Semi-Annual Management Report of Fund Performance

Transcription

1 BMO NESBITT BURNS (the Fund ) June 30, 2012 Portfolio Manager: BMO Asset Management Inc., Toronto, Ontario This semi-annual management report of fund performance contains financial highlights, but does not contain semi-annual or annual financial statements of the Fund. If the semi-annual or annual financial statements of the Fund do not accompany the mailing of this report, you can get a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling , by writing to us at BMO Nesbitt Burns Inc., 1 First Canadian Place, 37th Floor, P.O. Box 150, Toronto, Ontario, M5X 1H3 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 and/or quarterly portfolio disclosure. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Results of Operations The Fund s Class A units returned -0.5 net of expenses, whereas the Fund s blended benchmark of 55.0% of the S&P/TSX Composite Index (S&P/TSX) and 45.0% of the DEX Universe Bond Index (DEX) returned 0.2% for the period ended June 30, It was a volatile review period. After a strong start to the year, most stock markets had their worst performance in May 2012 since September 2011 as investors digested weak global economic data and the ongoing sovereign and banking crisis in Europe. In this challenging environment, it is not surprising that investors sought safety in less risky assets like Government of Canada bonds. Demand produced a rally that saw the 10-year Government of Canada bond yield move lower by about one fifth of a percent over the first half of This had the effect of flattening the yield curve as the relationship between the yields generated by 2-year and 10-year Government of Canada bonds changed when the 10-year bond s yield moved lower. Relative to its benchmark, the Fund contained an overweight in the middle of the yield curve and this was beneficial for relative performance for the review period. Over the review period, corporate bond spreads were narrower by about one-fifth of a percent and provincial bond spreads were relatively unchanged. The Fund held an underweight position in corporate bonds and retained a higher credit rating relative to its benchmark. These were defensive measures but had the effect of detracting from performance as corporate bonds outperformed their Government of Canada bond benchmarks. Within the Fund s equity portion, the Portfolio Manager held an overweight position in Consumer Staples and Health Care which contributed to performance, as these two sectors were among the strongest performing sectors for the review period. In particular, the Fund held a large position in Alimentation Couche-Tard Inc. which rose over 40%. The Fund s underweight to cyclical sectors such as Materials and Energy also contributed to performance, as these two sectors declined by 10.7% and 7.7%, respectively. The Fund benefited from its holding in Agrium Inc. (up 32%) and CGI Group Inc. (up 27%). The Fund held four relatively large overweight positions in the Energy sector that detracted from returns. Celtic Exploration Ltd., Canadian Natural Resources Limited, Veresen Inc. and Niko Resources Ltd. all declined more than 20%. During the period, the Fund made a minor shift away from equities and finished the period with a slight bias toward bonds. The Portfolio Manager s asset mix decision was neutral to performance. Over the six month period, the S&P/TSX and DEX Universe Bond Index returned -1.5% and 2.0%, respectively.

2 For information on the Fund s longer-term performance and composition, please refer to the Past Performance section and Summary of Investment Portfolio section of this report. Recent Developments The Portfolio Manager maintains the view that low interest rates across the yield curve will limit the upside for bonds in The North American economy should remain stable enough that investors will gradually reduce their bond holdings as the flight-to-quality effects experienced this year abate later this year or early next. Such a reduction in bond holdings will put downward pressure on bond prices and upward pressure on their yield. The Portfolio Manager believes the upward pressure on interest rates will be modest, but expects interest rate sensitivity (duration) will be lower than that of its benchmark. While interest rates have some room to move higher, the Portfolio Manager believes that in light of the global uncertainties, particularly in Europe, central banks will be reluctant to increase the interest rate for overnight money (the interest rate they administer). A combination of longer term interest rates rising and overnight rates relatively fixed, could result in the yield curve steepen and as a result, bonds in the mid-term sector of the term-to-maturity spectrum will be favoured. The spread on provincial and corporate bonds remains at a level where the Portfolio Manager feels that caution is warranted and that investors are not being adequately compensated for the increased credit risk of provincial and corporate debt. The Fund will be constructed so that it is underweight these two sectors relative to the benchmark, with a higher average credit rating than that of the benchmark. The Portfolio Manager has taken a conservative approach to managing the Fund over the past six months. Deteriorating global economic conditions and lack of consumer spending highlights the importance of government action toward achieving a sustained recovery in a deleveraging world. The Portfolio Manager believes that future monetary or fiscal action is data dependent. The Fund is well positioned to capitalize on good risk-reward opportunities as they arise. Transition to International Financial Reporting Standards In March 2011, the Canadian Accounting Standards Board ( AcSB ) amended its mandatory requirement for all Canadian publicly accountable enterprises to prepare their financial statements in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ), permitting investment companies, which includes mutual funds, to defer the adoption of IFRS. On December 12, 2011, the AcSB decided to extend by one year the deferral from fiscal years beginning on or after January 1, 2013 to January 1, The deferral of the mandatory IFRS changeover date to January 1, 2014 is to prevent Canadian investment companies and segregated accounts of life insurance enterprises from having to change their current accounting treatment for controlled investees while the IASB finalizes its proposed investment entities standard. Under IFRS 10 Consolidated Financial Statements, investment companies are required to consolidate their controlled investments. The IASB has issued an exposure draft that will exempt entities that qualify as investment entities from consolidating their controlled investments and requires such entities to record, with very limited exceptions, all of their investments at fair value through profit or loss account. This exposure draft is still under review. Canadian generally accepted accounting principles ( GAAP ) permits investment companies to fair value their investments regardless of whether those investments are controlled. The AcSB will continue to monitor the need to revise the IFRS changeover date for these entities. The Fund has not elected to early adopt IFRS, therefore it will adopt IFRS effective January 1, The Fund expects to report its financial results for the six month period ending June 30, 2014 prepared on an IFRS basis. The Fund will also provide comparative data on an IFRS basis, including an opening balance sheet as at January 1, Further revisions by the AcSB to the IFRS adoption date for investment companies are possible. The Manager has not identified any changes that will impact net asset value ( NAV ) per unit as a result of the changeover to IFRS. However, this determination is subject to change as the Manager finalizes its assessment of potential IFRS differences and as new standards are issued by the IASB prior to the Fund s adoption of IFRS. The criteria contained within the IAS 32 Financial Instruments: Presentation standard may require unitholders equity to be classified as a liability within the Fund s Statement of Net Assets, unless certain conditions are met. The Manager is currently assessing the Fund s unitholder structure to confirm classification. Related Party Transactions BMO Nesbitt Burns Inc., an indirect, wholly-owned subsidiary of Bank of Montreal, is the Manager (the Manager ), and principal distributor 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 (a Related Party ). Portfolio Manager BMO Nesbitt Burns Inc., as Manager of the Fund, has hired BMO Asset Management Inc. ( BMO AM ), a Related Party, to provide investment advice and make investment decisions for the Fund s investment portfolio. BMO AM receives an investment advisory fee based on assets under management that is calculated daily and payable monthly. BMO AM is paid by BMO Nesbitt Burns Inc. and not by the Fund. Distribution Services BMO Nesbitt Burns Inc. sells units of the Fund through its sales representatives. The Manager pays trailer fees to these sales

3 representatives based on the amount of assets held in the investor s account and additionally, in some cases, on the amount of the initial purchase. There may be other fees and expenses payable in respect to the operation of the investor s account with BMO Nesbitt Burns Inc. that could affect the investment in units of the Fund, if the investor receives special services, such as switch fees and registered plan fees. The amount of these fees should be discussed with your sales representative at the time of purchase or switch and when your account or registered tax plan is established. Unitholder Services The Fund is provided with certain facilities and services by Related Parties. Unitholder services, such as fund accounting, record keeping and purchase/redemption order processing, are provided by the Bank of Montreal Ireland p.l.c. and BMO AM, in its capacity as the Fund s Registrar. Fees associated with these services are paid by the Manager and charged to the Fund. The fees charged to the Fund during the period were as follows: Six-month period Six-month period ended June 30, 2012 ended June 30, 2011 Unitholder Servicing Fees $26,582 $38,917 Buying and Selling Securities Investments in Bank of Montreal Common Shares, Related-Party Underwritings and Trades in Debt Securities with a Related Entity, Trading as Principal During the period, the BMO Nesbitt Burns Inc. relied on an approval and standing instruction provided by the Fund s independent review committee ( IRC ) with respect to the following related party transactions: (a) investments in common shares of Bank of Montreal ( BMO ), an affiliate of BMO Nesbitt Burns Inc., (b) investments in a class of equity securities of an issuer during the period of distribution of those securities to the public and/or the 60- day period following the distribution period where BMO Nesbitt Burns Inc. acted as an underwriter in the distribution; and (c) trades in debt securities in the secondary market with BMO Nesbitt Burns Inc., who is trading with the Fund as principal (each, a Related Party Transaction ). In accordance with the IRC s approval and standing instruction, in making a decision to cause the Fund to make a Related Party Transaction, BMO Nesbitt Burns Inc. and the Portfolio Manager of the Fund are required to comply with the Manager s written policies and procedures governing the Related Party Transaction and report periodically to the IRC, describing each instance that BMO Nesbitt Burns Inc. and/or the Portfolio Manager relied on the approval and standing instruction and their compliance or non-compliance with the governing policies and procedures. The governing policies and procedures are designed to ensure the Related Party Transaction (i) is made free from any influence of BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of BMO and/or BMO Nesbitt Burns Inc. and without taking into account any considerations relevant to BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of BMO and/or BMO Nesbitt Burns Inc, (ii) represents the business judgment of the portfolio manager, uninfluenced by considerations other than the best interests of the Fund, and (iii) achieves a fair and reasonable result for the Fund. Management Fees As Manager of the Fund, BMO Nesbitt Burns Inc. is responsible for the day-to-day management of the business and operations of the Fund. It monitors and evaluates the Fund s performance, pays for the investment advice provided by BMO AM and provides certain administrative services required by the Fund. As compensation for its services, BMO Nesbitt Burns Inc. is entitled to receive a management fee payable monthly, calculated based on the daily net asset value of each class of the Fund at the maximum annual rate set out in the below table. As a percentage of Management Fees General Annual Administration Management Dealer Investment Fee Rate* Compensation Advice and Profit % % % Class A Units Class F Units * No service fees are payable in respect of Class F units.

4 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 CLASS A Period ended Periods ended December 31 June 30, ($) ($) ($) ($) ($) ($) Net Assets, beginning of year Increase (decrease) from operations: Total revenue Total expenses (0.13) (0.27) (0.25) (0.23) (0.24) (0.26) Realized gains (losses) for the period (0.40) (0.40) 1.08 Unrealized gains (losses) for the period (0.34) (0.92) (2.94) (0.32) Total increase (decrease) from operations 3 (0.06) (0.60) (3.13) 0.91 Distributions: From income (excluding dividends) 0.06 From dividends From capital gains 0.53 Return of capital Total annual distributions Net Assets, end of period $13.13 $13.32 $14.09 $12.98 $11.70 $14.90 CLASS F Period ended Periods ended December 31 June 30, ($) ($) ($) ($) ($) ($) Net Assets, beginning of year Increase (decrease) from operations: Total revenue Total expenses (0.06) (0.13) (0.11) (0.13) (0.02) Realized gains (losses) for the period (0.07) (0.56) Unrealized gains (losses) for the period (0.34) (0.92) Total increase (decrease) from operations (0.49) (0.16) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital Total annual distributions Net Assets, end of period $13.61 $13.79 $14.46 $13.27 $ ) This information is derived from the Fund s audited annual financial statements and unaudited June 30, 2012 semi-annual financial statements. The net assets per unit presented in the financial statements differs from the net asset value per unit calculated for Fund pricing purposes. An explanation of these differences can be found in the notes to the Fund s financial statements. 2) The provisions of Section 3855 have been applied retroactively without restatement of prior periods. Accordingly the opening Net Assets for the period ended December 31, 2007 has been adjusted. 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 units. 4) Distributions were paid in cash or reinvested in additional units of the Fund, or both, where applicable. 5) The information shown in this column is for the period beginning October 31, 2008 (the class inception date) and ending December 31, 2008.

5 Ratios and Supplemental Data CLASS A Period ended Periods ended December 31 June 30, Total net assets (000 s) 1 $34,410 $40,151 $52,351 $52,220 $47,312 $56,231 Number of units outstanding 1 2,615,951 3,009,395 3,710,872 4,017,943 4,034,893 3,737,357 Management expense ratio % 1.85% 1.85% 1.83% 1.75% 1.73% Management expense ratio before waivers or management absorptions % 1.85% 1.85% 1.83% 1.75% 1.73% Portfolio turnover rate % 84.28% 56.62% 81.62% % % Trading expense ratio % 0.07% 0.02% Net asset value per unit $13.15 $13.34 $14.11 $13.00 $11.73 $14.93 CLASS F Period ended Periods ended December 31 June 30, Total net assets (000 s) 1 $367 $362 $350 $172 $16 Number of units outstanding 1 26,960 26,198 24,211 12,920 1,330 Management expense ratio % 0.83% 0.80% 0.97% 0.98% Management expense ratio before waivers or management absorptions % 0.83% 0.80% 0.97% 0.98% Portfolio turnover rate % 84.28% 56.62% 81.62% % Trading expense ratio % 0.07% 0.02% Net asset value per unit $13.63 $13.81 $14.47 $13.29 $ ) This information is provided as at June 30 or December 31 of the period shown, as applicable. 2) Management expense ratio 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. In the period a fund is established, the management expense ratio is annualized from the date of inception to December 31. BMO Nesbitt Burns may absorb certain expenses or waive certain fees otherwise payable by a class. In doing so, Nesbitt Burns attempts to maintain the overall MER of the Fund at a relatively consistent level. Nesbitt Burns may discontinue the absorption or waiver at any time. 3) The Fund s portfolio turnover rate indicates how actively the Fund s Portfolio Adviser 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 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 rate is calculated based on the lesser of purchases or sales of investments divided by the average market value of the portfolio investments, excluding short-term investments. 4) The trading expense ratio represents the total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. 5) The information shown in this column is for the period beginning October 31, 2008 (the class inception date) and ending December 31, 2008.

6 PAST PERFORMANCE CLASS A 20.00% General The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional units of the Fund and is based on the net asset value of the Fund % 0.00% % 3.13% % 8.98% % 10.06% 5.70% % 9.69% * (0.49%) (4.29%) 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, how the Fund has performed in the past does not indicate how it will perform in the future. The Fund offers more than one class and the class returns may differ for a number of reasons, including if the class was not issued and outstanding for the entire reporting period and because of the different levels of management fees payable by each class. Year-by-Year Returns The following bar charts show the performance for each class of the Fund for each of the financial years shown. The charts show in percentage terms how much an investment made on the first day of each financial year would have increased or decreased by the last day of the financial year % (20.13%) CLASS F 20.00% 13.34% 10.83% 10.00% % 0.00% (0.83%) * (3.25%) % * For the six-month period ended June 30, For the period beginning November 1, 2002 to December 31, For the period beginning October 31, 2008 to December 31, 2008.

7 SUMMARY OF INVESTMENT PORTFOLIO As at June 30, 2012 Portfolio Allocation % of Net Asset Value Government and Government Guaranteed Bonds 25.9 Financials 15.7 Energy 13.6 Materials 10.6 Corporate Bonds 8.2 Provincial Government Bonds 8.2 Money Market Investments 4.7 Industrials 4.0 Telecommunication Services 4.0 Consumer Staples 2.7 Consumer Discretionary 2.3 Health Care 1.6 Information Technology 1.5 Cash/Receivables/Payables (3.0) Top 25 Holdings % of Net Asset Value Government of Canada, 3.500%, June 1, Government of Canada, 3.000% June 1, Toronto-Dominion Bank 3.7 Bank of Nova Scotia 3.5 Suncor Energy Inc. 3.1 Government of Canada, 3.500%, June 1, TransCanada Corporation 3.1 Province of Quebec, 5.500%, December 1, Government of Canada, 4.000%, June 1, Telus Corporation 2.4 Government of Canada, 4.250%, June 1, Cenouvus Energy Inc. 2.2 Government of Canada, 5.750%, June 1, Government of Canada Treasury Bill, October 25, Veresen Inc. 1.9 Brookfield Asset Management, Class A 1.7 Hospital for Sick Children, 5.217%, December 16, Government of Canada Treasury Bill, September 13, Alimentation Couche-Tard Inc., Class B 1.7 Agrium Inc. 1.7 Government of Canada, 8.000%, June 1, Human Genome Sciences Inc. 1.6 Bell Aliant Inc. 1.5 Potash Corporation of Saskatchewan Inc. 1.5 Canadian Imperial Bank of Commerce 1.4 Top holdings as a percentage of total net asset value 64.1 Total Net Asset Value $34.8 million The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

8 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 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 and the risks detailed from time to time in BMO Nesbitt Burns Group of 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 Nesbitt Burns 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 Nesbitt Burns Inc. 1 First Canadian Place, 37th Floor, P.O. Box 150 Toronto, Ontario M5X 1H3 contact.centre@bmonb.com BMO (M-bar roundel symbol) is a registered trade-mark of Bank of Montreal, used under licence. Nesbitt Burns is a registered trade-mark of BMO Nesbitt Burns Corporation Limited, used under licence.