NEI Northwest U.S. Dividend Corporate Class

Transcription

1 Annual Management Report of Fund Performance As at September 30, 2017 NEI Northwest U.S. Dividend This annual Management Report of Fund Performance contains financial highlights but does not contain either interim or annual financial statements of the investment fund. You can obtain a copy of the interim or annual financial statements at your request, and at no cost, by calling , by writing us at NEI Investments L.P., 151 Yonge Street Suite 1200, Toronto, ON M5C 2W7 or by visiting our website at or SEDAR at Security holders may also contact us using one of these methods to request a copy of the investment fund's proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. Management Discussion of Performance Investment Objective and Strategies The objective of this Fund is to provide investors with long-term capital growth. The Fund invests primarily in common shares of large-capitalization American corporations. The fund achieves its objective by investing substantially all of its assets in units of NEI Northwest US Dividend Fund (the "Underlying Fund"). Risk The risks of investing in the Fund are unchanged from the prior year and remain as discussed in the prospectus. The Fund is suitable for investors with an average tolerance for risk. Any changes in the Fund have not affected the overall level of risk of the Fund. Results of Operations The NEI Northwest U.S. Dividend s Series A units returned 4.21% for the twelve months ended September 30, 2017 compared with a return of 9.94% for the benchmark explained below. Unlike the benchmark return, the Fund s returns are after the deduction of fees and expenses paid by the Fund. Performance differences between series of units are mainly attributable to management fees charged to each series. Refer to the Past Performance section for the details of returns by series. The benchmark index for this fund is the Russell 3000 Value Total Returns Index. A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 1

2 Yearly Comparison of Holdings Comparison Period September 30, 2016 to September 30, 2017 The following tables summarize material changes, new and exited positions of individual securities within the Fund during the period whereby materiality of changes is defined as 1% of the current year NAV. Name No Material Changes Material Changes Change in NAV Ownership (%) Name New Positions % of Current Year NAV Canadian Dollar 0.70 Cash and Equivalents Exited Positions Cash and Equivalents 2 A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

3 Factors That Have Affected Performance Donald Trump s 2016 presidential election victory largely caught investors off guard and, after recovering from an immediate, sharp decline in thinly-traded overnight markets, equities rallied aggressively over the remainder of Q The optimism that dominated markets in the wake of Inauguration Day drove the market higher in Q1, but faltered as the political process reached a fever pitch in the waning days of the first quarter. As measured by Evercore ISI, company surveys continued to improve in both the U.S. and Europe and despite the strong market move in the second quarter, the AAII Sentiment Survey showed individual investor pessimism started to decline. Unfortunately, the political divide in Washington deepened as well and the Republican Party proved largely incapable of advancing its agenda in Congress, threatening the comprehensive tax and regulatory reform efforts. In Q3 2017, the market absorbed hit after hit, shrugging off a number of events that would typically unsettle investors. Tensions mounted between the U.S. and North Korea as leaders on both sides descended into name calling and saber-rattling. Not long after Hurricane Harvey pummeled the Houston region and its vital energy infrastructure, Irma marched up the length of Florida leaving a trail of destruction in its wake. In addition, the U.S. Treasury yield curve shifted higher over the course of September as the Federal Reserve signaled it would commence selling bonds it accumulated in the wake of the financial crisis. The most significant positive impact on relative performance was from stock selection in the Energy and Real Estate sectors. The three holdings with the highest contribution to Fund return during the period were PNC Financial Services Group Inc. (PNC), a super-regional commercial bank with operations in 19 states; GEO Group Inc. (GEO), a REIT offering correctional and detention facilities and services to federal, state, local, and foreign governments; and Microsoft Corp. (MSFT), a worldwide leader in software, services, devices, and solutions that focus on improving productivity for consumers and enterprises. The most significant negative impacts on relative results were from stock selection in Consumer Discretionary and the underweight in Financials. The three holdings with the lowest contribution to Fund return during the period were Uniti Group Inc. (UNIT), a first-of-its-kind telecom infrastructure REIT, W.W. Grainger Inc. (GWW), the largest maintenance, repair, and operating (MRO) distributor in the world; and QUALCOMM Inc. (QCOM), a designer and manufacturer of integrated circuits. Overall sector allocation and stock selection were both negative and responsible for the underperformance of the Fund. Recent Developments From a wildcard perspective, President Donald Trump remains the largest source of uncertainty. Assuming Congress remains ineffectual, it is likely that President Trump will follow his predecessor down the path of executive orders to affect change where he can. Presumably, such actions would be largely pointed at his overarching policy goal surrounding economic growth, but it is unclear how business leaders will respond to policies that could just as easily be unwound by the next president. More importantly however, the most visible aspect of President Trump s foreign policy currently is the attempt to bring North Korea to the negotiation table. Unfortunately, the strategy appears to require matching incendiary rhetoric and hostile provocations tit-fortat not only an alarming process, but one that could spiral out of control. A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 3

4 In the wake of the 2016 election, business leaders were generally quite positive about the impacts that lower taxation and reduced regulations could have on their businesses. However, that optimism has been tempered with a show me attitude. While business leaders may wait for concrete results before making significant investments in their companies, various economic measures suggest they are already moving forward. Numerous surveys about capex plans for the months to come are showing meaningful acceleration, the ISM non-manufacturing index jumped, the Purchasing Managers Index surged, and GDP came in above expectations. In the end, the political environment is friendlier to business, the dollar has weakened, and the economy is growing. At the end of the period, the weighted average discount to value for the top 20 holdings in DAV was 90%, up modestly from Q2. The weighted average EV/EBITDA multiple employed in the sub-advisors assessment of value of the top 20 holdings remains at an all-time high (in part due to the increased presence of high-multiple REITs). While the sub-advisor expects growth will ramp over the remainder of the year, much of that is already reflected in the cash flows and multiples they employ in their valuations and it remains a challenge to identify new positions with a compelling combination of quality and value in today s market. Thus, the sub-advisor remains cautious about the broader market despite the improved business sentiment. Additionally, the subadvisor cannot completely dismiss the increased risk that stems from the persistent decline in volatility complacency and investment do not typically mix well. The sub-advisor continues to believe that the downside risk of the market is elevated and expect that the relative return of their strategy will improve as volatility increases. As of September 30, the Fund held 63 positions. During the period, the portfolio sub-advisor established 13 positions, eliminated 14, and two, Adient PLC and Brighthouse Financial Inc., were spun off and eliminated. Significant changes in the relative positioning of the Fund include the following: The underweight in Financials expanded from -656 bps to -1,215 bps during the period. Despite the introduction of the position in Axis Capital Holdings Ltd. (AXS), this change was due to the elimination of the positions in Allied Word Assurance Co. Holdings AG (AWHHF), CME Group Inc. (Cl A) (CME), Stock Yards Bancorp Inc. (SYBT), and Washington Trust Bancorp Inc. (WASH), which were all trading at significant premiums to their assessed valuations, and due to the reduction of the positions in PNC Financial Services Group Inc., which was trading at a premium to its assessed valuation and had a yield below 2%, and Wells Fargo & Co. (WFC), which was reduced due to unrealized losses. The Energy sector went from -407 bps underweight to +143 bps overweight, largely driven by the initiation of the position in Marathon Petroleum Corp. (MPC) and the addition to the position in Valero Energy Corp. (VLO). The overweight in Industrials expanded from +161 bps to +653 bps versus the benchmark. Despite the elimination of positions in MSC Industrial Direct Co. Inc. (Cl A) (MSM), W.W. Grainger Inc., and Parker-Hannifin Corp. (PH), this was primarily due to the introduction of positions in General Electric Co. (GE), KAR Auction Services Inc. (KAR), and Nielsen Holdings PLC (NLSN). Pursuant to proposed changes to the Tax Act announced in the March 22, 2016 Federal Budget, after September 2016 the conversion of shares of one series of a Corporate Fund into shares of the same or different series of another Corporate Fund will be a disposition under the Tax Act, and the shareholder will realize a capital gain or loss on the conversion. The shareholder s cost of the shares acquired on the conversion will be equal to the fair market value of the shares that were converted immediately before the conversion. 4 A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

5 Financial Notes HST Following the introduction of a single harmonized tax HST levy and collection system on July 1st, 2010 Investment Funds had to change the way in which government taxes are charged to the Funds. The new rules require HST to be calculated and charged based on a blended tax rate derived from the residency of the unitholders and the current value of their units. This blended rate is required to be calculated and updated periodically and the table below indicates the current rate being charged until the Fund s next year end as well as the most recent completed period s rate for comparison. NEI Northwest U.S. Dividend For the Period Ending September 30, 2016 September 30, 2017 Series A 10.00% 9.27% Series F 10.55% 12.16% Effective April 1st, 2013, British Columbia replaced the 12% HST with separate PST and GST. A 5% GST rate is applicable going forward. Prince Edward Island introduced a new HST rate of 14%. On January 1st, 2013, Quebec increased the combined tax rate charged on the QST portion of taxable services from 14.95% to %. Accounting Standards The Fund's financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS"), applicable to the preparation of financial statements. The Funds adopted this basis of accounting in 2015, as required by the Canadian Securities Administrators and the Canadian Accounting Standards Board. Related Party Transactions Northwest and Ethical Investments L.P NEILP is the Manager, the Trustee, the Fund Manager and the Registrar of the Fund. NEILP is 50% indirectly owned by the Federation des Caisses Desjardins du Quebec (Federation) and 50% owned by five Provincial Credit Union Centrals. NEILP charges the Funds a fixed administration fee in place of certain variable expenses. NEILP in turn, pays all operating expenses of the Fund, other than specified fund costs (e.g. the fees and expense of the Independent Review Committee, taxes, and brokerage commissions) which include payments to related parties of which the Federation is a significant owner. These services are in the normal course of operations and are measured at an exchange amount that is consistent with other independent parties. A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 5

6 At the end of the period, the accrued expenses payable to related third parties are listed below. Where applicable the amounts received from underlying funds during the period are also presented. September 2016 September 2017 Accrued Expenses Payable to Related Parties 11,911 10,710 Received from Related Parties Dividends N/A N/A Underlying Funds 180, ,576 The Fund s sub advisors may place a portion of their fund transactions with brokerage firms which are affiliates of NEILP; provided that the affiliates trade execution abilities and costs are comparable to those of non-affiliated qualified brokerage firms. The Fund is distributed through Credential Asset Management Inc., Credential Securities Inc., Desjardins Securities Inc., Desjardins Financial Services Firm Inc., Desjardins Financial Securities Investments Inc., and Gestions SFL Inc., and other nonrelated parties by way of shared ownership. NEILP pays to these parties distribution and servicing fees based on a percentage of the daily values of the units of each held by the dealer s clients and additionally, in some cases, on the amount of initial purchase. This document contains forward-looking statements. Such statements are generally identifiable by the terminology used, such as plan, anticipate, intend, expect, estimate, or other similar wording. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market and business conditions; fluctuations in securities prices, fluctuation in interest rates and foreign currency exchange rates; and actions by governmental authorities. Future events and their effects on the fund may not be those anticipated by us. Actual results may differ materially from the results anticipated in these forwardlooking statements. We do not undertake, and specifically disclaim, any obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise. 6 A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

7 Financial Highlights The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for each of the past five years, as applicable. Net Assets per Unit (1) Series Period Net Assets, Beginning of Period Total Revenue Increase (Decrease) from Operations: Total Expenses Realized Gains (Losses) Unrealized Gains (Losses) Commissions and Other Portfolio Transaction Costs (2) Total Increase (Decrease) from Operations (3) From Income (Excluding Dividends) Distributions: From From Underlying Dividends Funds (6) A Sept N/A From Capital Gains Return of Capital Total Distributions (4,5) Sept N.A Sept N/A N/A Sept N/A Sept N/A Sept N/A F Sept N/A Sept N.A Sept N/A N/A Sept N/A Sept N/A Sept N/A (1) All per unit figures presented in 2017, are referenced to net assets determined in accordance with IFRS and are derived from the Fund's audited annual financial report for the period ended September 30, The beginning of period net assets per unit of 2015 and net assets per unit for prior periods were derived from the Fund's audited annual financial statements that were prepared in accordance with Canadian GAAP as defined in Part V of the CPA Handbook for prior periods. (2) From March 31, 2015, Commissions and other portfolio transaction costs are included in Expenses. (3) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. (4) Distributions were paid in cash or reinvested in additional units of the Fund. (5) Distributions (if any) that may have been made that included return of capital in excess of short term earnings were made to minimize disruption and provide stability to investors who have elected to take their distributions in the form of cash, and as disclosed in the Simplified Prospectus. These amounts are reviewed at each calendar yearend and management engages in discussions with the sub-advisor to determine the most applicable strategy on a go forward basis and will take any action(s) as needed for the long term stability of the Fund. (6) From September 30, 2016, distributions from underlying funds are presented separately. Previously, those amounts were split between the different type of revenues. Income and Realized gains (losses) have been revised accordingly, if applicable. Net Assets, End of Period A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 7

8 Ratios and Supplemental Data Series Period Total Net Asset Value (000 s of $) Number of Units Outstanding (000 s) Management Expense Ratio (%) (1) Management Expense Ratio before Waivers and Absorptions (%) Trading Expense Ratio (%) (2) Portfolio Turnover Rate (%) (3) Net Asset Value per Unit ($) A Sept , Sept , Sept , Sept , Sept , Sept , F Sept , Sept , Sept , Sept Sept Sept (1) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs, as well as withholding taxes) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (2) The trading expense ratio represents total commissions and other Fund transaction costs expressed as an annualized percentage of daily average net asset value during the period. (3) The portfolio turnover rate indicates how actively the Fund's subadvisor manages its investment holdings. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the period. The higher a fund s portfolio turnover rate in a period, the greater the trading costs payable by the Fund in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between a high turnover rate and the performance of a fund. Certain turnover rates for September 2011 were restated due to a formula inconsistency. 8 A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

9 Management Fees The Manager is responsible for the management, supervision and administration of the Fund. The Manager receives from the Fund management fees, before HST, calculated daily on the net asset value of the Fund at an annual rate shown below. The management fee covers the cost of investment advisory fees, sales, marketing, and distribution expenses of the Fund. In addition, the Manager may pay a trailer fee to dealers out of this management fee. The trailer fee is a percentage of the average daily value of the units of the Fund held by the dealer s clients. The following table shows the major services paid for out of management fees as a percentage of the management fee for all series of the Fund: Management Fee Investment Advisory and Other Fees Trailer Fee Series A 1.90% 79.6% 20.4% Series F 0.90% 100.0% N/A (1) (1) No trailer fees are paid in respect of any Series F units of the Fund Past Performance The following charts and tables show the past performance for each series of units of the Fund and will not necessarily indicate how the Fund will perform in the future. The information shown assumes that distributions made by the Fund in the periods shown were reinvested in additional units of the relevant series of the Fund. In addition, the information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. Year-by-Year Returns The following charts show the annual performance for each series of units of the Fund for each period shown and illustrate how the Fund s performance has varied from period to period. The charts indicate how much an investment made on the first day of each financial period would have grown or decreased by the last day of each financial period. Series A Series F Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 0 N/A N/A N/A N/A N/A Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 9

10 Annualized Compound Returns The following table shows the annual compound returns for all series of the Fund. All returns are in Canadian dollars, on a total return basis, net of all fees. For comparison, the returns for the benchmark are included. The benchmark index for this fund is the Russell 3000 Value Total Returns Index. The Russell 3000 Value is an index that measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. While the Fund uses this benchmark for long-term performance comparisons, it is not managed relative to the composition of the Index. As a result, the Fund may experience periods when its performance is not aligned with the Index, either positively or negatively. Please see the "Results of Operations" section of this report for a discussion of recent performance results. Group/Investment 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception Russell 3000 Value TR CAD NEI Northwest US Dividend CC A NEI Northwest US Dividend CC F A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

11 Summary of Investment Fund as at September 30, 2017 Total Net Asset Value: $7,160,718 Top 25 Positions (Long Positions) % 1 NEI Northwest U.S. Dividend Fund,Serie I Cash and Equivalents 0.7 There is no short position in this Fund or underlying funds. "Others" geographic category includes all countries representing less than 5% of the Fund s net asset value The Summary of Investment Fund may change due to ongoing Fund transactions of the investment fund. Total Net Asset Value Mix % Investment Funds 99.3 Cash and Equivalents 0.7 Sector Allocation % Investment Funds 99.3 Cash and Equivalents 0.7 Geographic Distribution % Canada 99.3 Cash and Equivalents 0.7 A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 1 1

12 Fund-of-Fund Underlying Holdings NEI Northwest U.S. Dividend This fund is a fund of fund structure which holds a position in one or more underlying Mutual Funds. Actual consolidated security holdings are only identifiable by including the holdings of the underlying Mutual Fund(s). The following tables represent an aggregated look-through of the top positions and category summaries that are held in the top and underlying fund(s). Top 25 Positions (Long Positions) % 1 Cash and Equivalents Iron Mountain REIT Praxair U.S. Bancorp BB&T Corning Marathon Petroleum Fastenal Company National Fuel Gas Co Nielsen Holdings Union Pacific Wal-Mart Stores Ryman Hospitality Properties Extended Stay America Verizon Communications Cinemark Holdings Amgen Johnson Controls International Cedar Fair Unilever, ADR Spectra Energy Partners United Parcel Service, Class B Ventas Emerson Electric Co KAR Auction Services 1.6 Total 52.8 Drill Down Total Net Asset Value Mix % Equities-U.S Equities-Foreign 11.0 Equities-Canadian 1.4 Cash and Equivalents 4.2 Drill Down Sector Allocation % Financials 14.2 Information Technology 9.6 Industrials 15.4 Consumer Discretionary 10.8 Energy 12.0 Consumer Staples 8.0 Materials 5.0 Utilities 3.6 Health Care 4.2 Telecommunication Services 2.7 Cash and Equivalents 4.2 Mortgage-Backed Securities 10.3 Drill Down Geographic Distribution % United States 83.3 Other 11.0 Canada 1.4 Cash and Equivalents A n n u a l M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e