NEI International Equity RS Fund (formerly NEI Ethical International Equity Fund)

Transcription

1 Annual Management Report of Fund Performance As at September 30, 2018 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 investment objective of the Fund is to achieve long-term capital growth by investing primarily in equity and equity-related securities of companies located mainly outside of Canada and the United States. The Fund follows a socially responsible approach to investing as described in Part A of the prospectus. Risk The Fund s assets will be invested in equity securities of global issuers. The Fund will therefore be subject to the risk of investments in foreign securities and since the Fund makes its investments in other currencies, investors are subject to foreign exchange fluctuations. The Fund is suitable for investors with a medium tolerance for risk, and a long term investment horizon. Any changes in the Fund have not affected the overall level of risk of the Fund. Results of Operations The s Series A units returned 5.42% for the twelve months ended September 30, 2018 compared with a return of 6.18% 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 MSCI EAFE 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, 2017 to September 30, 2018 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 Material Changes Change in NAV Ownership (%) ResMed TERUMO CORPORATION 1.28 Name New Positions % of Current Year NAV Bunzl 1.56 Henkel 1.44 Exited Positions Eutelsat Communications Gemalto Kingfisher Yahoo! Japan 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 2017 came to a close with continued strong performance from international markets both in local and Canadian currency terms has had no shortage of events: A dismal G-7 meeting, a complicated back-and-forth between the US and North Korea that eventually culminated in a summit between Donald Trump and Kim Jong Un, trade wars and the renegotiating of NAFTA, instability in Turkey, budgetary pressures in Italy and the endless Brexit saga and yet nothing seems to be able to really rattle the markets. The MSCI EAFE Index returned 6.30% in Canadian dollar terms for the period. Energy was the best performing sector for the period, returning 24.20%, quite ahead of the Information Technology sector which came in a distant second with a return of 9.57%. Financials was the worst performing sector with a return of -0.16%. In terms of regional performance, Japan outperformed European markets. The Fund s performance was mainly driven by stock selection. The sub-advisor s holdings in the Industrials and Health Care sectors contributed the most to performance while the holdings in the Consumer Discretionary sector were the main detractors with the sub-advisor s advertising agency names dealing with continued headwinds affecting their industry. Recent Developments Positions in Bunzl (UK, distribution group) and Henkel (Germany, home care, beauty and adhesive products) were initiated during the period, while Eutelsat (French, satellite operator), Kingfisher (UK, home improvement), Gemalto (Netherlands, digital security) and Yahoo Japan (internet media) were liquidated. Bunzl has a uniquely positioned business model. The Company partners with both suppliers and customers in providing outsourcing solutions and service oriented distribution. Over the years, the firm has built close relationships with their clients, allowing them to customize solutions and offer personalized services. As for Henkel, the company manufactures products for homecare and personal care but the main attraction of the Henkel story is its adhesives business, which benefits from strong structural growth trends. Growth expectations for Eutelsat and Kingfisher are not as compelling as they once were making the risk/return prospects less appealing. At the end of 2017, Thales announced the acquisition of Gemalto for 51. The stock was trading around that level during the second quarter, so the position was sold as the sub-advisor saw better investment opportunities elsewhere in the portfolio. Finally, the sub-advisor sold Yahoo Japan because of recent actions by company s management team which reduced the sub-advisor s confidence in the company s business model. The portfolio sub-advisor also added to their positions in Ingenico (France, payment solutions), Ipsos (France, market research), Nestlé (Switzerland, food manufacturer), Publicis (France, advertising agency), Rakuten (Japan, internet services), Reckitt Benckiser (UK, household products), Sodexo (France, on-site service solutions) and WPP (UK, ad agency) and reduced their holdings of Allianz (Germany, insurance), Hoya (Japan, electro-optics products), Linde (Germany, industrial gas), Nidec (Japan, small precision motors) and Resmed (Australia, sleep apnea treatment). All these weight adjustments were executed based on the risk/return profile of the respective holdings. The portfolio sub-advisor believes that sustainable and consistent operating earnings growth is what creates value overtime regardless of market condition. Consequently, through the years, it has been the portfolio sub-advisor s ability to identify and select global leaders with key competitive advantages, proven management teams and operational leverage capabilities that has produced strong and repeatable relative performances. 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 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. For the Period Ending September 30, 2017 September 30, 2018 Series A 7.92% 8.04% Series F 13.84% 13.37% 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. 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 2017 September 2018 Accrued Expenses Payable to Related Parties 84,545 92,238 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. 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 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. 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 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 N/A Sept N/A Sept N/A F Sept N/A Sept N/A Sept N.A N/A Sept N/A N/A Sept N/A Sept N/A I Sept N/A Sept N/A Sept N.A N/A Sept N/A N/A Sept N/A Sept N/A O Sept N/A (1) All per unit figures presented in 2018, 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 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 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 , , I Sept , , N/A N/A Sept , , N/A N/A Sept , , N/A N/A Sept , , N/A N/A Sept , , N/A N/A Sept , , N/A N/A O Sept N/A N/A (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. 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 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 2.00% 65.5% 34.5% Series F 1.00% 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-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 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 Series I Series O Historic performance reporting is not permitted until the series has at least 12 months of performance Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 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 MSCI EAFE Index. The MSCI EAFE Index is composed of over 1,000 large company stocks from over 20 of the world s industrialized nations. It does not include stocks issued in North America. 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 MSCI EAFE NR CAD NEI International Equity RS A NEI International Equity RS F NEI International Equity RS I 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, 2018 Total Net Asset Value: $207,051,732 Top 25 Positions (Long Positions) % 1 TERUMO CORPORATION SAP Prudential Nidec Linde Air Water Fresenius SE & Co Danone Smith & Nephew Diageo Reed Elsevier LVMH Moet Hennessy Louis Vuitton Hoya Experian Sodexo Heineken Shire Grifols Publicis Groupe WPP Reckitt Benckiser Group Qiagen Nv Allianz ING Groep Ingenico 2.2 Total 74.4 There is no short position in this Fund. "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. 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 Drill Down Total Net Asset Value Mix % Equities-Foreign 64.1 Cash and Equivalents 1.3 Equities-U.S. - Total 65.4 Drill Down Sector Allocation % Health Care 18.2 Consumer Discretionary 12.4 Consumer Staples 5.7 Industrials 9.0 Information Technology 4.1 Cash and Equivalents 1.3 Financials 9.1 Materials 5.6 Total 65.4 Drill Down Geographic Distribution % Other 64.1 United States - Canada 1.2 Total 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