Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Great-West Funds, Inc. (the Great-West Funds) is
a Maryland corporation organized on December 7, 1981 and is registered under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. Great-West Funds changed its name from Maxim Series Fund, Inc. on
September 24, 2012 and presently consists of sixty-four funds. Interests in the Great-West Templeton Global Bond Fund (the Fund) are included herein and are represented by a separate class of beneficial interest of the Great-West Funds.
Effective May 1, 2011, Maxim Global Bond Portfolio’s name changed to Maxim Templeton Global Bond Portfolio, which subsequently changed to Great-West Templeton Global Bond Fund on September 24, 2012. The investment objective of the
Fund is to seek current income with capital appreciation and growth of income. The Fund is non-diversified as defined in the 1940 Act. The Fund is available as an investment option for insurance company separate accounts for certain variable annuity
contracts and variable life insurance policies, to individual retirement account custodians or trustees, to plan sponsors of qualified retirement plans, to college savings programs, and to asset allocation funds that are a series of the Great-West
Funds.
The Fund offers two share classes, referred to as the Initial Class and Class L. This report includes information for the
Initial Class; Class L has not yet been capitalized.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of the significant accounting policies of the Fund.
Net Asset Value
The net asset value of
each class of the Fund’s shares is determined by dividing the net assets attributable to each class of the Fund by the number of issued and outstanding shares of each class of the Fund on each business day.
Security Valuation
The value of assets in
the Fund is determined as of the close of trading on each valuation date.
Short-term securities purchased with less than 60
days remaining until maturity and all U.S. Treasury Bills are valued on the basis of amortized cost, which approximates fair value. Short-term securities purchased with more than 60 days remaining until maturity are valued using
pricing services, or in the event a price is not available from a pricing service, may be model priced or priced on the basis of quotations from brokers or dealers, and will continue to be priced until final maturity.
Fixed income investments are valued using evaluated bid prices from approved pricing services, or in the event a price is not available from a
pricing service, may be model priced or priced on the basis of quotations from brokers or dealers.
Foreign exchange rates are
determined by utilizing the New York closing rates.
Independent pricing services are approved by the Board of Directors and are
utilized for all investment types when available. In some instances valuations from independent pricing services are not available or do not reflect events in the market between the time the market closed and the valuation time and therefore fair
valuation procedures are implemented. Developments that might trigger fair value pricing could be natural disasters, government actions or fluctuations in domestic and foreign markets.
Annual Report - December 31, 2012
The following table provides examples of the inputs that are commonly used for valuing particular
classes of securities. These classifications are not exclusive, and any inputs may be used to value any other security class.
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Class
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Inputs
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Fixed Income Investments:
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Government and Government Agency
Obligations (Foreign)
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Benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, evaluated bids, offers and reference data
including market research publications.
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Municipal Bonds and Notes
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Benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, evaluated bids, offers and reference data
including market research publications. Inputs also may include reported trades, benchmark yields and material event notices.
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Short Term Investments
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Maturity date and credit quality.
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Derivative Investments:
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Forward Foreign Currency Contracts
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Foreign currency spot and forward rates.
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The Fund classifies its valuations into three levels based upon the transparency of inputs to the valuation of the
Fund’s investments. The valuation levels are not necessarily an indication of the risk or liquidity associated with the underlying investment. The three levels are defined as follows:
Level 1 – Unadjusted quoted prices for identical securities in active markets.
Level 2 –
Inputs other than quoted prices included in Level 1 that are observable either directly or indirectly. These may include quoted prices for similar assets in active markets. The fair value for some Level 2 securities may be
obtained from pricing services or other pricing sources. The inputs used by the pricing services are reviewed quarterly or when the pricing vendor issues updates to its pricing methodologies.
Level 3 – Unobservable inputs to the extent observable inputs are not available and may include prices obtained from single broker quotes.
Unobservable inputs reflect the reporting entity’s own assumptions and would be based on the best information available under the circumstances. Broker quotes are analyzed through an internal review process, which includes a review of known
market conditions and other relevant data.
As of December 31, 2012, 100% of the Fund’s investments are valued using Level 2
inputs. A breakdown of the Fund’s sector and industry classifications is included in the Schedule of Investments. The Fund recognizes transfers between the levels as of the beginning of the reporting period. There were no transfers between
Levels 1, 2 and 3 during the year.
Risk Factors
Investing in the Fund may involve certain risks including, but not limited to, the following.
Unforeseen developments in market conditions may result in the decline of prices of, and the income generated by, the securities held by the Fund.
These events may have adverse effects on the Fund such as a decline in the value and liquidity of many securities held by the Fund, and a decrease in net asset value. Such unforeseen developments may limit or preclude the Fund’s ability to
achieve its investment objective.
The Fund may have elements of risk due to concentrated investments in foreign issuers located in a
specific country. Such concentrations may subject the Fund to additional risks resulting from future political or economic conditions and/or possible impositions of adverse foreign governmental laws or currency exchange restrictions. Investments in
securities of non-U.S. issuers have unique risks not present in securities of U.S. issuers, such as greater price volatility and less liquidity.
Annual Report - December 31, 2012
Fixed income securities are subject to credit risk, which is the possibility that a security could
have its credit rating downgraded or that the issuer of the security could fail to make timely payments or default on payments of interest or principal. Additionally, fixed income securities are subject to interest rate risk, meaning the decline in
the price of debt securities that accompanies a rise in interest rates. Bonds with longer maturities are subject to greater price fluctuations than bonds with shorter maturities.
The Fund may hold bonds which are rated below investment grade. These high yield bonds may be more susceptible than higher grade bonds to real or
perceived adverse economic or industry conditions. The secondary market, on which high yield bonds are traded, may be less liquid than the market for higher grade bonds.
Restricted Securities
The Fund may own certain investment securities which are restricted as
to resale. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities are valued after giving due consideration to pertinent factors including recent private sales, market
conditions, and the issuer’s financial performance. These securities are deemed illiquid unless it is otherwise determined that such securities are liquid pursuant to the Board-approved guidelines established in the Great-West Funds’
Policy and Procedures regarding Liquidity.
Foreign Currency Translations and Transactions
The accounting records of the Fund are maintained in U.S. dollars. Investment securities, and other assets and liabilities denominated in a foreign
currency are translated into U.S. dollars at the current exchange rate. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate on the dates of the transactions.
The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between
the amounts of dividends, interest, and foreign withholding taxes recorded by the Fund and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of
assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. These gains and losses are included in net realized gain or loss on investments and foreign currency transactions and in
change in net unrealized appreciation or depreciation on investments and foreign currency translations on the Statement of Operations.
Forward
Foreign Currency Contracts
A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future
date at a negotiated rate. Upon closing of such contract there is a gain or loss arising from the difference between the U.S. dollar cost of the original contract and the value of the foreign currency in U.S. dollars. Risks arise from the possible
inability of counterparties to meet the terms of their contracts and from movement in currency and securities values and interest rates.
Dividends
Dividends from net investment income of the Fund, if any, are declared and paid semi-annually. Income dividends are reinvested in
additional shares at net asset value. Dividends from capital gains of the Fund, if any, are declared and reinvested at least annually in additional shares at net asset value.
Security Transactions
Security transactions are accounted for on the date the security is
purchased or sold (trade date). Realized gains and losses from investments sold are determined on a specific lot selection.
Annual Report - December 31, 2012
Interest income, including amortization of discounts and premiums, is recorded daily.
Federal Income Taxes
The Fund’s
policy complies with the requirements under Subchapter M of the Internal Revenue Code applicable to regulated investment companies and the Fund intends to distribute substantially all of its net taxable income and net capital gains, if any, each
year. The Fund is not subject to income taxes to the extent such distributions are made. Therefore, no federal income taxes or excise tax provision is required.
As of and during the year ended December 31, 2012, the Fund did not have a liability for any unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits
as income tax expense in the Statement of Operations. During the year, the Fund did not incur any interest or penalties.
The Fund files
U.S. Federal and Colorado tax returns. The statute of limitations on the Fund’s U.S. Federal tax returns remain open for the fiscal years ended 2009 through 2012. The statute of limitations on the Fund’s Colorado tax returns remain open
for an additional year.
Application of Recent Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board issued ASU No. 2011-03
“Transfers and Servicing (Topic 860): Reconsideration
of Effective Control for Repurchase Agreements”
(ASU No. 2011-03). ASU No. 2011-03 removes from the assessment of effective control the criterion requiring a transferor to have the ability to repurchase or redeem the financial
assets transferred in a repurchase arrangement. This requirement was one of the criterions under ASU topic 860 that entities used to determine whether a transferor maintained effective control. Entities are still required to consider all the
effective control criterion under ASU topic 860; however, the elimination of this requirement may lead to more conclusions that a repurchase agreement should be accounted for as a secured borrowing rather than a sale. ASU No. 2011-03 is
effective for the interim or annual periods beginning on or after December 15, 2011. The Fund adopted ASU No. 2011-03 for its fiscal year beginning January 1, 2012. The adoption of ASU No. 2011-03 did not have an impact on
the Fund’s financial position or the results of its operations.
In May 2011, the Financial Accounting Standards Board issued ASU
No. 2011-04
“Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs”
(ASU No. 2011-04). ASU No. 2011-04 does not extend the use of
the existing concept or guidance regarding fair value. It results in common fair value measurements and disclosures between accounting principles generally accepted in the United States and those of International Financial Reporting Standards. ASU
No. 2011-04 expands disclosure requirements for Level 3 inputs to include a quantitative description of the unobservable inputs used, a description of the valuation process used and a qualitative description about the sensitivity of the fair
value measurements. ASU No. 2011-04 is effective for interim or annual periods beginning on or after December 15, 2011. The Fund adopted ASU No. 2011-04 for its fiscal year beginning January 1, 2012. The adoption of ASU
No. 2011-04 did not have an impact on the Fund’s financial position or the results of its operations.
In December 2011, the
Financial Accounting Standards Board issued ASU No. 2011-11
“Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”
(ASU No. 2011-11). ASU No. 2011-11 requires an entity to enhance disclosures
about financial and derivative instrument offsetting arrangements or similar arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 is effective
for interim or annual periods beginning on or after January 1, 2013. The Fund will adopt ASU No. 2011-11 for its fiscal year beginning January 1, 2013. At this time, the Fund is evaluating the impact, if any, of ASU
No. 2011-11 on the financial statements and related disclosures.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Great-West Funds has entered into an investment advisory agreement with Great-West Capital Management, LLC (the Adviser), formerly
known as GW Capital Management, LLC, a wholly-owned subsidiary of GWL&A. As compensation for its services to Great-West Funds, the Adviser receives monthly compensation at the annual rate of 1.30% of the average daily net assets of the Fund. The
management fee encompasses fund operation expenses. The Adviser and Great-West Funds have entered into a sub-advisory agreement with Franklin Advisers, Inc. The Fund is not responsible for payment of the sub-advisory fees.
Annual Report - December 31, 2012
GWFS Equities, Inc. (the Distributor), is a wholly-owned subsidiary of GWL&A and the principal
underwriter to distribute and market the Fund.
The total compensation paid to the independent directors with respect to all sixty-four
funds for which they serve as Directors was $238,800 for the year ended December 31, 2012. Certain officers of Great-West Funds are also directors and/or officers of GWL&A or its subsidiaries. No officer or interested director of Great-West
Funds receives any compensation directly from Great-West Funds.
3. PURCHASES AND SALES OF INVESTMENT SECURITIES
For the year ended December 31, 2012, the aggregate cost of purchases and proceeds from sales of investment securities (excluding all U.S.
Government securities and short-term securities) were $84,068,089 and $59,284,796, respectively. For the same period, the aggregate cost of purchases and proceeds from sales of long-term U.S. Government securities were $0 and $2,366,499,
respectively.
4. UNREALIZED APPRECIATION (DEPRECIATION)
At December 31, 2012, the U.S. Federal income tax cost basis was $199,752,080. The Fund had gross appreciation of securities in which there was an excess of value over tax cost of $26,706,520 and gross
depreciation of securities in which there was an excess of tax cost over value of $1,459,351 resulting in net appreciation of $25,247,169.
5.
DERIVATIVE FINANCIAL INSTRUMENTS
The Fund seeks to capture potential returns from changes in international exchange rates or seeks to
reduce the risk of undesired currency exposure by entering into forward foreign currency contracts. The Fund uses forward foreign currency contracts when the manager believes it may be more cost or tax efficient to use derivative instruments or
it provides more liquidity than investing directly in the underlying bond or currency market.
Valuation of derivative instruments as of
December 31, 2012 is as follows:
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Asset Derivatives
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Liability Derivatives
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Derivatives Not Accounted for as Hedging Instruments
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Statement of Assets and Liabilities Location
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Value
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Statement of Assets and Liabilities Location
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Value
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forward foreign currency contracts
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Unrealized appreciation on forward foreign currency contracts
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$
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5,650,773
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Unrealized depreciation on forward foreign currency contracts
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$
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2,346,321
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The effect of derivative instruments for the year ended December 31, 2012 is as follows:
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Net Realized Gain/Loss
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Net Unrealized Gain/Loss
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Derivatives Not Accounted for as Hedging Instruments
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Statement of Operations Location
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Value
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Statement of Operations Location
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Value
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forward foreign currency contracts
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Net realized gain on forward foreign currency contracts
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$
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6,508,847
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Net change in unrealized appreciation on forward foreign currency contracts
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$
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3,602,371
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The Fund held an average notional value of $211,468,211 on forward foreign currency contracts for the reporting period.
6. DISTRIBUTIONS TO SHAREHOLDERS
Net investment
income (loss) and net realized gain (loss) for federal income tax purposes may differ from those reported on the financial statements because of temporary and permanent book and tax basis differences. The differences may include but are not limited
to the following: wash sales, distribution adjustments, market discount adjustments and foreign
Annual Report - December 31, 2012
currency reclassifications. The differences have no impact on net assets or the results of operations. The character of dividends and distributions made during the fiscal year from net investment
income and/or realized gains may differ from their ultimate characterization for federal income tax purposes. In addition, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the fiscal year
in which the income or realized gain was recorded by the Fund.
For the year ended December 31, 2012, the Fund reclassified
permanent book and tax differences of:
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Paid-in Capital
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Overdistributed
Net Investment
Income
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Accumulated Net
Realized Gain
on
Investments
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$
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–
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$
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5,502,827
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$
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(5,502,827
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)
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The tax character of distributions paid during the years ended December 31, 2012 and 2011 were as follows:
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2012
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2011
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Distributions paid from:
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Ordinary income
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$
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13,913,462
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$
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11,611,851
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Long-term capital gain
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2,527,769
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737,333
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$
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16,441,231
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$
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12,349,184
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As of December 31, 2012, the components of distributable earnings on a tax basis were as follows:
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Undistributed ordinary income
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$
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2,489,171
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Undistributed capital gains
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2,329,580
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Net accumulated earnings
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4,818,751
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Net unrealized appreciation on investments
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25,247,169
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Net unrealized appreciation on futures contracts, forward foreign currency contracts and foreign currency translations
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515,755
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Capital loss carryforward
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–
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Post-October losses
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(2,530,448
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)
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Tax composition of capital
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$
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28,051,227
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The Fund has elected to defer to the next fiscal year the following Post-October losses:
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Post-October ordinary
losses
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Post-October capital
losses
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$
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–
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$
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(2,530,448
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)
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Under the Regulated Investment Company Modernization Act of 2010, net capital losses realized in taxable years
beginning after December 22, 2010 may be carried forward indefinitely, and the character of the losses is retained as short-term and/or long-term.
7. TAX INFORMATION (unaudited)
Dividends paid by
the Fund from net investment income and distributions of net realized short-term capital gains are, for federal income tax purposes, taxable as ordinary income to shareholders. Of the ordinary income distributions declared for the year ended
December 31, 2012, 0% qualifies for the dividend received deduction available to the Fund’s corporate shareholders.
Annual Report - December 31, 2012