Brookfield Investment Management

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1 Brookfield Investment Management 2013 Brookfield New Horizons Income Fund BIF.UN Annual Management Report of Fund Performance For the period from January 1, 2013 to December 31, 2013

2 In Profile Brookfield New Horizons Income Fund (the Fund ) is managed by Brookfield Investment Management (Canada) Inc. ( BIM Canada ). BIM Canada is a subsidiary of Brookfield Asset Management Inc., a global alternative asset manager with greater than US$187 billion of assets under management as at December 31, 2013 and over a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. BIM Canada is also the investment manager of the Fund. BIF.UN (CSE listed) Unit Information Units Outstanding (December 31, 2013): Targeted Quarterly Distributions: Record Date: Payment Date: 12,959,400 Units The quarterly distributions are targeted to be $0.20 per Unit. The Fund does not have a fixed distribution. The last business day of each of March, June, September and December. No later than the 15th business day of the month following the distribution Record Date Annual Management Report of Fund Performance 1

3 LETTER TO UNITHOLDERS Dear Unitholders, We are pleased to provide this Annual Management Report of Fund Performance for Brookfield New Horizons Income Fund (the Fund ) for the year ended December 31, 2013 (the Period ). Brookfield New Horizons Income Fund was created with the objective of providing holders of Units ( Unitholders ) with high current income through the payment of quarterly cash distributions while preserving the net asset value of the Fund. The quarterly distributions are currently targeted at $0.20 per Unit or $0.80 per annum. To achieve this level of income, the Fund obtains economic exposure to a portfolio (the Portfolio ) held by New Horizons Master Fund through the utilization of a forward agreement. The Portfolio investments focus on, but are not limited to, investments in high yield corporate debt, and publicly-listed securities in infrastructure and real estate companies across a global universe. Performance As at December 31, 2013, the net asset value per Unit of the Fund was $12.69 compared to a net asset value per Unit of $10.71 on December 31, For the twelve month period ended December 31, 2013, we are pleased to report that your Fund had a total return of 26.5% including assumed reinvestment of the Fund s distributions to Unitholders of $0.80 per Unit. During the year, we substantially increased our allocation to equities which enabled us to capitalize on the U.S. economic recovery. While we remain optimistic going into 2014, we do not expect to repeat this performance easily and continue to target an annual return of inflation plus 4.00% as our target return going forward. Throughout 2013, the majority of the Portfolio continued to be invested in U.S. high yield fixed income securities as this asset class continued to offer the most attractive yield characteristics of our three focus asset classes and best supported the Fund s mandate of paying a high level of current income. We continue to like high yielding corporate debt that supports an attractive income stream but acknowledge the opportunity for capturing capital gains in this asset class has become more challenging. However, we have been increasing the Portfolio s weighting to select high yielding equities and selling our bond positions where we see limited capital appreciation potential. At December 31, 2013, investments in equities represented approximately 26% of the Portfolio s holdings up from 10.6% as of the beginning of the year. Looking forward, we continue to see value in higher yielding equities and expect to continue to increase the allocation to these securities in The Fund s return of 26.5% for the Period was driven by strong market performance of lower-rated corporate bonds, returns generated from high yielding equities and a benefit from the weakening Canadian dollar. As at December 31, 2013 just over 25% of the Portfolio s holdings were in high yield debt issues rated CCC+ or lower. Debt securities of lower rated issuers tended to outperform higher rated issuers during the Period. By way of illustration, in the U.S. high yield corporate bond market (as measured by Merrill Lynch U.S. High Yield Indices in Canadian dollar terms), CCC and lower rated securities returned 12.96% in Canadian dollar terms versus only 7.47% for those rated single B, resulting in a pick-up of 549 basis points. There were several notable outperforming investments in the Fund. In our fixed income investments, company specific events throughout the Period included a partial redemption of our holdings in North American Energy Partners at a premium to market price, an advantageous legal victory for MBIA, improving recovery prospects for Edison Mission Energy, strong price appreciation in our Forbes Energy Services and First Data Corporation bonds and the closing of the SuperMedia merger with Dex Media Inc. These company-specific events were important contributors to the Portfolio s performance Annual Management Report of Fund Performance 2

4 The equity positions in the Portfolio also had some notable outperformers. In particular the Master Fund s holdings in Sun Life Financial Inc. and AGF Management Ltd. benefitted from their sensitivity to strong equity market performance. We acquired Sun Life at a very attractive price when many investors were concerned about the exposure life insurance companies had to the equity markets in their variable annuities businesses. We concluded that Sun Life shares had unduly discounted this concern. As at December 31, 2013 the shares were trading at roughly a 65% premium to our acquisition cost. The impact of the weakening of the Canadian dollar against the U.S. dollar had a favourable overall impact on the Portfolio s performance, adding approximately 6.8% to the Fund s total return during the Period. We elected to keep our Portfolio largely unhedged although, with the strong recent correction in the Canadian dollar, we have begun to hedge the Portfolio. Global capital market performance during the Period was quite volatile, as positive performance in the beginning of the year was followed by a period of enhanced investor anxiety and ultimately a strong rally into the year-end. Overall confidence was buoyed in the first quarter by ongoing global liquidity, continued signs of stabilization in Europe and modest signs of growth within the U.S. economy. However, investor sentiment reversed significantly following indications that the Federal Reserve would begin to taper monetary stimulus later in the year and as Congress battled over debt ceiling issues, causing interest rates to spike and capital markets to soften. Once the markets digested the impact of tapering and stronger economic data began to emerge out of the US, equities resumed an upward trajectory. Within this environment, performance of income-producing asset classes was varied with highly ratesensitive instruments such as investment grade bonds declining in value, while asset classes with less correlation to interest rates such as low-rated high yield corporates and high yielding equities outperformed. In addition, fundamentals in certain asset classes generally continued to improve, reflecting the ongoing recovery of many developed economies. In particular, real estate and infrastructure assets generally experienced improving demand profiles and corporate credit conditions among high yield borrowers remained very healthy, supporting the cash flow streams underlying these investments. The Fund has benefited from this macro environment in the U.S. Outlook The following is our outlook for each of our three focus investment areas: High yield corporate debt: Due to strong credit conditions, low defaults, and modest leverage, the high yield debt market is trading at historically low credit spreads. Nevertheless, we maintain our constructive view of the market. However, our expectations for broad market returns are even more tempered given the multi-year rally this asset class has enjoyed, the fact that much of the high yield market is trading at a premium to par and that corporate bonds are trading at increasingly narrow spreads. We continue to believe that the primary risk facing high-yield investors today are worldwide geopolitical and macroeconomic risks rather than credit specific risks. These macro risks include the potential for renewed economic turmoil in Europe, the risk of fiscal policy error as countries seek to reign in ballooning budget deficits, and lack of political consensus in the U.S. on fiscal policy and the unintended consequences of tapering on emerging market economies. We believe that spreads remain wider than we typically see at this point in the cycle and expect future market returns to be in line with current yields. While we remain watchful of the possibility of a continued rise in long term interest rates, we believe the opportunity for credit tightening will help mitigate the negative impact of higher rates on the prices of lower rated high yield bonds. We continue to invest in our highest conviction ideas in this space and are focused on lower grade credit stories with improving fundamentals and special situations that we believe to be undervalued by the broader market Annual Management Report of Fund Performance 3

5 Publicly-listed infrastructure securities: We believe underperformance of the infrastructure asset class in 2013 creates investment opportunities for the year ahead. While a steep increase in interest rates would present a near-term downside risk for infrastructure securities, our expectations are for a modest rise in long-term interest rates at a moderate pace. A number of positive trends, particularly investor demand for infrastructure securities as well as rapid growth in the asset class, support our positive outlook for the space in We will continue to focus on high yielding securities in this sector. Publicly-listed real estate securities: Although we have not added any exposure to this sector to date, we are increasingly constructive on the outlook for global real estate securities on the back of their underperformance relative to the S&P 500 Index in We anticipate the interest rate environment will be less impactful than it was in 2013, supporting property valuations. In addition, we expect economic growth will be strong enough to drive increases in occupancy, rental rates, and cash flow but not strong enough to encourage significant new construction. We are selectively reviewing markets and sectors that have exhibited weakness in recent months to identify potential opportunities. We remain focused on higher growth sectors and have a geographical preference for continental Europe. With the Portfolio s investments concentrated in high yield corporate debt and a meaningful and growing weight in high yielding equities, we believe the Fund is currently well-positioned to generate its target distributions while protecting its net asset value. We will seek to continue to take profits as appropriate in our high yield debt positions and redeploy capital into other high yielding securities that have attractive risk-reward characteristics. We welcome your questions and comments, and encourage you to contact our Investor Relations team at (800) or visit us at for more information. Thank you for your support. Gail Cecil, Managing Director On behalf of the Manager and Investment Manager, Brookfield Investment Management (Canada) Inc Annual Management Report of Fund Performance 4

6 MANAGEMENT REPORT OF FUND PERFORMANCE This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of Brookfield New Horizons Income Fund ( the Fund ). The annual financial statements may contain information not included in the management report of fund performance. You can get a copy of the annual financial statements at your request, and at no cost, by contacting us (see contact information at end of this report) or by visiting our website at or by viewing our filings on SEDAR at Unitholders may also contact us to request a free copy of the Fund s interim financial report, proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. This report may contain forward-looking statements. The use of any of the words anticipate, may, will, expect, estimate, should, believe and similar expressions are intended to identify forward-looking statements. Such statements reflect the opinion of Brookfield Investment Management (Canada) Inc. ( Investment Manager or BIM Canada ) regarding factors that might be reasonably expected to affect the performance and the distribution on units of the Fund and are based on information available at the time of writing. The Investment Manager believes that the expectations reflected in these forwardlooking statements and in the report are reasonable but no assurance can be given that these expectations or the report will prove to be correct and accordingly, they should not be unduly relied on. These statements speak only as at the date of the report. Actual events and outcomes may differ materially from those described in these forward-looking statements or report. Unless otherwise indicated, all information is presented as at December 31, 2013 and expressed in Canadian dollars. None of the websites referred to in this annual management report of fund performance, nor any of the information on such websites, are incorporated by reference in this annual management report of fund performance. INVESTMENT OBJECTIVES AND STRATEGIES The Fund endeavours to provide holders of units ( Unitholders ) with quarterly cash distributions currently targeted at $0.20 per unit while preserving the net asset value ( NAV ) of the fund. The Fund was created with the objective of producing a high income return by obtaining economic exposure to a portfolio (the Portfolio ) held by New Horizons Master Fund (the Master Fund ), through the utilization of a forward agreement. The investments in the Portfolio focus on, but are not limited to, investments in high yield corporate debt and publicly-listed securities in infrastructure and real estate companies across a global universe. BIM Canada is the manager (the Manager ) and the investment manager of the Fund and the Master Fund (together, the Funds ). RISK At December 31, 2013, the Portfolio was primarily invested in high yield fixed income securities of companies domiciled in the United States and to a lesser extent, Canada and Brazil. In addition, the Portfolio has a growing weighting in high yielding equities which represented approximately 26% of the Portfolio holdings as at December 31, The Portfolio holdings are exposed to various risks including risks related to the credit quality of the issuer of the securities, the trading liquidity of the securities and the currency in which the securities are denominated. The Master Fund seeks to minimize potentially adverse effects of these risks on the Portfolio s performance by employing experienced portfolio managers and by continuously monitoring the Portfolio s securities positions and markets. Over the year ended December 31, 2013 there was no material change in the overall level of risk created by the credit quality, trading liquidity or currency denomination of the investments employed by the Master Fund Annual Management Report of Fund Performance 5

7 During the period ended December 31, 2013, the Master Fund had exposure to forward currency contracts and equity total return swaps. The Investment Manager seeks to mitigate the counterparty risk arising from such arrangements through the careful selection of its derivative contract counterparties. As at December 31, 2013 the Master Fund held two positions through equity total return swaps representing $7.39 million of gross exposure and had no forward currency contracts in place. In the fourth quarter of 2011, the Master Fund began to use leverage to finance the purchase of certain investments. The introduction of indebtedness in the Fund represented a material change in the overall level of risk employed by the Fund. Leverage in the Master Fund is restricted to 25.00% of the total assets of the Master Fund. Accordingly, at the time of borrowing, the maximum amount of leverage that the Fund could employ is 1.33:1 (total long positions, including leveraged positions, divided by net assets of the Master Fund). At December 31, 2013, the Master Fund had employed leverage equal to 18.90% (December 31, %) of the net assets of the Fund, equating to $31.6 million (December 31, $2.4 million) which includes both margin payable and leverage obtained through equity total return swaps. RESULTS OF OPERATIONS The following Manager s commentary relates to the Fund s exposure to the performance of the Portfolio held by the Master Fund: The Fund s net asset value was $164.4 million as at December 31, 2013, an increase of $25.1 million from $139.3 million as at December 31, The increase in net asset value was largely comprised of net investment income generated by the Master Fund of approximately $13.0 million plus net realized and unrealized investment gains of approximately $24.0 million (including currency gains of approximately $9.6 million). The Fund s net asset value was reduced by $10.4 million during 2013 through distributions to Unitholders, $0.5 for amounts paid for redemption of Units, and a further $1.0 million of expenses. As at December 31, 2013, the net asset value per Unit of the Fund was $12.69, after recording distributions to Unitholders of $0.80 per Unit, compared to $10.71 per Unit on December 31, The total return for the Fund was 26.52% for the year ended December 31, The Fund s total return of 26.52% over the period was primarily driven by: (1) investment income generated in the Portfolio, (2) price changes in individual holdings of the Portfolio, and (3) the positive impact of currency translation. While the Fund does not have a specific benchmark index due to its ability to obtain exposure to a variety of asset classes, the Portfolio, throughout the year ended December 31, 2013, was comprised primarily of high yielding fixed income securities and select high yielding equities. The performance of the Merrill Lynch Global High Yield Index helps to explain general trends in high yielding corporate credit. For the year ended December 31, 2013, the corporate high yield debt market, as measured by the Merrill Lynch Global High Yield Index, had a total return of 15.20% in Canadian dollar terms. The index return was comprised of a -0.25% impact from price decreases, coupon payments of 7.31% and a positive impact of 8.14% from the weakening of the Canadian dollar. The Portfolio had a greater weighting in issuers that had a lower average credit quality than this index. Lower credit quality issues generally outperformed the index due to higher yield and positive price performance. Global capital market performance during the Period was quite volatile, as positive performance in the beginning of the year was followed by a period of enhanced investor anxiety and ultimately a strong rally into the year-end. Overall confidence was buoyed in the first quarter by ongoing global liquidity, continued signs of stabilization in Europe and modest growth within the U.S. economy. However, investor sentiment reversed significantly following indications that the Federal Reserve would begin to taper monetary stimulus later in the year and as Congress battled over debt ceiling issues, causing 2013 Annual Management Report of Fund Performance 6

8 interest rates to spike and capital markets to soften. However, once the markets digested the impact of tapering and stronger economic data began to emerge out of the US, equities resumed an upward trajectory. In addition to the high income return on securities within the Portfolio, there were several single name outperformers in the Portfolio. The Master Fund s high yield debt holdings in North American Energy Partners benefitted from a redemption at a premium to market price. MBIA Corp. benefited from an advantageous legal settlement achieved by the company. Improving recovery prospects for Edison Mission Energy caused its Senior Unsecured bonds to rally significantly. Also of note was our holdings in SuperMedia Inc. s term loan which benefitted from anticipated expense savings resulting from the closing of its merger with Dex Media Inc. Lastly, the Portfolio s holdings in higher beta names such as Forbes Energy Services and First Data Corporation experienced strong market price appreciation. These events were important contributors to the Portfolio s performance. Weak thermal coal prices drove under performance in our high yield holdings in Arch Coal. The equity portion of the Portfolio also had some notable outperformers. In particular the Master Fund s holdings in AGF Management Ltd. and Sun Life Financial Inc. benefitted from their sensitivity to strong equity market performance. One relative underperformer in the Portfolio was EV Energy Partners which experienced modest price declines. The Fund is exposed to currency risk as the Units of the Fund are denominated in Canadian dollars and the investments in the Portfolio may be in currencies other than the Canadian dollar. The Investment Manager may hedge such currency exposures from time to time. As at December 31, 2013 the Portfolio had no such hedges in place. However, during the year ended December 31, 2013 the Master Fund had in place forward currency swaps. During the year ended December 31, 2013 the Canadian dollar dropped in value relative to the U.S. dollar from CAD/USD to CAD/USD. The weakness in the Canadian dollar relative to the U.S dollar, netted with the currency hedging activities undertaken by the Fund, had a positive impact on the Portfolio with realized and unrealized foreign exchange gains of approximately $9.6 million for the year ended December 31, This tailwind added approximately 6.8% to the Master Fund s total return during the Period. Leverage is restricted to 25.00% of the total assets of the Master Fund. Accordingly, at the time of borrowing, the maximum amount of leverage that the Master Fund could employ is 1.33:1 (total long positions, including leveraged positions, divided by net assets of the Fund). At December 31, 2013, the Master Fund had employed leverage equal to 18.90% (December 31, %) of the net assets of the Master Fund, equating to $31.6 million (December 31, $2.4 million) which includes both margin payable and leverage obtained through derivatives. The minimum and maximum amounts of borrowings outstanding during the twelve month period ended December 31, 2013 were $2.3 million and $36.4 million, respectively. The minimum and maximum amounts of borrowings outstanding during the year-ended December 31, 2012 were $0 and $23.8 million, respectively. The borrowings were used to grow the Master Fund s investments and for working capital needs. Adding leverage to the Master Fund is consistent with the Master Fund s objectives. RECENT DEVELOPMENTS Consistent with the Investment Manager s strategy, the Portfolio is focused on, but not limited to, investments in high yield corporate debt and publicly-listed securities in infrastructure and real estate companies across a global universe. Allocations across these asset classes are based on trends and risk and return expectations, and the Investment Manager s assessment of the macro-economic environment and investment landscape. At the current time, of the three focus asset classes, the Investment Manager believes that equities are becoming increasingly attractive relative to high yield corporate debt. We Intend to continue to take profits as appropriate in our high yield debt positions and redeploy capital into other high yielding securities that have attractive risk-reward characteristics Annual Management Report of Fund Performance 7

9 Federal Budget Announcement The Fund, like many closed-end funds in Canada, utilizes a forward agreement that is considered to be a tax advanced strategy. On March 21, 2013, the Government of Canada introduced a budget proposal that will have a significant impact on investment funds that employ such tax advantages strategies referred to as character conversions in the budget. The Fund will monitor guidance as issued by the Federal Government with respect to the implementation of the budget proposals as certain grandfathering provisions were proposed for forward agreements entered into prior to March 21, 2013 provided the term of the forward agreement is not extended thereafter. Change of Trustee Pursuant to the terms of the declaration of trust, BIM Canada replaced Caledon Trust Company as trustee of the Fund effective June 1, BIM Canada does not receive any fees for providing this service. FUTURE ACCOUNTING CHANGES International Financial Reporting Standards ( IFRS ) replaced Canadian GAAP for publicly accountable enterprises other than investment funds. Under the general transition rules, publicly accountable enterprises, other than investment funds, adopted IFRS for the fiscal period beginning January 1, On September 7, 2010, the Canadian Accounting Standards Board ("AcSB") approved an optional one year deferral of IFRS adoption for investment companies applying Accounting Guideline AcG 18, Investment Companies until fiscal years beginning on or after January 1, On January 12, 2011, the AcSB approved an additional one year extension to the optional one year deferral until fiscal years beginning on or after January 1, 2013 and in December 2011 was further extended to January 1, Accordingly, the Fund will adopt IFRS no later than for the fiscal year beginning January 1, 2014, and will issue its initial financial statements in accordance with IFRS, including comparative information, no later than for the period ending June 30, At this point in the transition from GAAP to IFRS, the Fund anticipates that there will not be a material impact to the Net Assets per Unit. The impact of IFRS on accounting policies and implementation decisions will mainly be in the areas of additional note disclosures in the financial statements. RELATED PARTY TRANSACTIONS The Manager is a wholly owned subsidiary of Brookfield Asset Management Inc. ( Brookfield ) and it manages the investment and trading activities of the Funds pursuant to a management agreement. Due to Brookfield s ability to control the Funds, Brookfield, and its affiliates over which it has the ability to exercise control or significant influence, are related parties of the Fund by virtue of common control or common significant influence. Transactions with related parties, including investment transactions, are conducted in the normal course of operations and are recorded at exchange amounts, which are equivalent to normal market terms. Please refer to the section titled Management Fees, which outlines the fees paid to the Manager by the Funds. The Master Fund entered into an agreement dated March 1, 2011 with three entities, two of which were related parties of the Master Fund (the Exchange Option Purchasers ) due to common control. Each of the Exchange Option Purchasers agreed to sell to the Master Fund on April 1, 2011 (the Closing Date ), a portfolio of securities (the Exchange Option Securities ). The Investment Manager determined that the Exchange Option Securities complied with the Master Fund s investment restrictions that owning such securities was consistent with the Master Fund s investment objectives and that acquiring these securities on this basis was in the best interest of the Master Fund. The Manager sought the approval of the Funds Independent Review Committee (the IRC ) on the pri cing mechanism that would be used to value the Exchange Option Securities. The IRC provided its approval on the Manager s recommendation. The transaction was effected at the market price of the Exchange 2013 Annual Management Report of Fund Performance 8

10 Option Securities on the day before the Closing Date. The total value of the Exchange Option Securities was $103.6 million. Brookfield and its affiliates own a 44.6% interest in the Fund. An additional 47.1% of the Fund s Units are held by Partners Value Fund Inc. (formerly BAM Investments Corp.) which is a related party due to its ability to exercise significant influence over the Fund resulting from its ownership interest. In the third quarter of 2011, one of the affiliated parties sold its 26.9% interest to Brookfield, and in the fourth quarter of 2013, Brookfield sold 3.4% of its interest in the market. FINANCIAL HIGHLIGHTS The following tables provide selected key financial information about the Fund and are intended to help you understand the Fund s financial performance since inception: For the twelve months ended For the twelve months ended For the nine months ended The Fund s Net Assets per Unit (1) December 31, 2013 December 31, 2012 December 31, 2011 (2) Net assets, beginning of period (3) $10.68 $9.10 $9.93 Increase (decrease) from operations Total revenue Total expenses (0.09) (0.08) (0.07) Realized gains (losses) for the period 0.16 (0.11) (0.02) Unrealized gains (losses) for the period (0.14) Total increase (decrease) from operations $2.80 $2.38 (0.23) Distributions Due to return of capital (4) (0.80) (0.80) (0.60) Total distributions (5) (0.80) (0.80) (0.60) Net assets, end of period (4)(6) $12.68 $10.68 $9.10 Notes: (1) This information is derived from the Fund s audited annual financial statements. The net assets per Unit presented in the Fund s financial statements may differ from the net asset value calculated for fund pricing purposes. An explanation of these differences can be found in the notes to the Fund s financial statements. (2) Results are for the period from April 1, 2011 (the inception date of the Fund) to December 31, (3) The beginning of period net assets per Unit in 2011 reflects the issue price of $10.00 less share issue expenses of $0.07 per Unit. (4) 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. Accordingly, totals may not sum in the above table due to the different basis for computing the per unit amounts. (5) Distributions were recorded as equal payments of $0.20/unit. Cash payment of distributions occurs within 15 business days of the record date. (6) This is not a reconciliation of the beginning and ending net assets per Unit Annual Management Report of Fund Performance 9

11 For the twelve months ended For the twelve months ended For the nine months ended Ratios and Supplemental Data December, 2013 December 31, 2012 December 31, 2011 (2) Total net asset value (1) $164,403,981 $139,293,781 $118,669,901 Number of Units outstanding 12,959,400 13,000,000 13,000,000 Management expense ratio (3) 1.29% 1.41% 2.16% Management expense ratio before waivers and absorptions (3) 1.29% 1.41% 2.16% Trading expense ratio (4) N/A N/A N/A Portfolio turnover rate (4) N/A N/A N/A Net asset value per Unit $12.69 $10.71 $9.13 Closing market price (5) $12.72 $9.74 $9.00 Notes: (1) This information is provided as at December 31, 2013, December 31, 2012 and December 31, The net asset value calculated for fund pricing purposes may differ from the net assets per Unit presented in the Fund s financial statements. An explanation of these differences can be found in the notes to the Fund s financial statements. (2) Results are for the period from April 1, 2011 (the inception date of the Fund) to December 31, (3) Management expense ratio ( MER ) is based on total expenses (excluding commissions and other portfolio transaction costs, but including interest expense and management fees from the Master Fund) for the stated period, except as stated in the following sentence, and is expressed as an annualized percentage of daily average net asset value during the period. The MER for the period ended December 31, 2011, includes agents fees and other offering expenses, which are one-time expenses and therefore are not annualized. The MER for the nine month period ended December 31, 2011, excluding agents fees and offering expenses, is 1.42%. (4) The Fund s return is linked, by virtue of a forward agreement, to the performance of the Portfolio and consequently, the portfolio turnover rate and trading expense ratio do not apply to the Fund. (5) Bid price of BIF.UN on the CSE as of December 31, 2013, December 31, 2012 and December 31, MANAGEMENT FEES The Manager is responsible for providing or arranging for all investment advisory and portfolio management services required by the Fund including, without limitation, managing the Portfolio in a manner consistent with the investment objectives, guidelines and restrictions of the Fund and for arranging for the execution of all portfolio transactions. The Manager is also responsible for the operational and administrative functions of the Fund. As compensation for the management services rendered to the Fund, the Manager is entitled to an annual management fee equal to 0.10% per annum based on the net asset value of the Fund as well as an annual fee of 0.30% based on the net asset value of the Master Fund (total overall management fee of 0.40%). These manageme nt fees are calculated daily and payable monthly in arrears, plus applicable taxes. The management fees totaled $175,328 and $149,219 for the Fund and $527,060 and $448,443 for the Master Fund for the twelve months ended December 31, 2013 and 2012 respectively. PAST PERFORMANCE Note that the performance information shown in this section assumes that all distributions made by the Fund in the period shown were reinvested in additional Units of the Fund. Also note that the performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns on performance. The performance of the Fund in the past does not necessarily indicate how it will perform in the future Annual Management Report of Fund Performance 10

12 Year-by-Year Returns The bar chart below shows the Fund s performance for the periods shown. The bar chart shows, in percentage terms, how much an investment made on the first day of the period would have grown or decreased by the last day of the period % 26.81% 26.52% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -2.72% (1) (2) (3) 12/31/ /31/ /31/2013 Notes: (1) Represents period from April 1, 2011 (the Fund s inception date) to December 31, This calculation is based on the $10.00 per Unit offering price and includes offering expenses of $0.07 per Unit which are not recurring. If offering expenses are excluded from the calculation the total return for the period would be negative 1.94%. (2) Represents period from January 1, 2012 to December 31, (3) Represents period from January 1, 2013 to December 31, Annual Compound Returns As the Fund s investment strategy is to seek attractive income opportunities with a focus on, but no limitation to, investments in high yield corporate debt, and publicly-listed securities in infrastructure and real estate companies across a global universe, the Investment Manager has decided to replace the appropriate broad-based securities market indices with the S&P/TSX Composite Total Return Index and the DEX Universe Bond Index. In the Investment Manager s view, the new indices are a better comparison to the Fund s investment strategy and will provide Unitholders with a more familiar and appropriate set of comparative indices upon which to judge performance. The S&P/TSX Composite Total Return Index is a broad equity market proxy and DEX Universe Bond Index is a broad measure of the Canadian investment-grade fixed income market. The Investment Manager believes that the indices that were used previously are more suited to an investment strategy with a total return emphasis that is specifically constrained to the high yield corporate debt, and publicly-listed securities in infrastructure and real estate asset classes, rather than an investment strategy with an emphasis on income generation. The following table shows the Fund s compound returns, based on published net asset values, for the periods noted and the annual compound returns, based on net asset values, since inception. The returns of the indices are presented for the same periods as the Fund Annual Management Report of Fund Performance 11

13 2013 (1) 2012 (2) 2011 (3) Inception (4) Since % % % % Brookfield New Horizons Income Fund (2.72) DEX Universe Bond Index (1.21) S&P/TSX Composite Index (13.55) 1.69 Notes: (1) For the twelve months ended December 31, 2013 (2) For the twelve months ended December 31, 2012 (3) For the period from April 1, 2011 to December 31, 2011 (4) For the period from April 1, 2011 to December 31, 2013, annualized The following table shows the Fund s compound returns, based on published net asset values, for the periods noted and the annual compound returns, based on net asset values since inception, in Canadian dollar terms. These returns are compared to the returns of indices that the Investment Manager originally used for performance comparisons. The returns of the indices are presented for the same periods as the Fund and in Canadian dollar terms (1) 2012 (2) 2011 (3) Inception (4) Since % % % % Brookfield New Horizons Income Fund (2.72) Merrill Global High Yield Index Dow Jones Brookfield Global Infrastructure Total Return Index FTSE EPRA/NAREIT Developed Index (4.45) Notes: (1) For the twelve months ended December 31, 2013 (2) For the twelve months ended December 31, 2012 (3) For the period from April 1, 2011 to December 31, 2011 (4) For the period from April 1, 2011 to December 31, 2013, annualized SUMMARY OF INVESTMENT PORTFOLIO The Fund has entered into forward agreement whereby the Fund obtains economic exposure to the performance of the Portfolio. Accordingly, this management report of fund performance should be read in conjunction with the management report of fund performance and financial statements of the New Horizons Master Fund. The management report of fund performance and financial statements for the New Horizons Master Fund are available to Unitholders and may be obtained by visiting our website at or by writing to the Investor Relations group of Brookfield Investment Management (Canada) Inc., Brookfield Place, 181 Bay Street, Suite 300, Toronto, Ontario, Canada, M5J 2T3. The following is a summary of the Master Fund portfolio as at December 31, This is a summary only and will change due to ongoing portfolio transactions of the Master Fund. Quarterly updates will be posted to Annual Management Report of Fund Performance 12

14 As at December 31, 2013 Top 25 Holdings % of Net Asset Value of the Master Fund First Data Corp. Bonds 8.04 MBIA Inc. Bonds 7.91 Beazer Homes USA, Inc. Bonds 6.40 BlackBerry Ltd. Bonds 6.35 Forbes Energy Services Ltd. Bonds 6.22 Arch Coal Inc. Bonds 6.17 Lightstream Resources Ltd. Bonds 5.76 SuperMedia Inc. Bonds 5.30 AGF Management Ltd. Equity 5.26 Man Group PLC. Equity 5.06 Banco Do Brasil S.A. Bonds 4.88 Sun Life Financial Inc. Equity 4.29 Hexion US Finance Corp. Bonds 3.80 Canadian Oil Sands Ltd. Equity 3.70 Calfrac Holdings LP. Bonds 3.65 Edison Mission Energy Bonds 3.61 Unilever PLC Equity 3.39 Walter Energy Inc. Bonds 3.35 BP PLC Equity 3.19 GP Investments Ltd. Bonds 2.86 North American Energy Partners Inc. Bonds 2.82 Cash and cash equivalents 2.56 Just Energy Group Inc. Bonds 2.41 Texas Competitive Electric Holdings LLC Bonds 2.32 K Hovnanian Enterprises Inc. Bonds 2.09 Total *The Fund has notional exposure resulting from derivatives representing 4.69% of NAV Annual Management Report of Fund Performance 13

15 As at December 31, 2013 Sector Allocation % of Net Asset Value of the Master Fund Banking 4.88 Basic Industry Consumer, Non-Cyclical 3.39 Energy Finance & Investment Insurance Media 5.30 Services Cyclical 8.49 Technology & Electronics Utility 6.45 Cash and cash equivalents 2.56 Other Liabilities and Accrued Investment Income (15.23) Total *The Fund has notional exposure resulting from derivatives that would increase the Banking and Energy sectors by 1.77% and 2.92% of NAV, respectively Annual Management Report of Fund Performance 14

16 FUND INFORMATION MANAGER AND INVESTMENT MANAGER Brookfield Investment Management (Canada) Inc. George E. Myhal Director, President & Chief Executive Officer Jonathan Tyras Managing Director, Chief Financial Officer, and General Counsel Gail Cecil Director, Managing Director INDEPENDENT REVIEW COMMITTEE John P. Barratt (Chair) Corporate Director James L. R. Kelly President Earth Power Inc. Frank Lochan Corporate Director Craig Noble Director CONTACT INFORMATION Brookfield New Horizons Income Fund welcomes inquiries from Unitholders, analysts, media representatives or other interested parties. Manager, Investment Manager, and Trustee Brookfield Investment Management (Canada) Inc. Brookfield Place 181 Bay Street, Suite 300 Toronto, Ontario M5J 2T3 t w. Transfer Agent and Registrar Unitholder inquiries relating to distributions, address changes and Unitholder account information should be directed to the Fund s Transfer Agent: Valiant Trust Company 710, 130 King Street West Toronto, Ontario M5X 1A9 t (toll-free North America) f (toll-free North America) International e. inquiries@valianttrust.com w Annual Management Report of Fund Performance 15

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