|
|
|
|
|
Period of Redemption
|
|
Total Number of Shares Redeemed
|
|
Average Price Paid per Share
|
|
Three Months Ended September 30, 2008
|
|
800,000
|
|
$21.80
|
|
Three Months Ended
September 30, 2007
|
|
-
|
|
$-
|
33
|
Item 3.
|
Defaults Upon Senior Securities.
|
None.
|
Item 4.
|
Submission of Matters to a Vote of Security Holders.
|
None.
|
Item 5.
|
Other Information.
|
None.
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
|
|
32.2
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith)
|
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
PowerShares DB Multi-Sector Commodity Trust with respect
to PowerShares DB Base Metals Fund
|
|
|
|
|
|
|
By: DB Commodity Services LLC,
|
|
|
|
its Managing Owner
|
|
|
|
|
|
|
By:
/s/ Kevin
Rich
|
|
|
|
Name: Kevin Rich
|
|
|
|
Title: Managing Director and Chief Executive Officer
|
|
|
|
|
Dated: November 7, 2008
|
|
By:
/s/ Michael
Gilligan
|
|
|
|
Name: Michael Gilligan
|
|
|
|
Title: Principal Financial Officer
|
35
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
Number
|
|
Description of Document
|
|
Page
Number
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
|
|
E-2
|
|
|
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
|
|
E-3
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
|
|
E-4
|
|
|
|
|
|
32.2
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
|
|
E-5
|
E-1
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