2013 MARRET ASSET MANAGEMENT INC. MARRET MULTI-STRATEGY INCOME FUND

Transcription

1 2013 MARRET ASSET MANAGEMENT INC. MARRET MULTI-STRATEGY INCOME FUND 2013 Annual Management Report of Fund Performance Caution regarding forward-looking statements This document may contain forward-looking statements relating to anticipated future events, results, performance, decisions, circumstances, opportunities, risks or other matters. Forward-looking statements are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as may, will, should, could, expect, anticipate, intend, plan, believe, or estimate or other similar expressions. These statements require us to make assumptions and are subject to inherent risks and uncertainties. Our predictions and other forwardlooking statements may not prove to be accurate, or a number of factors could cause actual events, results, performance, etc. to differ materially from t h e t a r g e t s, e x p e c t a t i o n s, e s t i m a t e s o r i n t e n t i o n s e x p r e s s e d o r i m p l i e d i n t h e f o r w a r d - l o o k i n g statements. These factors could include, among others, 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, and the risks detailed from time to time in the fund s simplified prospectus. Forward-looking statements are not guarantees of future performance. For these reasons, it is important that readers do not place undue reliance on our forward-looking statements and should be aware that the Fund may not update any forward-looking statements whether as a result of new information, future events or otherwise.

2 MARRET MULTI-STRATEGY INCOME FUND This management report of fund performance contains financial highlights but does not contain the annual financial statements of the Fund. You may obtain a copy of the annual financial statements at your request, and at no cost, by collect calling , by sending a request to Investor Relations, Marret Asset Management Inc., 200 King Street West, Suite 1902, Toronto, ON M5H 3T4, or by visiting our website at 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, or quarterly portfolio disclosure relating to the Fund. MANAGEMENT DISCUSSION OF FUND PERFORMANCE The Fund Marret Multi-Strategy Income Fund (the Fund ) is a closed-end investment fund managed by Marret Asset Management Inc. ( Marret or the Manager ) that commenced operations on March 18, The interest in the Fund is divided into two classes, Class A units and Class F units. The Class A units of the Fund trade on the Toronto Stock Exchange ( TSX ) under the symbol MMF.UN. The Class F units were intended for fee-based/institutional accounts and are not listed on the TSX. The Class F units are convertible into Class A units as described in the Fund s prospectus. Through a forward agreement (the Forward Agreement ) between the Fund and The Bank of Nova Scotia (the Counterparty ), the Fund is exposed to a portfolio of securities (the Portfolio ) held by Marret MSIF Trust (the Trust ). The Portfolio is an income generating portfolio comprised of a minimum of four distinct underlying portfolios, and a variety of asset classes, including investment grade and non-investment grade bonds, preferred shares, common equities and other income producing securities. At launch, the Trust had five underlying portfolios. They were the Marret High Yield Hedge Portfolio, the Marret Investment Grade Hedge Portfolio (both managed by Marret), the WARATAH Income Portfolio (managed by WARATAH Capital Advisors Ltd.), the East Coast Performance Portfolio (managed by East Coast Fund Management Inc.) and the RCM Special Situations Portfolio (managed by RCM Partners Inc.). During 2012, two of the original underlying portfolios, the RCM Special Situations Portfolio and the East Coast Performance Portfolio, were wound up. In January 2013, the Marret Resource Yield Portfolio (managed by Marret), was added leaving four underlying portfolios. Investment Objective and Strategies The Fund was created to achieve the following investment objectives: (i) to generate equity-like returns with substantially less volatility than the S&P/TSX Composite Index, and (ii) to provide unitholders of the Fund with attractive, risk adjusted, quarterly, tax advantaged cash distributions, initially targeted to be 5% per annum on the original issue price of $12.00 per unit, by obtaining exposure to the underlying income producing portfolios. The Marret High Yield Hedge Portfolio invests primarily in, and may sell short, the securities of companies who are issuers of, or are anticipated to be issuers of, non-investment grade securities. The Portfolio s strategy is primarily focused on corporate non-investment grade bonds, but may also include investing in debt a n d e q u i t y s e c u r i t i e s a n d o t h e r financial instruments with a focus on balance sheet arbitrage, industry arbitrage, and event specific situations such as reorganizations. Marret Investment Grade Hedge Portfolio The Marret Investment Grade Hedge Portfolio invests predominately in investment grade corporate debt, rated BBB- (by Standard & Poor s, or the equivalent rating of another nationally recognized credit rating agency) and above. WARATAH Income Portfolio The WARATAH Income Portfolio will take long and short positions in U.S. and Canadian equities with a targeted portfolio yield of 4% to 7%. It may also invest in corporate bonds and preferred shares. To maximize opportunities and to reduce risks in response to market conditions, the gross and net position of the WARATAH Income Portfolio will be actively adjusted. The WARATAH Income Portfolio will target low volatility of daily returns and seek to minimize capital drawdowns by employing rolling stop loss limits on all individual long positions. Marret Resource Yield Portfolio (since January 31, 2013) The investment objective of the Marret Resource Yield Portfolio is to achieve a high level of income and potential capital gains, with an attractive risk-adjusted return and moderate volatility. To achieve its objective, the Marret Resource Yield Portfolio intends to invest primarily in public and private debt securities and invest in term loans (including bridge and mezzanine debt) made to issuers in a broad range of The return to investors of the Fund is dependent on the return of Marret MSIF Trust s portfolio pursuant to the Forward Agreement. As a result, this management report of Fund performance includes discussion of the Trust, where applicable. Each of the underlying portfolios employs hedging strategies designed to generate positive returns and/or protect the underlying portfolios against the risk of losses from market declines, interest rate changes and currency fluctuations. The following outlines the investment strategies of each of the underlying portfolios. Marret High Yield Hedge Portfolio 2 MARRET MULTI-STRATEGY INCOME FUND

3 natural resource sectors, including but not limited to energy (including exploration and development, services and related businesses), base and precious metals, other commodities and other investments. Risk Risks associated with an investment in the units of the Fund are discussed in the Fund s prospectus dated February 25, 2011 (the Prospectus ), which is available on the Fund s website at or on SEDAR at Leverage Leverage did not cause a material change in the risk associated with an investment in units of the Fund. An increase in leverage may cause an investment in units to become more risky should any event adversely affect the value of an investment held by the Fund as the impact would be magnified to the extent leverage is employed. The leverage of the Fund during the period was below the thresholds stated in the Prospectus and did not result in a change in suitability of the investment from w h a t w a s p r e v i o u s l y d i s c l o s e d i n t h e Prospectus. The Trust has aggregate leverage restrictions in place such that the Net Long Exposure will not exceed 150%, the Net Short Exposure will not exceed 35% and the Total Exposure will not exceed 200%. At December 31, 2013, the Trust was in a net long position (making the Net Short Exposure constraint not applicable). The Net Long Exposure and Total Exposure were approximately 31.7% and 76.3%, respectively. Figures presented in this management report of fund performance are generally based on the Fund s calculation of its weekly net asset value ( Net Asset Value ), in accordance with the Fund s Prospectus which may be calculated on a basis different from the application of CPA Canada Handbook Section In accordance with National Instrument Investment Fund Continuous Disclosure ( NI ), certain figures are derived from the financial statements calculation of net assets ( Net Assets ) and are noted as such. Results of Operations from January 1, 2013 to December 31, 2013 The indicated rates of return are the gross returns for the underlying portfolios of the Trust, including changes in unit value and reinvestment of all distributions but without taking into account expenses of the Trust. full recovery appears unlikely at this point. Cline Mining is a situation where we are a secured lender and essentially have become the Company s owner as restructuring proceeds. We have a number of comparables that support the value of the company, however capital for mining companies is very scarce at present and we see this as at least a year long workout even though markets are modestly improving. 3. We maintained macro hedges, hedged AAA corporate bonds and small positions in gold related securities that also reduced returns by approximately 2%. These were a component of our conservative positioning reflective of markets where risks well exceeded the fundamentals of weak economic growth in the US, potential for implosion in the Eurozone and political instability in the Middle East. Central bank policies overrode all of these risks and we did not recognize this impact quickly enough. It is in our DNA to preserve capital first and foremost, but 2013 was a year where we did not balance capital preservation and generating solid risk adjusted returns. As we enter 2014, we see a year where volatility will increase and the potential for a policy mistake by the Federal Reserve increases as the tapering process unfolds. Having said that, economic growth is improving and fiscal drag is diminishing so fundamentals are finally improving. With this backdrop we are building a less conservative portfolio that is more diversified, with greater yield and with fewer macro hedges. The focus, as always, is on capital preservation and risk adjusted returns but balance is also essential. Marret Investment Grade Hedge Portfolio For the period, the Portfolio returned 8.99%. This compares to 1.06% for the DEX Mid-Term Corporate Index and 0.82% for the BofA Merrill Lynch All Canadian Corporate Index. The portfolio produced positive returns in each month of the year with the exception of June. Negative returns in June were the result of the broad sell-off across all asset classes as the Federal Reserve considered the eventual wind-down of their securities purchase program. In May of 2013, the portfolio began to trade European investment grade credit following an almost year long examination of the market and research into sectors and individual credits. Marret High Yield Hedge Portfolio While the portfolio realized only a small gain of 0.30%, it was a year where returns should have been greater as we were overly conservative. After reviewing the portfolio s performance, our conclusions are as follows: 1. Our core portfolio was overly conservative we avoided CCC credits which produced the highest returns and we overweighted shorter duration names while the 5-7 year area produced the best returns. Longer term issues were hurt by rising bond yields which we avoided. We also focused on large liquid issues whereas the extraordinary liquidity provided by the Fed favored smaller names. 2. We had two problem companies, DAVE (Mobilicity) and Cline Mining which reduced returns by approximately 2%. DAVE was a credit that we entered into on the premise that if the company did not execute well, we would be protected by being able to sell its valuable spectrum to Bell, Telus or Rogers. Unfortunately the Canadian government has refused approval for this backstop on anti-competition grounds and MARRET MULTI-STRATEGY INCOME FUND 3

4 With Europe lagging the global economic recovery and corporations and financial institutions at the early stage of deleveraging, we believed there would be attractive trading opportunities in the market. The relative outperformance of European credit s p r e a d s w a s a d d i t i v e t o t h e p o r t f o l i o s returns. Other significant contributors to the portfolio s performance over the period included: During the second half the portfolio slightly underperformed the 50/50 benchmark, with returns of 6.36% versus 7.58%, respectively. Cline Mining, the portfolio s largest position, was a drag on performance in that period. We are a secured lender to Cline and essen- 4 MARRET MULTI-STRATEGY INCOME FUND tially have become the Company s owner as it proceeds with its restructuring. We are extremely focused on Cline, but expect the restructuring and workout will be a year long process given the s c a r c i t y o f c a p i t a l f o r m i n i n g companies. Overweight exposure to U.S and Yankee financials as this sector, on a spread basis, tightened 54 basis points versus nonfinancials which tightened by only 22 basis points. Exposure to weaker rated credits provided improved relative performance as ratings compression remained a dominant theme. Increased exposure to European crossover credits (utilizing our BB- rating bucket). The new issue market was active in all three markets (U.S., Canada and Europe) and Fund participated actively in new issues which were priced with attractive concessions. Core holdings in Verizon, Lloyds Bank and Glencore were each strong performers in their respective sectors. Long and short interest rate overlays via U.S. Treasuries enhanced portfolio returns. WARATAH Income Portfolio The WARATAH Income portfolio increased 19.85% in Our top contributors in the fourth quarter were long positions in Badger Daylighting Ltd., Apple Inc., Lincoln National Corporation, AutoCanada Inc. and Manulife Financial Corporation. Our largest negative contributors include a long position in Ford Motor Company and short positions in the financial and energy sectors. The portfolio was and remains appropriately positioned to benefit from rising interest rates by shorting government bonds and overvalued equities that are bonds in disguise. Additionally, the portfolio benefits from rising interest rates by owning businesses that have hidden cash floats, companies with exposure to rising net interest margins and by identifying businesses with underfunded pension liabilities that see large improvements in their funded status as interest rates increase. Current investments with these characteristics include Lincoln National Corporation, Wells Fargo & Co., Sun Life Financial Inc., companies in the Canadian utilities sector and US master limited partnerships. Our top five long positions at year end were Calfrac Holdings LP 7.5% Notes due December 2020, Canadian Tire Corporation, Lincoln National Corporation, Power Financial Corporation and Badger Daylighting Ltd. Our top five short positions at year end were concentrated in the financial sector. Marret Resource Yield Portfolio (since January 31, 2013) The year long trend of energy outperforming materials continued in the second half. The TSX Energy Composite gained 12.68% in H2 (YTD %) while the Materials Composite gained 2.47% and finished 2013 down 29.10%. The 50/50 benchmark lost 7.75% for the year while the Marret Resource Yield Portfolio realized strong relative performance, gaining 1.98% in 2013.

5 Recent Developments On September 26, 2013 Marret announced that CI Financial Corp. agreed to acquire a majority interest in Marret. Marret continued to be the manager of the Fund following the transaction which was completed in December Effective on closing, the Independent Review Committee ( IRC ) of the Fund was changed to align with the IRC of CI Investments. The CI Investments IRC consists of 5 members who have expertise in a broad range of areas, including the management and oversight of investment funds, accounting and general corporate experience. The new members of the IRC are the following: Stuart P. Hensman, Chair of the IRC, William Harding, Christopher M. Hopper, Sharon M. Ranson and James M. Werry. On December 3, 2013, Marret announced that 7,400,033 Class A units and 458,377 Class F units of the Fund were submitted for redemption on the annual redemption date of December 31, Unitholders who tendered units for redemption received $ per Class A unit and $ per Class F unit, the applicable net asset value per unit on the annual redemption date. Redeeming unitholders also received the previously announced quarterly distribution for December of $0.15 per unit. Redemption payments were made on January 22, After adjusting for the redemption, the Fund s holdings of certain Data Audio & Visual Enterprises and Cline Mining Corp. bond positions are considered illiquid and represent 2.9% of the Trust s net assets pre-annual redemption and 8.9% post-annual redemption. (a) IAS 32, Financial Instruments; Disclosure and Presentation, requires puttable instruments to be classified as a liability unless certain conditions are met. The Fund s unitholders equity meets the definition of a puttable instrument. The Manager has assessed the Fund s unitholder structure and currently expects that liability treatment will be the appropriate classification. (b) IFRS 13, Fair Value Measurements, was published in May The standard provides guidance on the measurement of fair value and allows for the use of closing market prices or another price within the bid/ask spread to value investments. Under Canadian GAAP the fair value of investments for financial statement reporting purposes, was required to be measured at closing bid price for long positions and closing ask price for short positions. The Manager has assessed the guidance that will apply under IFRS and has determined that the use of closing market prices for exchange traded securities and the mean of the bid and ask for fixed income investments is likely to be appropriate in valuing investments. The Manager has presently determined that the impact of IFRS will also include additional note disclosure and modifications to existing presentation. The Manager does not expect that the trading net asset value or trading net asset value per unit will be impacted by the changeover to IFRS. The Manager s current evaluation may be subject to change due to issuance of new standards or new interpretations of existing standards. On January 13, 2014, Marret announced the annual rebalancing of the underlying portfolios to be effective on January 13, 2013 (the Rebalancing Date ). On the Rebalancing Date, the underlying portfolios were rebalanced as follows: Marret High Yield Hedge Portfolio 30% (increase from 22.5%), Marret Investment Grade Hedge Portfolio 20% (decrease from 32.5%), WARATAH Income Portfolio 20% (decrease from 30%) and the Marret Resource Yield Portfolio 30% (increase from 15%). International Financial Reporting Standards On December 12, 2011 the Canadian Accounting Standards Board ( AcSB ) allowed investment funds to defer mandatory adoption of International Financial Reporting Standards ( IFRS ) as issued by the International Accounting standards Board ( IASB ) until t h e f i s c a l y e a r b e g i n n i n g o n o r a f t e r January 1, Accordingly, the Fund will adopt IFRS for its fiscal year beginning January 1, 2014, and will first issue financial statements in accordance with IFRS, including comparative information, for the semi-annual period ending June 30, The June 30, 2014 semi-annual and December 31, 2014 annual financial statements will include an opening Statement of Financial Position as at January 1, 2013 and comparative financial information prepared in accordance with IFRS. The Manager has evaluated the differences between Canadian GAAP and IFRS and implemented a transition plan to meet the AcSB implementation timeline. The key elements of the plan include an assessment of: differences between Canadian GAAP and IFRS; changes required to financial statement disclosure; and, the impact on the financial reporting process. Based on the Manager s assessment of the accounting differences between Canadian GAAP and IFRS, the following areas of differences were identified: MARRET MULTI-STRATEGY INCOME FUND 5

6 Related Party Transactions Related party transactions consist of services provided by the Manager to the Fund. Pursuant to the management agreement, the Manager receives a management fee from the Fund equal to 0.25% per annum of the net asset value of the Fund (or 1.50% in total when combined with the management fee received from Marret MSIF Trust), calculated and payable monthly in arrears, plus applicable taxes. The management fee is in consideratio n f o r p rovid ing mana geme nt, p o r tf o lio management, and administrative services and facilities to the Fund. The Manager is responsible for paying the sub-advisors engaged to manage the underlying portfolios their portion of the management fee. In addition to the management fee, the Manager receives a service amount calculated and paid as soon as practicable after the end of each calendar quarter, equal to 0.40% per annum of the Net Asset Value attributable to the Class A units of the Fund. The service amount is paid to brokers based on the number of Class A units of the Fund held by clients of such brokers at the end of the relevant quarter. For the year ended December 31, 2013, the management fee, inclusive of applicable taxes, earned was $317,169 ($1,935,594 in total when combined with the management fee earned from Marret MSIF Trust). The service amount paid/ payable from the Fund, inclusive of applicable taxes, for the year ended December 31, 2013 was $462,742. Tax Treatment of Forward Purchase & Sale Agreement Recent amendments to the Tax Act relating to character conversion transactions will treat gains and losses realized from the disposition of property under certain derivative forward contracts, as defined in the legislation (such as the Forward Agreement), as ordinary income and losses. These amendments will not apply to the Forward Agreement currently used by the Fund, provided that the term of the Forward Agreement is not extended and that, prior to its expiration date, the size of the Forward Agreement is not increased. No new Forward Agreements will be entered into by the Fund and it is the intention of the Manager to avoid the application of the amendments described above to the existing Forward Agreement by not making any of the changes described above. However, the Fund Termination date, December 31, 2016, is approximately nine months after the Termination Date of the Forward Agreement, March 15, Upon the Termination Date, but prior to the Fund Termination, gains and losses realized from the disposition of securities will be treated as ordinary income and losses. The Manager also receives a performance fee from the Marret MSIF Trust (the Performance Fee ) for each fiscal year, if and only if the Marret MSIF Trust performance exceeds 6.2%, subject to a high water mark. The Performance Fee is determined as of December 31 of each year in accordance with the calculation outlined in the Prospectus. There was no Performance Fee earned for the year ended December 31, The Bank of Nova Scotia has a significant interest in CI Financial Corp., the parent company of the Manager. The Bank of Nova Scotia is also the Counterparty to the Forward Agreement and the only Unitholder of Marret MSIF Trust. 6 MARRET MULTI-STRATEGY INCOME FUND

7 FINANCIAL HIGHLIGHTS FOR THE PERIODS ENDED DECEMBER 31, 2011 TO DECEMBER 31, 2013 The following tables show selected key financial information about the Fund that are intended to help you understand the Fund s financial performance for the periods ended December 31. The inception of the Fund was March 18, In the year a fund is established, period represents inception to December 31 of that year. In all other cases, period represents year ended December 31. The Fund s Net Assets per Unit (1) Period ended Dec 31, 2013 Period ended Dec 31, 2012 Period ended Dec 31, 2011 (2) Class A Class F Class A Class F Class A Class F Net Assets, beginning of period $ $ $ $ $ $ Issue expense $ - $ - $ - $ - $ (0.71) $ (0.32) Net Assets, beginning of period (net of issue expense) $ $ $ $ $ $ Increase / (decrease) from operations: Total revenue $ - $ - $ - $ - $ - $ - Total expenses $ (0.11) $ (0.07) $ (0.11) $ (0.07) $ (0.10) $ (0.06) Realized gains / (losses) for the period $ 0.08 $ 0.10 $ (0.02) $ (0.02) $ (0.02) $ (0.02) Unrealized gains / (losses) for the period $ 0.64 $ 0.63 $ 0.40 $ 0.41 $ (0.41) $ (0.45) Total increase / (decrease) from operations (3) $ 0.61 $ 0.66 $ 0.27 $ 0.32 $ (0.53) $ (0.53) Distributions: From income $ - $ - $ - $ - $ - $ - From dividends $ - $ - $ - $ - $ - $ - From capital gains $ - $ - $ - $ - $ - $ - Return of capital $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.45 $ 0.45 Total Distributions (4) $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.45 $ 0.45 Net Assets, end of period $ $ $ $ $ $ (1) This information is derived from the Fund s audited annual financial statements. The Net Assets per unit presented in the financial statements differs from the Net Asset Value calculated for Fund pricing purposes. The Net Assets per unit is the difference between the aggregate value of the assets of the Fund and the aggregate value of the liabilities on that date and includes the valuation of securities at bid prices for securities held long and at ask prices for securities held short divided by the number of units then outstanding. (2) Information presented is for the period from March 18, 2011 to December 31, (3) Net Assets per unit and distributions per unit are based on the actual number of units outstanding at the relevant time. The increase (decrease) in Net Assets from operations per unit is based on the weighted average number of units outstanding over the period. (4) Distributions to unitholders are based on the number of units outstanding on the record date for each distribution and were paid in cash. MARRET MULTI-STRATEGY INCOME FUND 7

8 Ratios and Supplemental Data (based on Net Asset Value) Period ended Dec 31, 2013 Period ended Dec 31, 2012 Period ended Dec 31, 2011 (1) Class A Class F Class A Class F Class A Class F Total Net Asset Value $ 32,137,151 $ 4,067,009 $ 103,867,064 $ 11,700,057 $ 152,731,119 $ 17,356,217 Number of Units Outstanding 3,205, ,982 10,362,710 1,117,490 14,757,837 1,617,434 Management Expense Ratio ("MER") (2) 4.64% 4.16% 4.71% 4.26% 11.10% 7.34% Trading Expense Ratio (3) 0.33% 0.33% 0.33% 0.33% 0.40% 0.40% Portfolio Turnover Rate (4) 0.00% 0.00% 0.00% 0.00% 3.59% 3.59% Net Asset Value per Unit $ $ $ $ $ $ Closing Market Price $ 9.57 N/A $ 9.64 N/A $ N/A (1) Information presented is for the period from March 18, 2011 (Fund inception) to December 31, (2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) of the Fund and the Trust for the stated period, including interest expense and issuance costs, and is expressed as an annualized percentage of daily average net asset value of 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 of the Fund and the Trust during the period. (4) The Fund s portfolio turnover rate indicates how actively the Fund s Portfolio Manager manages its portfolio investments. 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 year. The higher the Fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year. There is not necessarily a relationship between a high turnover rate and the performance of the Fund. Portfolio turnover rate is calculated by dividing the lesser of the cost of purchases and the proceeds of sales of portfolio securities for the period, excluding cash and short-term investments maturing in less than one year, by the average market value of investments during the period. The portfolio turnover ratio for Marret MSIF Trust for the period ended December 31, 2013 was 1,708.25% (2012-2,526.88%, ,600.66%) Management Expense Ratio The calculation of the management expense ratio ( MER ) requires that all items included in the expenses, as presented in the statement of operations, be included in this calculation. As the Fund invests both long and short, the expenses in the statement of operations include interest expense (on cash borrowings), security borrowing fees, interest expense on short positions, and dividend expense on short positions. These expenses relate to execution of the investment strategy, not the administrative efficiency of the Fund, and increase the MER relative to funds that invest long only. The MER for the Fund excluding these items and issue expenses during the period was 2.66% for Class A ( %, %) and 2.18% for Class F ( %, %). The MER also includes performance fees in years that a performance fee was earned by the Manager. The MER for the period excluding execution expenses and performance fees was 2.66% for Class A ( %, %) and 2.18% for Class F ( %, %) as there were no performance fees earned. Marret MSIF Trust Portfolio Turnover Rate The Portfolio Turnover Rate disclosed in Note 4 in the table above is calculated in accordance with the prescribed methodology. Because the Marret MSIF Trust invests both long and short, the figure arrived at above does not result in a Turnover Ratio that is indicative of the level of trading activity that takes place within Marret MSIF Trust. The is because the numerator for the calculation includes portfolio trading activity related to both long and short positions, while the denominator for the calculation is based on the value of portfolio securities (which we have interpreted to be long positions less short positions). Since the Fund invests long and short, it is the Manager s view that a more appropriate denominator is the average long positions plus the absolute value of short positions ( Gross Assets ). If Gross Assets are used as the denominator, the Marret MSIF Trust s Portfolio Turnover Ratio for the year ended December 31, 2013 was % ( %, %). 8 MARRET MULTI-STRATEGY INCOME FUND

9 PAST PERFORMANCE This section shows the historical performance for the Fund for the periods ended December 31. Historical performance is based on the change in Net Asset Value per unit, assuming reinvestment of all distributions. Management fees and operating expenses have been taken into account before calculating performance. Historical performance does not take into account the potential impact on returns of purchases, redemptions, distribution fees or other optional charges or income taxes payable by an investor. Keep in mind that past performance does not necessarily indicate how the Fund will perform in the future. Year-by-Year Returns The bar charts show the Fund s total return for the overall Portfolio, long Portfolio positions and short Portfolio positions for the period from inception to December 31, The charts show, in percentage terms, how an investment held on the first day of each period would have changed by the last day of the period. Class A Units 15% Overall Performance 10% Long Positions 10% 5% 2.7% 6.2% 5% 2.9% 5.7% 0% 0% -5% -10% -10.0% -5% -3.9% -15% % Short Positions 10% 5% 0% -0.2% 0.5% -5% -6.1% -10% (1) Period from March 18, 2011 (Fund inception) to December 31, MARRET MULTI-STRATEGY INCOME FUND 9

10 Class F Units Overall Performance Long Positions 15% 10% 10% 7.1% 6.6% 5% 3.3% 5% 3.5% 0% -5% 0% -0.7% -10% -6.8% -5% -15% % Short Positions 10% 5% 0% -0.2% 0.5% -5% -6.1% -10% (1) Period from March 18, 2011 (Fund inception) to December 31, MARRET MULTI-STRATEGY INCOME FUND

11 Benchmark Indices The S&P/TSX Composite Total Return Index ( TSX ), S&P 500 Total Return Index ( S&P 500 ), BofA Merrill Lynch U.S. High Yield Master II Index hedged to CAD ( High Yield Index ), DEX Mid-Term Corporate Bond Index ( DEX Mid Corp Index ), BofA Merrill Lynch Canadian Corporate Index ( Merrill Corporate Index ), S&P/TSX Composite Energy Total Return Index ( TSX Energy Index ) and S&P/TSX Materials Total Return Index ( TSX Materials Index ). The TSX tracks the performance of approximately 300 large-cap stocks listed on the TSX and the S&P 500 tracks 500 large-cap U.S. stocks representing all major industries. The High Yield Index is a broad-based index that tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The DEX Mid Corp Index which comprises semi-annual pay fixed rate bonds denominated in Canadian dollars, with remaining terms greater than 5 years and less than 10 years, rated BBB or higher, issued by Canadian Federal, Provincial or Territorial corporations. The Merrill Corporate Index tracks the performance of CAD denominated investment grade corporate, securitized and collateralized debt publicly issued in the Canadian domestic market. The TSX Energy Index is a float adjusted market capitalization weighted index, the constituents of which are a subset of the constituents of the TSX that have been classified as part of the energy sector according to the Global Industry Classification Standard ( GICS ). The TSX Materials Index is a floated adjusted capitalization weighted index, the constituents of which are a subset of the constituents of the TSX that have been classified as part of the materials sector according to GICS. Annual Compound Returns The following table shows the Fund s annual compound return for each period indicated, compared with TSX and the S&P 500. TSX and S&P 500 are calculated without the deduction of fees and fund expenses, whereas the performance of the Fund is calculated after deducting such fees and expenses. December 31, 2013 Since Inception (1) Class A Class F Class A Class F Marret Multi-Strategy Income Fund - Overall (2) 6.2% 7.1% -0.7% 1.1% Long positions (3) 5.7% 6.6% 1.5% 3.1% Short positions (4) 0.5% 0.5% -2.2% -2.2% S&P/TSX Composite Total Return Index 13.0% 13.0% 2.7% 2.7% S&P 500 Total Return Index (5) 33.2% 33.2% 17.3% 17.3% (1) Period from March 18, 2011 (Fund inception) to December 31, (2) Based on Net Asset Value per unit and assuming that distributions made by the Fund on its units in the periods shown were reinvested (at Net Asset Value per unit) in additional units of the Fund. (3) Expenses including issue costs have been netted against long performance. (4) Annual compound return for short positions does not include foreign currency hedging gains/losses. (5) Hedged to the Canadian dollar. MARRET MULTI-STRATEGY INCOME FUND 11

12 SUMMARY OF INVESTMENT PORTFOLIO As at December 31, 2013 Portfolio Composition Top 25 Holdings (1) Category Percentage of Net Asset Value Security Name Percentage of Net Asset Value High Yield Corporate Debt Long 22.3% Long Positions High Grade Corporate Debt Long 19.5% Cash and Cash Equivalents 65.6% Equities Long 8.5% Cline Mining Corp 10% 15Jun % Government Debt Long 1.0% Royal Bk Scotlnd Grp Plc 6% 19Dec % ETFs Long 0.8% Casino Guichard Perrachon SA 4.875% 01Jan % Business Trust Long 0.4% Viterra Inc 6.406% 16Feb % Bank Loans Long 0.2% Raiffeisen Bank Intl 6% 16Oct % Convertible Debt Long 0.1% Atlantia SpA 2.875% 26Feb % Business Trust Short -0.0% Canadian Government 5% 01Jun % High Grade Corporate Debt Short -0.2% Heathrow Funding Ltd 4.625% 31Oct % High Yield Corporate Debt Short -0.2% Telecom Italia SPA 4.875% 25Sep % Equities Short -1.7% Calfrac Holdings LP 7.5% 01Dec A 0.7% ETFs Short -1.7% IMSCI D 5.276% 12Feb % Government Debt Short -17.6% Sherritt International C 7.5% 24Sep % Viterra Inc 5.95% 01Aug A 0.6% Cash and Cash Equivalents 65.6% Aeroporti Di Roma SPA 3.25% 20Feb % Other assets (liabilities) 2.7% Short Positions Total Net Asset Value (in $ millions) Canadian Government 4% 01Jun % Bundesrepub. Deutschland 2.5% 04Jan % Bundesrepub. Deutschland 2% 15Aug % Canadian Government 3.5% 01Jun % Canadian Government 2% 01Jun % US Treasury N/B 2.75% 15Nov % Canadian Government 3.75% 01Jun % Canadian Government 1.25% 01Sep % UK TSY 4 1/4% % 07Dec % Bundesrepub. Deutschland 2.25% 04Sep % Total Portfolio Longs 54.0% Total Portfolio Shorts -22.3% (1) Through the Forward Agreement, the Fund is exposed to the value of the investment portfolio of Marret MSIF Trust. A summary of the investment portfolio of Marret MSIF Trust is included above. (2) The top 25 holdings of Marret MSIF Trust, as a percentage of the Net Asset Value of Marret MSIF Trust, have been presented in accordance with NI The investment portfolio may change due to ongoing portfolio transactions of the investment fund. Quarterly updates are available within 60 days of each quarter end. The prospectus and other information about Marret MSIF Trust are available on the internet at and at 12 MARRET MULTI-STRATEGY INCOME FUND

13 MARRET MULTI-STRATEGY INCOME FUND 13

14 Marret Asset Management Inc. 200 King Street West Suite 1902 Toronto, ON M5H 3T MARRET MULTI-STRATEGY INCOME FUND