Management Report on Fund Performance

Transcription

1 Management Report on Fund Performance This management report of fund performance of Big 8 Split Inc. (the Company ) contains financial highlights but does not contain the complete financial statements of the Company. This report should be read in conjunction with the financial statements and notes thereto for the year ended December 15, You can get a copy of the interim or annual financial statements at your request, and at no cost, by calling , by writing to us at 25 Price Street, Suite 500, Toronto, Ontario M4W 1Z1, or by visiting our website located at or SEDAR at Securityholders may also contact us using one of these methods to request a copy of the Company s financial statements, proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure when that information becomes available. Investment Objective and Strategies The Company holds a portfolio (the Portfolio ) of publicly listed common shares (the Portfolio Shares ) of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation and Sun Life Financial Inc. in order to generate quarterly fixed cumulative preferential dividends of $ per share for the holders of the Company s Class D Preferred Shares while providing the holders of the Class D Capital Shares with a leveraged investment, the value of which is largely linked to the changes in the market price of the Portfolio Shares. Holders of the Class D Capital Shares will also receive, subject to the prior rights of preferred shareholders, excess distributions, if any, after payment of all the expenses of the Company and the dividends on the Class D Preferred Shares. The Company only trades the Portfolio Shares in limited circumstances as described in the Company s original prospectus. As such, the Portfolio Shares are not actively traded and the Company can be considered a passive investment vehicle. Risk Holders of the Class D Capital Shares are exposed to a leveraged return based on the performance of the underlying Portfolio. In the event of a decrease in the value of the Company s underlying investment in the Portfolio Shares, this leverage will work to the disadvantage of the holders of the Class D Capital Shares. The leverage on the Class D Capital Shares is approximately 1.83 (based on a Net Asset Value per Unit ( NAV ) of $27.44 as at December 15, 2016) in comparison with 2.21 as at December 15, 2015 (based on a NAV of $22.69 as at December 15, 2015). The value of the Class D Preferred Shares is dependent on the value of the Portfolio. Downside protection on the Class D Preferred Shares is the percentage by which the net assets can decline and still cover the $10.00 redemption price of a Class D Preferred Share. Downside protection on the Class D Preferred Shares increased slightly to 63.6% at December 15, 2016 (December 15, %). The Dominion Bond Rating Service has assigned rating of Pfd-2 to the Class D Preferred Shares as of November 2016, an upgrade from Pfd-2 (low) to the Class D Preferred Shares from previous year.

2 Results of Operations As a result of the Company s Special Annual Retraction on December 15, 2016 ( 2016 Retraction ), an assessment of the financial performance comparison on a Unit basis is considered to be more relevant than on a dollar basis which has been provided for informational purposes only. A Unit consists of one Class D Preferred Share and one Class D Capital Share. Dividend income per Unit for the year ended December 15, 2016 compared to prior period increased by 7.30%, reflecting the increasing level of dividend income received per unit from Portfolio Shares. Total operating expenses per Unit were $0.22 compared to $0.19 prior period, an increase of $0.04 or 15.8% primarily due to the lower Unit base. Class D Preferred Share Dividend - Holders of Class D Preferred Shares are entitled to receive quarterly fixed cumulative dividends equal to $ per Class D Preferred Share. For the year ended December 15, 2016, the Company declared dividends of $532,741 or $ per Class D Preferred Share (Year ended December 15, 2015 $655,361 or $ per Class D Preferred Share). Class D Capital Share Dividend - For the year ended December 15, 2016, the Company declared and paid dividends of $203,625 or $ per Class D Capital Share (Year ended December 15, $278,892 or $ per Class D Capital Share). This is a decrease of 10.18% compared to December 15, 2015, predominantly due to increased part IV taxes in The available loss carry forwards were generally exhausted in the prior year. As at December 15, 2016, net assets attributable to holders of redeemable Class D Capital Shares per share was $17.44 compared to $12.69 as at December 15, 2015, reflecting an increase of 37.43%, primarily due to an increase in the market value of the Portfolio Shares. The total fair value of the Company s investment portfolio as at December 15, 2016 was $28,242,833 (December 15, $26,738,757). Recent Developments 2016 Special Annual Retraction Due to the Company s Special Annual Retraction on December 15, 2016, 11,385 Class D Capital Shares and Class D Preferred Shares were retracted for cash and 138,900 Class D Capital Shares and Class D Preferred Shares were retracted for a prorated share of the Portfolio Shares. The Company paid $315,566 in cash and transferred Portfolio Shares with a total value of $3,649,621 to Class D Capital Shareholders Special Annual Retraction Due to the Company s Special Annual Retraction on December 15, 2015, 4,400 Class D Capital Shares and Class D Preferred Shares were retracted for cash and 268,089 Class D Capital Shares and Class D Preferred Shares were retracted for a prorated share of the Portfolio Shares. The Company paid $131,856 in cash and transferred Portfolio Shares with a total value of $6,347,611 to Class D Capital Shareholders. Page 2

3 Related Party Transactions Management fees On September 19, 2014, Timbercreek assumed the role of Administrator and Investment Manager of the Company and administers the ongoing operations pursuant to the original Administration Agreement with TDSCI, which now applies to Timbercreek, dated December 15, As part of the reorganization of the Company on December 15, 2011, the monthly management fee payable to the Administrator, beginning December 16, 2011, was amended to 1/12 of 0.25% of the market value of the Portfolio Shares. The total management fee paid to the Administrator for the year ended December 15, 2016 was $77,171 (2015 $99,684). As at December 15, 2016, accrued liabilities include an amount of $939 payable to the Administrator (2015 $51,486) for the management fee. Independent Review Committee fees The total remuneration paid to members of the Independent Review Committee for the year ended December 15, 2016 was $23,336, which comprised of $14,250 related to services incurred in the current fiscal year and $9,086 related to services incurred in the previous fiscal year (2015 $7,500). Directors fees The total Directors fees paid for the year ended December 15, 2016 were $40,622 (2015 $34,500). Financial Highlights The following table shows selected key financial information about the Company and is intended to help you understand the Company s financial performance for each of the fiscal periods presented below. For the year ended December 15, 2016 For the year ended December 15, 2015 For the year ended December 15, Net Assets per Unit, beginning of period (1). $22.69 $22.89 $21.02 Increase (decrease) from operations: Total rev enue Total ex penses (0.33) (0.28) (0.18) Realized gains for the period Unrealized gains (losses) for the period (1.24) 0.90 Total increase (decrease) from operations (2) Distributions: From div idends on Preferred Shares (3)... (0.45) (0.45) (0.45) From div idends on Capital Shares.. (0.17) (0.19) (0.22) Total Distributions (2) (3)... (0.62) (0.64) (0.67) Share Issue Costs (4) Net Assets per Unit, end of the period $27.44 $22.69 $22.89 Redemption Value per Class D Preferred Share (10.00) (10.00) (10.00) Net Assets per Class D Capital Share $17.44 $12.69 $12.89 (1) This information is derived from the Company s annual audited financial statements. (2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. (3) All distributions were paid in cash. (4) During fiscal 2014, issue costs were reduced by $57,545 due to an over-accrual on the issuance of Class D Preferred Shares. (5) The Company has presented financial highlights since 2014 as the Company went through a capital reorganization on December 13, The capital reorganization resulted in the redemption of all of the Class A Capital Shares, Class B Preferred Shares and Class C Preferred Shares and the issuance of Class D Preferred Shares and Class D Capital Shares. Page 3

4 Ratios and Supplemental Data Class D Capital Shares As at December 15, As at December 15, As at December 15, Total net asset value (000s) (1) 18,022 15,029 18,779 Number of shares outstanding.. 1,033,583 1,183,868 1,456,357 Management Expense Ratio (excluding Preferred Dividends) (2). 1.67% 1.43% 1.20% Management Expense Ratio (including Preferred Dividends) (2). 5.51% 4.85% 4.69% Portfolio Turnover Rate (3).. n/a n/a n/a Trading Expense Ratio (4). nil nil nil Net asset value per Class D Capital Share (1) Closing Market Price per Class D Capital Share Ratios and Supplemental Data Class D Preferred Shares For the year ended For the year ended For the year ended December 15, 2016 December 15, 2015 December 15, 2014 Total net asset v alue (000s) (1) $10,336 $11,839 $14,564 Number of shares outstanding 1,033,583 1,183,868 1,456,357 Management Ex pense Ratio (2) n/a n/a n/a Portfolio Turnov er Rate (3) n/a n/a n/a Trading Ex pense Ratio (4) nil nil nil Net asset v alue per Class D Preferred Share (1) $10.00 $10.00 $10.00 Closing Market Price per Class D Preferred Share.. $10.47 $10.18 $10.56 (1) Net Asset Value per Class D Capital Share is equal to Net Asset Value attributable to Class D Capital Shares divided by the number of Class D Capital Shares outstanding. Net Asset Value per Class D Preferred Share is represented by its redemption value of $ Net Asset Value is calculated using the closing price. (2) Management expense ratio for Class D Capital Shares is based on the requirements of National Instrument This instrument requires that all split share companies produce an expense ratio which allocates all operating expenses of the Company, all distributions on Class D Preferred Shares and all issuance costs to the Class D Capital Shares and expresses this as an annualized percentage of net assets applicable only to the Class D Capital Shares during the period. The management expense ratio per Class D Capital Share should not be interpreted as the required return necessary for the Company or the Class D Capital Share to cover the operating expenses of the Company. This calculation is based only on a portion of the Company s assets whereas the Company utilizes its entire assets to generate investment returns. Management believes that the base management expense ratio per Unit disclosed in the table above is the most representative ratio in assessing the ongoing efficiency of the administration of the Company, making comparisons to the expense ratios of single unit mutual funds or determining the minimum investment returns necessary by the Company to achieve growth in NAV. (3) The Company was created to acquire and hold the Portfolio Shares and only trades the Portfolio Shares in limited circumstances as described in the prospectus. The Portfolio Shares are not actively traded and the Company can be considered to be a passive investment vehicle. At or shortly before year-end, Portfolio Shares are disposed of on a pro-rata basis to facilitate the Company s special annual retraction, if necessary. As a result, the turnover rate is considered not applicable for these purposes. (4) Trading commissions were paid to fund the special annual retraction and were deducted from the proceeds paid to the retracting shareholders. Trading commissions charged on all other assets were immaterial. Page 4

5 Past Performance Year by Year Returns The following chart shows the total return to shareholders and net asset value of the Company s Class D Capital Shares for each of the fiscal periods presented below, the last business day prior to year-end, indicating, in percentage terms, how much an investment made on the first day of each financial year would have grown or decreased by the last day of each financial year based on the market value including dividends received during the year. The Company has presented year by year fiscal 2014 returns as the Company went through capital reorganization on December 13, Past performance of the Class A Capital Shares, which were retracted in 2013 as part of the capital reorganization, is not an indication of how the Class D Capital Shares will perform in the future. Total Return to Shareholders (1) Net Asset Value Dividend Reinvestment (2) (1) Total Return to Shareholders is the annual change in the market value of Class D Capital Shares and includes dividends received. (2) Includes Total Return to Shareholders and assumes all dividends received are reinvested in Class D Capital Shares. This may not be relevant as the Company is not an open-ended investment fund. Page 5

6 Annual Compound Returns Returns are based on the market value of a Class D Capital Share: One Year Two Years Three Years Big 8 Split Total Return to Capital Shareholders (1)(2) 47.7% 16.3% 8.6% Net Asset Value per Capital Share % 16.3% 16.6% Big 8 Split Total Returns w ith div idend reinv estment (1). 48.0% 16.7% 9.0% S&P/TSX Composite Index. 17.8% 5.4% 5.1% S&P/TSX Composite Financials Sector Index % 9.0% 9.2% (1) Total Return to Shareholders is the annual change in the market value of capital shares and includes dividends received. (2) Includes Return to shareholders and assumes all dividends received are reinvested in Capital Shares. This may not be relevant as the Company is not an open-ended investment fund. Due to the leveraged nature of the Capital Shares, their risk profile is not comparable to the S&P/TSX Composite Index or the S&P/TSX Composite Financials Sector Index. There are no comparable leveraged indices for these purposes. However, the Net Asset Value per Unit, which is unlevered, has been included for comparative purposes against the indices. Neither the indices nor the Unit Value return calculations include the value of dividend distributions. The Capital Share return is very closely related to the return on the Portfolio Shares but actual returns will differ due to operating expenses of the Company, the trading premium/discount on the Capital Shares relative to their Net Asset Value, and the presence of leverage in the form of Preferred Shares. Since the general lackluster performance by the financial sectors of 2015, the financial markets experienced a revival during 2016, especially during fourth quarter rally in the stock market, due to improved outlook with the economy. This resulted in the growth in the market value of common stock of the banks and insurance companies held by Big 8 Split Inc. As a result, the market value of Capital Shares has appreciated, and the total return to shareholders inclusive of the dividend was 47.7%. Summary of Investment Portfolio Below is a summary of the Company s investment portfolio as at December 15, This summary of investment portfolio is unlikely to change significantly due to the investment objectives of the Company. Weekly updates are available on the internet at or by contacting the investor relations at Summary of Investment Portfolio As at December 15, 2016 Amounts Percentage of Net Assets Bank of Montreal 3,803, % The Bank of Nova Scotia 3,279, % Canadian Imperial Bank of Commerce 3,387, % Royal Bank of Canada. 3,617, % Toronto Dominion Bank 3,764, % Great-West Lifeco Inc.. 3,031, % Manulife Financial Corporation 3,434, % Sun Life Financial Inc... 3,924, % 28,242, % Cash.. 236, % Dividends receiv ables. 99, % Prepaid assets % Less: Accrued liabilities (221,055) -0.78% Total Net assets 28,357, % Page 6