2017 Annual Management Report of Fund Performance

Transcription

1 (the Fund ) For the 12-month period ended September 30, (the Period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio manager: BMO Asset Management Inc., Toronto, Ontario (the portfolio manager ) Sub-advisor: Taplin, Canida & Habacht, LLC, Miami, Florida Annual 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 the Fund. If the annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the annual financial statements at your request, and at no cost, by calling and , by writing to us at BMO Investments Inc., First Canadian Place, 100 King Street West, 43rd Floor, Toronto, Ontario, M5X 1A1 or by visiting our website at and or SEDAR at You may also contact us using one of these methods to request a copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Investment Objective and Strategies The Fund s objective is to provide a high level of total return through a combination of income and capital appreciation by investing primarily in fixed income securities issued by U.S. corporations. The portfolio manager invests primarily in a diversified pool of fixed income securities, such as bonds and debentures issued by corporations or obtains exposure to those securities. The portfolio manager invests primarily in high yield securities rated below BBB as they seek the best potential investments for the portfolio by analyzing the credit ratings of various issuers and using fundamental analysis. Risk No changes affecting the overall level of risk associated with investing in the Fund were made during the Period. The risks of the Fund remain as discussed in the Fund s most recent simplified prospectus or any amendments and fund facts. Results of Operations During the Period, the Fund s total net asset value changed from approximately $963 million to approximately $1,080 million. Series A units of the Fund returned 4.74% versus the Fund s benchmark, the Bank of America Merrill Lynch U.S. High Yield, BB/B Rated, Constrained Index (C$ hedged), return of 7.56%. Please see the Past Performance section for information on the performance returns of the Fund s other series. During the Period, news was dominated by the surprise election of Donald Trump as President of the U.S. President Trump s election caused a significant increase in market expectations of growth and inflation based on the new administration s campaign platform of fiscal stimulus, corporate deregulation and corporate and personal tax reform. These expectations quickly impacted markets broadly, and had a significant impact on fixed income specifically. Interest rates rose nearly 100 basis points during the fourth quarter of and credit spreads (i.e., difference in yields) tightened, reflecting a more favorable corporate landscape. During the Period, the portfolio manager reduced the number of securities and focused on higher conviction securities. They also increased lower quality holdings as these had been underrepresented in the portfolio manager s strategy. In the second half of the Period, the portfolio manager didn t significantly shift the Fund s quality or duration positioning, but shifted sector weightings, as they reduced exposure to certain securities within the Retail sector, which are fundamentally deteriorating or overly exposed to secular shifts in their subsectors. The Fund added exposure to the Homebuilding sector, which the portfolio manager believes will continue to benefit from the solid U.S. economy and low interest rate environment. For the first half of the Period, high yields delivered strong excess positive returns, while overall fixed income was negative. During that time, lower quality issuers outperformed, with CCCs outpacing Bs and BBs. On a sector basis, Energy and Basic Industry were the two strongest sectors while Retail and Consumer Goods were

2 underperformers. In the second half of the Period, higher quality issuers in the index outperformed with BBs outpacing Bs and CCCs. On a sector basis, Financials and Transportation were the best performing sectors and Retail and Energy were underperformers. The rebound in energy prices had a positive impact on the Fund s returns combined with the effects of security selection. The second half of the Period was characterized by continued economic strength in the U.S. and globally against increasing geopolitical tensions, especially with regards to North Korea. Economic barometers in the U.S., such as housing prices, unemployment and gross domestic product growth were resilient, despite little progress in passing legislation, which was seen as a lynchpin of President Trump s economic strategy. Health care reform failed to be enacted on several occasions and was abandoned by late September in favour of tax reform. Hurricanes Harvey and Irma disrupted economic activity late in the Period but their effects are expected to be transitory. Bond and equity markets continued their upward march throughout the Period, as energy and industrial commodity markets were resilient, which gave markets confidence in the underlying economy. Interest rates were slightly tighter but exhibited significant intra-period volatility. In June, the U.S. Federal Reserve Board raised interest rates for the second time in and also announced a balance sheet normalization of their stimulus program, which should take effect in October. Interest rates had little impact on the high yield market, but the improving economies helped to lower defaults and underpin confidence in the broader high yield market among investors. The Fund generated strong absolute performance, and strong performance relative to overall U.S. fixed income, which had negative returns during the Period. However, the Fund s higher quality positioning led to its underperformance relative to its benchmark. Defensive security selection in Energy and Metals & Mining sectors also contributed to underperformance. Subsequently, detractors to performance include a high cash position, which was a function of being selective with new investments due to a tight spread environment, in historical terms, and the portfolio managers desire to be selective with security selection. Selection was mixed, with issuers within the Energy sector and Telecommunication Services sectors alternating as contributors and detractors, though issuers in the Retail sector detracted from performance as the sector faced challenges. For the second half of the Period, within sector and quality selection the major driver was the Fund s underweight allocation to BB rated high yield credits, which outperformed in the quarter. Security selection was negative overall, and the largest detractors from performance were in sectors such as Consumer Goods, Retail and Wireline Telecommunications. The major contributors to performance were in the Energy and Wireless Telecommunications sectors. The Manager confirms that the Fund did not borrow money during the Period. For information on the Fund s performance and composition, please refer to the Past Performance section and Summary of Investment Portfolio section of this report. Recent Developments The Fund remains moderately positioned given the relatively tight spread environment and degree of optimism priced into the high yield market, though sector performance has remained strong and fundamentals, including default data, remain robust. Demand remains strong for higher yielding assets given the low yield environment, a factor the portfolio manager expects to persist as a positive for the sector. RELATED PARTY TRANSACTIONS BMO Investments Inc., an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ), is the Manager of the Fund. From time to time, the Manager may, on behalf of the Fund, enter into transactions or arrangements with or involving other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Manager (each a Related Party ). The purpose of this section is to provide a brief description of any transaction involving the Fund and a Related Party. Portfolio Manager The Fund s portfolio manager is BMO Asset Management Inc. ( BMOAM ), an affiliate of the Manager and Taplin, Canida & Habacht, LLC, also an affiliate of the Manager, is a subadvisor to BMOAM. BMOAM provides portfolio management services to the Fund. BMOAM receives from the Fund a management fee based on assets under management, calculated daily and payable monthly. Administration Fee and Operating Expenses The Fund pays a fixed administration fee to the Manager in respect of each series other than Series I. The Manager in return pays the operating expenses of these series of the Fund, other than certain specified expenses that are paid directly by the Fund ( Fund Expenses ). Fund Expenses, include expenses incurred in respect of preparing and distributing fund facts, interest or other borrowing expenses, all reasonable costs and expenses incurred in relation to

3 compliance with NI , including compensation and expenses payable to the Fund s Independent Review Committee ( IRC ) members, taxes to which the Fund is or might be subject, and costs associated with compliance with any new governmental or regulatory requirement introduced after December 1, Fund Expenses are allocated proportionately among the relevant series. If the Fund Expenses are specific to a series, the Fund Expenses are allocated to that series. The fixed administration fee is calculated as a fixed annual percentage of the average net asset value of each relevant series of the Fund. Separate fees and expenses are negotiated and paid by each Series I investor. Further details about the fixed administration fee and/or Fund Expenses can be found in the Fund s most recent simplified prospectus at and or Distribution Services The Manager markets and distributes the Fund through Bank of Montreal branches and/or (depending on the series) through registered dealers and brokers, including BMO InvestorLine Inc. and BMO Nesbitt Burns Inc., both affiliates of the Manager. The Manager pays to these affiliates a service fee called a trailing commission based on the average daily value of the units and/or shares that are held in investor accounts. This service fee is paid monthly or quarterly and varies by purchase option and by series. Management Fees The Manager is responsible for the day-to-day management of the business and operations of the Fund. The Manager monitors and evaluates the Fund s performance, pays for the investment advice provided by the Fund s portfolio manager and provides certain administrative services required by the Fund. As compensation for its services, the Manager is entitled to receive a management fee payable monthly, calculated based on the daily net asset value of each series of the Fund at the maximum annual rate set out in the table below. As a Percentage of Management Fees General Maximum Annual Administration, Management Dealer Investment Fee Rate* Compensation Advice and Profit % % % Series A Units Advisor Series Units Series F Units Series D Units Series I Units Series O Units 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 the periods indicated. The Fund s Net Assets per Unit (1) Series A Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Advisor Series Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ * For Series I Units, separate Series I fees are negotiated and paid by each Series I investor. Since the Manager pays no distribution, service or trailing fees on Series I Units, the combined management and administrative fees for Series I Units will not exceed the management fee charged for Advisor Series or Series A Units.

4 Series F Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Premium Series Units )(7) ) Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ 9.80 Series D Units ) Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ 0.01 Total Annual Distributions (4) $ Net assets, end of period $ Series I Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $

5 Series O Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ * Initial net assets. (1) This information is derived from the Fund s audited financial statements. The financial information presented for the periods ended September 30,, September 30,, September 30, and September 30, is derived from the financial statements determined in accordance with IFRS. Information for periods prior to October 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. (2) Includes commissions and other portfolio transaction costs. Prior to October 1, 2013, withholding taxes were not included in expenses as they were included in revenue. (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. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (4) Distributions were either paid in cash or reinvested in additional units of the Fund, or both. The allocation of the distributions from each of income, dividends, capital gains and return of capital is based on the Manager s estimate as at September 30 of the period shown, which is the Fund s financial year-end. However, the actual allocation of distributions is determined as at December 15, the Fund s tax year-end. Accordingly, the actual allocation among income, dividends, capital gains and return of capital may differ from these estimates. The information shown in this column is for the period beginning April 7, (the series inception date) and ending September 30,. The information shown in this column is for the period beginning February 18, (the series inception date) and ending September 30,. (7) As at the close of business on October 30,, the Premium Series was terminated. Ratios and Supplemental Data Series A Units Total net asset value (000 s) (1) $ 7,337 6,733 8,188 12,084 14,385 outstanding (000 s) (1) ,193 1,424 (2) % before waivers or absorptions % Net asset value per unit $ Advisor Series Units Total net asset value (000 s) (1) $ 75,424 3,071 4,573 3,372 3,197 outstanding (000 s) (1) 7, (2) % before waivers or absorptions % Net asset value per unit $ Series F Units Total net asset value (000 s) (1) $ 19,948 20,754 35,878 24,797 15,140 outstanding (000 s) (1) 1,695 1,770 3,107 1,990 1,230 (2) % before waivers or absorptions % Net asset value per unit $ Premium Series Units )(7) ) Total net asset value (000 s) (1) $ 1 outstanding (000 s) (1) 0 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ 9.80 Series D Units ) Total net asset value (000 s) (1) $ outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series I Units Total net asset value (000 s) (1) $ 125, , , , ,009 outstanding (000 s) (1) 13,182 17,900 20,852 32,192 37,136 + % 0.00 before waivers or absorptions + % 0.00 Net asset value per unit $

6 Series O Units Total net asset value (000 s) (1) $ 851, , , , ,062 outstanding (000 s) (1) 86,682 78,340 70,574 64,651 61,185 (2) % before waivers or absorptions % Net asset value per unit $ Operating expenses are paid by BMOII and management fees are paid directly to BMOII as negotiated with the investor. (1) This information is provided as at September 30 of the period shown, as applicable. (2) is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. For all the financial periods-ended September 30,, September 30,, September 30, and September 30,, no commissions or portfolio transaction costs were incurred by the Fund. As a result, the trading expense ratio for these periods was zero. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 10 is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher a fund s portfolio turnover rate in a year, the greater the trading costs payable by the fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. The information shown in this column is for the period beginning April 7, (the series inception date) and ending September 30,. The information shown in this column is for the period beginning February 18, (the series inception date) and ending September 30,. (7) As at the close of business on October 30,, the Premium Series was terminated. On October 14,, after obtaining all necessary unitholder and regulatory approvals, BMO High Yield Bond Fund merged into the Fund. On March 6,, BMO Asset Management Inc. replaced Monegy, Inc. as portfolio manager of the Fund and Taplin, Canida & Habacht, LLC became the sub-advisor of the Fund. These changes could have affected the performance of the Fund had they been in effect throughout the performance measurement periods presented. Year-by-Year Returns The following bar charts show the performance of each series of the Fund for each of the financial years shown. The charts show in percentage terms how an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year. Series A Units PAST PERFORMANCE The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional securities of the Fund and is based on the net asset value of the Fund. The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember that how the Fund has performed in the past does not indicate how it will perform in the future (2) Advisor Series Units The returns of each series may differ from one another for a number of reasons, including if the series was not issued and outstanding for the entire reporting period and because of the different levels of management fees and expenses allocated and payable by each series. On July 15,, the management fees on Series A and Advisor Series units was lowered from 1.75% to 1.6. In addition, the management fee on Series F units was lowered from 0.55% to 0.45% (4) Series F Units On July 15,, the administration fee applicable to the Fund (except Series O units) was lowered from 0.28% to 0.25%. In addition, the administration fee on Series O units was lowered from 0.275% to 0.25% (3)

7 Series D Units Series A Units 2 year years years years Inception (2) BMO U.S. High Yield Bond Fund % Constrained Index (C$ hedged) % Advisor Series Units year years years years Inception (4) BMO U.S. High Yield Bond Fund % Constrained Index (C$ hedged) % Series I Units Series F Units year years years years Inception (3) BMO U.S. High Yield Bond Fund % Constrained Index (C$ hedged) % Series D Units year years years years Inception (1) BMO U.S. High Yield Bond Fund % Constrained Index (C$ hedged) % Series O Units (1) For the period beginning with the performance launch date of May 9, 2008 to September 30, (2) For the period beginning with the performance launch date of June 23, 2008 to September 30, (3) For the period beginning with the performance launch date of February 17, 2009 to September 30, (4) For the period beginning with the performance launch date of November 11, 2009 to September 30, For the period beginning with the performance launch date of July 30, 2012 to September 30, For the period beginning with the performance launch date of April 8, to September 30,. Annual Compound Returns This table compares the historical annual compound returns of the Fund with its benchmark, the Bank of America Merrill Lynch ( BOAML ) U.S. High Yield, BB/B Rated, Constrained Index (C$ hedged) Series I Units year years years years Inception (1) BMO U.S. High Yield Bond Fund % Constrained Index (C$ hedged) % Series O Units year years years years Inception BMO U.S. High Yield Bond Fund % Constrained Index (C$ hedged) % (1) Return from the performance launch date of May 9, 2008 to September 30,. (2) Return from the performance launch date of June 23, 2008 to September 30,. (3) Return from the performance launch date of February 17, 2009 to September 30,. (4) Return from the performance launch date of November 11, 2009 to September 30,. Return from the performance launch date of July 30, 2012 to September 30,. Return from the performance launch date of April 8, to September 30,. A commentary on the market and/or information regarding the relative performance of the Fund as compared to its benchmark can be found under the Results of Operations section of this report. The BOAML U.S. High Yield BB/B Rated, Constrained Index (C$ hedged) contains all securities in the BOAML U.S. High Yield Index rated BB1 through B3, based on an average of Moody s, S&P and Fitch, but caps issuer exposure at 2%.

8 SUMMARY OF INVESTMENT PORTFOLIO As at September 30, % of Net Portfolio Allocation Asset Value Corporate Bonds 91.3 Cash/Receivables/Payables 8.7 Total Portfolio Allocation % of Net Top 25 Holdings Asset Value Issuer Cash/Receivables/Payables 8.7 Sprint Corporation, Senior, Unsecured, Notes, 7.875% Sep 15, Cheniere Corpus Christi Holdings, LLC, Senior, Secured, Notes, 7.00 Jun 30, Cablevision Systems Corporation, Senior, Unsecured, Notes, 5.875% Sep 15, ESH Hospitality, Inc., Series 144A, Senior, Unsecured, Notes, Callable, 5.25 May 1, Beazer Homes USA, Inc., Series 144A, Senior, Unsecured, Notes, Callable, 5.875% Oct 15, B.C. ULC/New Red Finance, Inc., Series 144A, Secured, Notes, Callable, 4.25 May 15, Discovery Communications, LLC, Senior, Unsecured, Notes, Callable, 3.95 Mar 20, Cenovus Energy Inc., Senior, Unsecured, Notes, 6.75 Nov 15, Allison Transmission, Inc., Series 144A, Senior, Unsecured, Notes, Callable, 4.75 Oct 1, CalAtlantic Group, Inc., Senior, Unsecured, Notes, Callable, 5.00 Jun 15, Tribune Media Company, Senior, Unsecured, Notes, Callable, 5.875% Jul 15, Iron Mountain Incorporated, Senior, Notes, Subordinated, Callable, 5.75 Aug 15, Micron Technology, Inc., Series 144A, Senior, Unsecured, Notes, Callable, 5.25 Aug 1, Fly Leasing Ltd., Senior, Unsecured, Notes, Callable, 6.375% Oct 15, Ingram Micro Inc., Senior, Unsecured, Notes, Callable, Multi-Step Coupons, 5.45 Dec 15, Kinross Gold Corporation, Series 144A, Senior, Unsecured, Notes, Callable, 4.50 Jul 15, Dell Inc., Senior, Unsecured, Notes, 6.50 Apr 15, QEP Resources, Inc., Senior, Unsecured, Notes, Callable, 5.25 May 1, CCO Holdings LLC/CCO Holdings Capital Corporation, Series 144A, Senior, Unsecured, Notes, Callable, 5.50 May 1, % of Net Top 25 Holdings Asset Value Issuer Post Holdings Inc., Series 144A, Senior, Unsecured, Notes, Callable, 5.00 Aug 15, Freeport-McMoRan Inc., Senior, Unsecured, Notes, Callable, 3.55 Mar 1, PBF Holding Co. LLC/PBF Finance Corp., Series 144A, Senior, Unsecured, Notes, Callable, 7.25 Jun 15, Geo Group Inc., The, Senior, Unsecured, Notes, Callable, 5.125% Apr 1, NRG Energy, Inc., Senior, Unsecured, Notes, Callable, 6.625% Mar 15, Top Holdings as a Percentage of Total Net Asset Value 26.8 Total Net Asset Value $1,079,798,535 The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

9 and BMO Investments Inc. First Canadian Place, 43rd Floor, 100 King Street West Toronto, ON M5X 1A1 For more information please call BMO Investment Centre at (investors who purchased BMO Mutual Funds through a BMO Bank of Montreal branch or BMO Online Banking) or call Client Services toll-free at (investors who purchased BMO Mutual Funds through a full-service or discount broker) or at (investors who purchased Series NBA and NBF through a full-service or discount broker). This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, the effects of competition in the geographic and business areas in which the Fund may invest in and the risks detailed from time to time in BMO Mutual Funds simplified prospectus. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, BMO Investments Inc. does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. BMO (M-bar roundel symbol) registered trademark, and BMO (M-bar roundel symbol) Mutual Funds are owned by Bank of Montreal, used under license. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal.