2014 Annual Management Report of Fund Performance

Transcription

1 (the Fund ) For the 12-month period ended December 31, (the period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio Manager: BMO Asset Management Inc. (the portfolio manager ) Annual Management Report of Fund Performance This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the Fund. If the annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the annual financial statements at your request, and at no cost, by calling , by writing to us at BMO Investments Inc., 1 First Canadian Place, 43rd Floor, 100 King Street West, Toronto, Ontario, M5X 1A1 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 Investment Objective and Strategies The Fund s objective is to provide long-term growth through capital appreciation, by investing primarily in equities and equity-related securities of companies with small to medium market capitalization located throughout the world. The Fund attempts to achieve its objective by investing in global smaller capitalization companies that are displaying strong growth in earnings or sales. The portfolio manager may frequently buy and sell investments for the Fund while seeking out superior investment opportunities. Risk No changes affecting the overall level of risk associated with investing in the Fund were made during the period. The risks of this Fund remain as discussed in the Fund s most recent simplified prospectus or any amendments and fund facts. Results of Operations During the period, the Fund s total net asset value increased from approximately $108 million to approximately $162 million. Advisor Series units of the Fund returned 17.42% versus the Fund s benchmark, the MSCI World Small Cap Index (C$), which returned 11.92%. Please see the Past Performance section for information on the performance returns of the Fund s other series. During the period, global equity market performance was mixed, surging in the second quarter on the news of betterthan-expected economic data and falling in the third and fourth quarters amid higher market volatility and sharply declining crude oil prices. U.S. markets were strong, with the S&P 500 Index rising in eight of the last 10 quarters. European markets, after posting strong returns in the first two quarters of, most notably in Italy and Spain, weakened later in the year. Though the European Central Bank reduced interest rates during the third quarter, low inflation levels and high debt and unemployment in Europe continued to be a concern. By December, European political elections and various regional uncertainties had led to a year-end sell-off. In Japan, the Nikkei 225 Index fell considerably during the first quarter amid concern about the country s consumption tax increase in April. The rapidly decreasing value of the Japanese yen drove strong performance in Japanese equity markets in the third quarter. Taiwanese equities suffered as increased competition from cheaper Japanese exports compromised performance. Emerging markets performed well over the period, but small-capitalization equities were weak, though they recovered with a strong rally at the end of the year. The Fund s security selection and allocation in the Information Technology, Health Care and Industrials sectors contributed to its performance during the period. Significant individual contributors to the Fund s performance included Pilgrim s Pride Corporation, AmTrust Financial Services, Inc. and Myriad Genetics, Inc. Pilgrim s Pride Corporation shares rose on strong earnings, rising margins, higher pork prices and lower feed costs. AmTrust Financial Services, Inc. had strong earnings results on the expectation that immigration reforms would benefit insurers. Myriad Genetics, Inc. stock rose after positive results for the company s diagnostic test for the recurrence of prostate cancer were published.

2 Exposure to the poorly performing Energy sector detracted from the Fund s performance, as did its underweight position in the global Telecommunication Services sector. Significant individual detractors from performance included SM Energy Company, Pioneer Energy Services Corp. and NTELOS Holdings Corp. SM Energy Company and Pioneer Energy Services Corp. performed poorly on weakening crude oil prices, and NTELOS Holdings Corp. shares fell after the unexpected announcement that they would wind down the company s businesses in the eastern U.S. During the period, the portfolio manager bought and sold a number of the Fund s positions and initiated some new positions. Shares of Sturm, Ruger & Company, Inc., a U.S.- based small arms manufacturer, were eliminated from the portfolio because of softening handgun sales. The portfolio manager also trimmed the Fund s position in Autoneum Holding AG as a result of stronger global automotive sales. A new position was initiated in Splunk Inc., a U.S.-based software company specializing in web-based big data management, as it fits the Fund s technology focus. In addition, the Fund s holdings in Alaska Air Group, Inc. were increased to take advantage of the company s strong margins, increased passenger load and lower fuel costs. The Manager confirms that the Fund did not borrow money during the period. Recent Developments The portfolio manager remains cautious about global equities in the short term, but is optimistic about their performance over the long term. The U.S. economy is expected to continue to perform well in 2015, and the portfolio manager is cautiously optimistic about prospects in Europe and Japan if their supportive monetary policies continue to develop. With its overweight allocation to global growth and cyclical stocks, the portfolio manager believes that the Fund is well positioned for the coming period. Significant Accounting Changes Resulting from our Adoption of IFRS Effective January 1,, the Fund adopted International Financial Reporting Standards ( IFRS ) as its basis of accounting. The annual financial statements for the year ended December 31, are the first set of annual financial statements prepared on an IFRS basis. The adjustments made to reflect the impact of the change from Canadian generally accepted accounting principles ( Canadian GAAP ) to IFRS are presented in note 8 to the financial statements. Key changes to the financial statements as a result of the implementation of IFRS are: Statement of Financial Position replaced the Statement of Net Assets: - The Fund s unitholders investments in the units of the Fund did not qualify for equity classification under IFRS and have been classified as a financial liability for financial reporting purposes. - Classification of financial instruments: derivatives and short positions have been classified as held for trading while all other financial instruments have been designated as fair valued through profit and loss. Following adoption of IFRS by the Fund for financial reporting purposes, the Fund now fair values its investment securities traded on an exchange at close price, which is determined as the price within the bid ask range that represents the best estimate of fair value. Statement of Comprehensive Income replaced Statement of Operations: - The Fund accounts for interest income using the effective interest rate method, rather than the coupon method previously used under Canadian GAAP. Statement of Changes in Net Assets Attributable to Holders of Redeemable Units replaced the Statement of Changes in Net Assets and the Fund now presents a Statement of Cash Flows. Other notable changes to the financial statement notes include additional or enhanced information in the notes to the financial statements, including a more detailed note and reconciliation on the Fund s transition from Canadian GAAP to IFRS. RELATED PARTY TRANSACTIONS BMO Investments Inc., an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ), is the Manager of the Fund. From time to time, the Manager may, on behalf of the Fund, enter into transactions or arrangements with, or involving, other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Manager (each a Related Party ). The purpose of this section is to provide a brief descrip tion of any transaction involving the Fund and a Related Party. Portfolio Manager The Fund s portfolio manager is BMO Asset Management Inc. ( BMOAM ), an affiliate of the Manager. BMOAM receives from the Fund a management fee based on assets under management, calculated daily and payable monthly.

3 Administration Services The Manager and other members of BMO Financial Group provide the Fund with certain administration services, such as those relating to fund accounting, record keeping, order processing, issuing and distributing account statements and general administrative support. Further details about the Fund s administration fees can be found in the Fund s most recent simplified prospectus. The expenses charged to the Fund in respect of such services during the period amounted to $63,595 (2013 $60,444). Distribution Services The Manager markets and distributes the Fund through Bank of Montreal branches and/or (depending on the series) through registered dealers and brokers, including BMO InvestorLine Inc. and BMO Nesbitt Burns Inc., both affiliates of the Manager. The Manager pays to these affiliates a service fee called a trailing commission based on the average daily value of the units and/or shares that are held in investor accounts. This service fee is paid monthly or quarterly and varies by purchase option and by series. Management Fees The Manager is responsible for the day-to-day management of the business and operations of the Fund. The Manager monitors and evaluates the Fund s performance, pays for the investment advice provided by the Fund s portfolio manager and provides certain administrative services required by the Fund. As compensation for its services, the Manager is entitled to receive a management fee payable monthly, calculated based on the daily net asset value of each series of the Fund at the maximum annual rate set out in the table below. As a Percentage of Management Fees General Maximum Annual Administration, Management Dealer Investment Fee Rate* Compensation Advice and Profit % % % Series A Units Advisor Series Units Series F Units Series I Units Classic Series Units FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the periods indicated. The Fund s Net Assets per Unit (1) Series A Units (5) Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Advisor Series Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ * For Series I Units, separate Series I fees are negotiated and paid by each Series I investor. Because the Manager pays no distribution, service or trailing fees on Series I Units, Series I Units will have lower Series I fees than the management fees for Advisor Series Units.

4 Series F Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Series I Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ 0.00 From dividends $ From capital gains $ Return of capital $ 0.00 Total annual distributions (4) $ Net assets, end of period $ Classic Series Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ * Initial net assets. (1) The information is derived from the Fund s audited annual financial statements. The financial information presented for the years ended December 31, and December 31, 2013 is derived from the financial statements determined in accordance with IFRS. Information for years prior to January 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. An explanation of these differences can be found in the notes to the Fund s financial statements. (2) Includes commissions and portfolio transaction costs. Prior to 2013, withholding taxes were not included in expenses as they were included in revenue. (3) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (4) Distributions were 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 April 16, 2012 (the series inception date) and ending December 31, Ratios and Supplemental Data Series A Units (5) Total net asset value (000s) (1) $ 29,283 22,633 14,774 outstanding (000s) (1) 2,165 1,790 1,392 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Advisor Series Units Total net asset value (000s) (1) $ 15,564 14,628 12,286 3,415 4,320 outstanding (000s) (1) 1,077 1,075 1, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $

5 Series F Units Total net asset value (000s) (1) $ 1, outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series I Units Total net asset value (000s) (1) $ 115,316 68,734 35,286 24,926 12,527 outstanding (000s) (1) 8,441 5,525 3,471 2,832 1,337 + % before waivers or absorptions + % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Classic Series Units Total net asset value (000s) (1) $ outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Operating expenses are paid by BMOII and management fees are paid directly to BMOII as negotiated with the investor. (1) This information is provided as at December 31 of the period shown. (2) The management expense ratio of a particular series is calculated based on all expenses allocated to the series, as applicable, including all taxes and interest expenses but excluding brokerage commissions and other portfolio transaction costs, divided by the average daily net asset value of that series, annualized. BMOII may reduce the effective management fees payable by some unitholders by reducing the management fees it charges to the Fund and directing the Fund to make management fees distributions to these unitholders in amounts equal to the amounts of the management fees reduction. The management expense ratio does not take into account the reduction in management fees due to management fees distributions to unitholders. (3) BMOII absorbed certain expenses or waived certain fees otherwise payable by a series. In doing so, BMOII attempts to maintain the overall MER of the Fund at a rela tively consistent level. BMOII may discontinue the absorption or waiver at any time. (3) 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. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 10 is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher a fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. (5) The information shown in this column is for the period beginning April 16, 2012 (the series inception date) and ending December 31, PAST PERFORMANCE The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional units or shares of the Fund and is based on the net asset value of the Fund. The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember, how the Fund has performed in the past does not indicate how it will perform in the future. The returns of each series may differ from one another for a number of reasons, including if the series was not issued and outstanding for the entire reporting period and because of the different levels of fees and expenses allocated and payable by each series. On August 20, 2010, Global Alpha Capital Management Ltd. replaced RCM Capital Management LLC. On June 15, 2012, BMO Guardian Global Technology Fund and BMO U.S. Special Equity Fund merged into the Fund. On July 12, 2013, BMO Asset Management Inc., an affiliate of the Manager, replaced Global Alpha Capital Management Ltd. as portfolio manager of the Fund. In addition, the investment strategies changed to reflect the investment style of BMO Asset Management Inc. These changes could have affected the performance of the Fund, had they been in effect throughout the performance measurements periods presented. Year-by-Year Returns The following bar charts show the performance for each series of the Fund for each of the financial years shown. The charts show in percentage terms how an investment made on the first day of each financial year would have increased or decreased by the last day of the financial year. Series A Units 25% (2) 2013

6 Advisor Series Units 25% Annual Compound Returns This table compares the historical annual compound returns of the Fund with its benchmark, the MSCI World Small Cap Index (C$), a broad-based index. The MSCI World Small Cap Index (C$) is an index comprised of small capitalization companies from 24 developed market countries and across all industries. Series A Units year years years years Inception (2) Series F Units BMO Global Small Cap Fund % MSCI World Small Cap Index (C$) % % Advisor Series Units year years years years Inception BMO Global Small Cap Fund % MSCI World Small Cap Index (C$) % (1) Series F Units year years years years Inception (1) BMO Global Small Cap Fund % MSCI World Small Cap Index (C$) % Series I Units Series I Units year years years years Inception (1) 25% BMO Global Small Cap Fund % MSCI World Small Cap Index (C$) % Classic Series Units (1) year years years years Inception BMO Global Small Cap Fund % MSCI World Small Cap Index (C$) % (1) Return from July 5, 2006 to December 31,. (2) Return from April 16, 2012 to December 31,. Classic Series Units 25% A commentary on the market and/or information regarding the relative performance of the Fund as compared to its benchmark can be found under the Results of Operations section of this report (1) Return from July 5, 2006 to December 31, (2) Return from April 16, 2012 to December 31, 2012.

7 SUMMARY OF INVESTMENT PORTFOLIO As at December 31, % of Net Portfolio Allocation Asset Value United States 56.1 Japan 13.2 United Kingdom 11.0 Canada 5.2 France 3.0 Cash/Receivables/Payables 2.4 Germany 2.3 Sweden 2.0 Switzerland 1.8 Bermuda 1.7 Other 1.3 Total Portfolio Allocation Sector Allocation Financials 21.5 Information Technology 20.6 Industrials 19.9 Consumer Discretionary 14.1 Health Care 12.8 Consumer Staples 3.7 Cash/Receivables/Payables 2.4 Utilities 1.8 Materials 1.7 Energy 1.5 Total Sector Allocation % of Net Top 25 Holdings Asset Value Issuer Cash/Receivables/Payables 2.4 AmTrust Financial Services, Inc. 2.1 Allison Transmission Holdings, Inc. 2.1 United Therapeutics Corporation 2.0 Lexmark International Group, Class A 2.0 Centene Corporation 2.0 Man Group plc 2.0 MID REIT, Inc. 2.0 Intrum Justitia AB 2.0 Huntington Ingalls Industries, Inc. 2.0 Take-Two Interactive Software, Inc. 2.0 Hikma Pharmaceuticals Public Limited Company 1.9 Barnes & Noble Inc. 1.9 Arlington Asset Investment Corp., Class A 1.9 Transcontinental Inc., Class A 1.9 Fairchild Semiconductor International, Inc. 1.8 Round One Corporation 1.8 Sanderson Farms, Inc. 1.8 Ryman Hospitality Properties, Inc. 1.7 Aspen Insurance Holdings Ltd. 1.7 Entertainment One Ltd. 1.7 American Equity Investment Life Holding Company 1.6 Aspen Technology Inc. 1.6 Metropole Television SA 1.5 WH Smith PLC 1.5 Top Holdings as a Percentage of Total Net Asset Value 46.9 Total Net Asset Value $162,032,169 The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

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