Moneda Latam Corporate Bond Fund

Transcription

1 Management Report of Fund Performance Moneda Latam Corporate Bond Fund The following is a report on the performance of Moneda Latam Corporate Bond Fund (the Fund ) and contains financial highlights but does not contain the complete financial statements of the Fund. This report should be read in conjunction with the financial statements and notes thereto for the year ended December 31, You can get a copy of the Fund s financial statements at your request, and at no cost, by calling (416) , by writing us at 40 King St. West, Scotia Plaza, 26th Floor, Box 4085, Station A, Toronto, Ontario M5W 2X6 Attention: Moneda Latam Corporate Bond Fund Investor Relations or by visiting our website located at or SEDAR at Unitholders 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 and quarterly portfolio disclosure. The Fund s proxy voting disclosure record for the annual period ending June 30, 2014 is available on our website. Any references to net assets or net assets per Unit in this report are references to net assets attributable to Unitholders determined in accordance with Canadian GAAP as presented in the financial statements of the Trust. Additionally, any references to net asset value or net asset value per Unit are references to values determined for valuation and transactional purposes. There are no differences between net assets per Unit and net asset value per Unit. Investment Objectives and Strategies The Fund is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of Class A Units and Class U Units (collectively, the Units and each, a Unit ) with investment exposure to a diversified portfolio of fixed income securities of companies located in, or with significant operations in Latin America, primarily denominated in U.S. dollars. The Fund s investment objectives are to: (i) preserve and enhance the net asset value (the Net Asset Value or NAV ) of the Fund; and (ii) provide Unitholders with quarterly tax-advantaged distributions consisting primarily of returns of capital, in each case through exposure by virtue of a forward agreement (defined below) to the total return performance of the Moneda Deuda Latinoamericana Fondo de Inversion (the Moneda Fund ), a US$937 million (as at December 31, 2014) Chilean listed investment fund established in 2000 which is actively managed by Moneda S.A. Administradora de Fondos de Inversion ( Moneda or the Portfolio Manager ). The NAV for the Class A Units is calculated in Canadian dollars and for the Class U Units, in U.S. dollars. To pursue its investment objectives, the Fund entered into a forward purchase agreement (the Forward Agreement ) with The Bank of Nova Scotia (the Counterparty ) pursuant to which the Counterparty has agreed to pay the economic return provided by a notional portfolio (the Notional Portfolio ) of units of the Moneda Fund. Substantially all of the value of the Notional Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U units are designed for investors wishing to make their investment in U.S. dollars. As a result of the forgoing, the Net Asset Value per Unit of each class of Units will vary depending on the performance of the Moneda Fund by virtue of the Forward Agreement and will also vary depending on the expenses allocated to, and distributions paid in respect of, the particular class of Units of the Fund. The Fund will partially pre-settle the Forward Agreement in order to fund: (i) quarterly distributions on the Units; (ii) redemptions of Units from time to time; and (iii) operating expenses and other liabilities of the Fund. The Class A Units of the Fund are listed for trading on the Toronto Stock Exchange under the symbol MLD.UN. The Class U Units are not listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes. Risk Changes in the risk exposure of the Fund occurred in the following areas: Use of leverage The Forward Agreement allows the Fund to leverage its exposure to the Moneda Fund in an amount up to 15% of the total assets of the Fund at the time of borrowing with a maximum leverage to net assets of 18% (the Funded Amount ). As at December 31, 2014, the Fund had leverage of $4.0 million or 9.7% to the net assets of the Fund (2013 $4.6 million or 9.6%) Changes in the risk exposure of the Moneda Fund occurred in the following areas: Use of leverage The Moneda Fund may employ leverage in an amount up to 50% of its net assets. The Portfolio Manager targets leverage between 15% and 30% of net assets. As at December 31, 2014, the Moneda Fund had leveraged exposure of US$141.0 million or 15.0% of net assets of the Fund (2013 US$271.8 million or 29.0%). Moneda Latam Corporate Bond Fund 1 Management Report of Fund Performance

2 Short Selling The Moneda Fund is permitted to sell short securities with a value up to the lesser of 50% of the Moneda Fund s net worth or 33% of its total assets. As at December 31, 2014, the Moneda Fund had securities acquired though short selling valued at US$151.0 million or 12.3% of total assets (2013 US$93.0 million or 7.1%). Distressed Securities The Moneda Fund is permitted to invest 15% of its total assets in securities issued or guaranteed by entities in receivership or rated D by Standard & Poors. As at December 31, 2014, the Moneda Fund had distressed securities valued at US$61.5 million or 5.0% of total assets (2013 US$61.5 million or 4.7%). For full disclosure of the risks associated with an investment in the Fund s units, please refer to the Fund s annual information form available on our website located at or at SEDAR located at Results of Operations The net assets attributable to Unitholders were $10.21 per Class A Unit and US$10.14 per Class U Unit as at December 31, 2014 as compared to $10.38 per Class A Unit and US$10.34 per Class U Unit as at December 31, 2013 representing decreases of 1.6% and 1.9%, respectively, based on the positive performance of the Moneda Fund offset by the Fund s operating expenses including Forward Agreement fees and distributions paid on the Units. The following is a report from the Portfolio Manager for the year ended December 31, 2014: Report from Portfolio Manager The Latin American high yield corporate debt market, as measured by the CEMBI Broad Latin High Yield Index (the Index ), rose 1.3% during The Moneda Fund outperformed posting a total return of 5.9% for the year. This performance can be explained by: (i) on the positive side, a good allocation at the country level, with long positions in Argentina and Peru significantly contributing to the positive performance; and (ii) good selection at the security level in most countries offset by two negative credit events. Despite these credit events the Moneda Fund managed to outperform its benchmark during As of the end of December 2014, the largest country allocations were Brazil, Mexico, Argentina, Peru and Dominican Republic. Argentina, Dominican Republic and Paraguay are the largest overweights versus the Index, while Brazil, Colombia and Jamaica the largest underweights. Market Outlook As December 2014 ended, we saw the main economies of the world post uneven performances. While the US economy kept expanding, Europe and China slowed down while Japan went into recession. These events made the US dollar stronger, the Euro weaker and brought global interest rates down. Volatility levels that had seen record lows during the first half, bounced back. In this context, the yield on 10 year U.S. treasuries kept falling to finish the year at 2.17%, a drop of almost 90 basis points. Equity and fixed income markets saw volatility spike while major commodities saw a significant downward correction. WTI oil that had started the year at $90 a barrel, ended the year at $55. Latin-American debt funds which had experienced investment outflows since April 2013, started seeing a return of money flows into Latin- American debt securities in late march 2014, ending the year with a net inflow. It is important to mention that dedicated institutional investors kept allocating money into the region even in the worst periods of outflows which were dominated by retail fund outflow. This is a positive sign in our view as it shows the commitment of dedicated investors to the region and the asset class. We expect this support to continue for the time being. Most Latin-American currencies were also affected by the strengthening of the USD and the fall in commodity prices. The Brazilian real, Colombian, Chilean and Mexico pesos depreciated double digits while the Peruvian Sol depreciated mid-single digits. Currency volatility increased with the economic slowdown and political change. Chile has a newly elected government with an aggressive social agenda while Colombia re-elected President Santos. In both countries we are seeing corporate taxes going up as a way to finance reforms. Similarly, Brazil re-elected President Rousseff amid a lot of economic volatility, corruption scandals and fears of sovereign downgrade. In the bright side we have Argentina entering a presidential election period that is expected to bring political and economic change while Mexico has been successfully moving ahead with its aggressive package of economic reforms that should foster growth in the medium term. In this context we continue to find value in corporate bonds throughout the region supported by 1) the absence of a maturity wall, as companies have been proactive in extending maturities and 2) spreads that have widened to compensate investors for the economic slowdown in the region. Distributions The Fund does not have a fixed distribution but pays quarterly distributions funded through partial pre-settlements of the Forward Agreement based on, among other things, the current yield of the portfolio of the Moneda Fund less the expenses of the Fund for the period. The Fund paid cash distributions of $0.75 per Class A Unit and US$0.75 per Class U Unit for the year ended December 31, Management Report of Fund Performance 2 Moneda Latam Corporate Bond Fund

3 The quarterly distributions received by Unitholders were characterized as return of capital. Amounts distributed on the Units that represent returns of capital are generally non-taxable to the Unitholder but reduce a Unitholder s adjusted cost base of the Units for tax purposes. Recent Developments Tax Changes Affecting Forward Agreement Structures In the budget announced March 21, 2013, the government proposed and enacted legislation to eliminate the tax benefits associated with forward agreements used by some investment funds to achieve capital gains treatment on income that would otherwise be treated as ordinary income. The government refers to these as character conversion transactions. Distributions from investment funds which enter into a forward agreement will now generally be taxed as income at the time of distribution as opposed to returns of capital which are not generally taxable at time of receipt and capital gains. This measure applies to forward agreements entered into on or after March 21, The less favorable tax treatment also applies to forward agreements entered into before March 21st, if the terms of the agreement are extended or modified. This measure does not immediately affect the Fund as it entered into its forward agreement before March 21, 2013 and as such, the distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on October 31, 2016 International Financial Reporting Standards ( IFRS ) The Fund s financial statements have been prepared in accordance with IFRS commencing January 1, 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Fund prepared its financial statements in accordance with Part V of the CPA Canada Handbook ( Canadian GAAP ). The Fund has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position at January 1, 2013 and throughout all periods presented, as if these policies had always been in effect. There was no impact to net assets as presented under Canadian GAAP from the changeover to IFRS other than additional disclosures in the financial statements and a change in the presentation of Unitholders equity to a financial liability. Related Party Transactions For its services to the Fund, Scotia Managed Companies Administration Inc. ( SMCAI ) is entitled to receive a management fee equal to 0.40% per annum of the Net Asset Value. The total management fee payable to SMCAI for the year ended December 31, 2014 was $216,983 (December 31, 2013 $231,571). The ongoing management fee and is calculated and accrued weekly and is payable quarterly in arrears. Under the Forward Agreement, the Fund pays to the Counterparty an additional purchase amount, calculated weekly and payable monthly in arrears, of up to 0.40% per annum of the notional amount of the Forward Agreement including the cost of providing collateral. The total fees paid or payable to The Bank of Nova Scotia relating to the Forward Agreement were $214,457 for the year ended December 31, 2014 (December 31, 2013 $225,723). Fees charged on the Funded Amount totaled $69,077 (December 31, 2013 $79,783). At December 31, 2014, the Fund had accrued liabilities of $44,670 (December 31, 2013 $52,293) payable to SMCAI and Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia, and had cash of $262,306 on deposit with The Bank of Nova Scotia (December 31, 2013 $35,899). 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 since inception. For the Year Ended For the Year Ended For the Year Ended For the Period Ended December 31, 2014 (1) December 31, 2013 (1) December 31, 2012 December 31, 2011 (2) Class A Class U Class A Class U Class A Class U Class A Class U CAD USD CAD USD CAD USD CAD USD Net assets per Unit, beginning of year.. $ $ $ 9.74 $ 9.72 $ 9.33 $ 9.32 $ $ Increase (decrease) from operations: Total revenue... Total expenses (3)... (0.08) (0.08) (0.07) (0.07) (0.07) (0.07) (0.68) (0.68) Realized gains (losses) for the year (4) (0.12) (0.01) (0.01) (0.01) Unrealized gains (losses) for the year Total increase (decrease) from operations (0.67) (0.68) Distributions: From capital gains... From return of capital... (0.75) (0.75) (0.75) (0.75) (0.75) (0.75) Total distributions... (0.75) (0.75) (0.75) (0.75) (0.75) (0.75) Net assets per Unit, end of year... $ $ $ $ $ 9.74 $ 9.72 $ 9.33 $ 9.32 Based on the weighted average number of Units during the period/year except for the net asset values and distributions wherein the actual number of Units outstanding at the relevant time are used. Moneda Latam Corporate Bond Fund 3 Management Report of Fund Performance

4 (1) 2014 and 2013 are in compliance with IFRS. Prior years have not been restated for IFRS. (2) Results for the period November 3, 2011 (commencement of operations) to December 31, (3) Total expenses for 2011 include issue costs of $3,018,511 for Class A Units and US$291,378 for Class U Units. (4) Including transaction costs being Forward Agreement fees. Ratios and Supplemental Data December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2011 Class A Class U Class A Class U Class A Class U Class A Class U CAD USD CAD USD CAD USD CAD USD Net asset value (000 s) (1)... $36,209,572 $3,866,027 $43,659,082 $4,084,481 $44,819,171 $3,893,127 $42,551,932 $4,108,940 Number of Units outstanding.. 3,547, ,165 4,207, ,165 4,600, ,390 4,559, ,890 Management expense ratio (2) % 2.64% 2.69% 2.75% 2.86% 2.90% 10.22% 10.22% Management expense ratio excluding interest (2) % 2.50% 2.53% 2.58% 2.67% 2.70% 10.03% 10.01% Trading expense ratio (3) % 0.00% 0.00% 0.00% 0.001% 0.001% 0.002% 0.002% Portfolio turnover rate (4) % 28.2% 31.7% 31.7% 62.4% 62.4% 7.2% 7.2% Net asset value per Unit... $ $ $ $ $ 9.74 $ 9.72 $ 9.33 $ 9.32 Market value per Unit... $ n/a $ 9.95 n/a $ 9.86 n/a $ 9.86 n/a (1) Net asset value is equal to net asset value per Unit multiplied by the number of Units outstanding. (2) Management expense ratio ( MER ) is based on total expenses of the Fund for the stated period including Forward Agreement fees, fees on Funded Amount and expenses of the Moneda Fund and is expressed as an annualized percentage of the weekly average Unit net asset value during the year/period. The Fund realized issue costs in Without these costs, the MER s would have been 3.07% and 3.07% and excluding fees on Funded Amount embedded in the Forward Agreement, 2.88% and 2.87%, for Class A Units and Class U Units, respectively. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the year/period. (4) The Fund s portfolio turnover rate indicates how actively the Portfolio Manager manages its bond portfolio. A portfolio turnover rate of 100% is equivalent to the Moneda Fund buying and selling all of the fixed income securities in its portfolio once in the course of a year. Past Performance Year by Year Returns The following chart shows the performance of the Fund s Units based on net asset value since the Fund s inception indicating, in percentage terms, how much an investment made on the first day of each financial year/period would have increased or decreased by the last day of each financial year/period assuming reinvestment of all distributions at net asset value. Past performance is not an indication of how the Units will perform in the future. The calculation of the returns based on net asset value follows the requirements of NI As an investor cannot purchase or sell the Units at net asset value, the following is an indication of the performance of the assets of the Fund rather than returns available to Unitholders. Returns based on market value are also presented in narrative form below as an indication of returns actually available to Unitholders. Class A Class U 12.8% 14.7% 12.7% 14.5% 5.7% 5.5% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -6.7% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -6.8% MAR MAR The Class A Units are listed for trading on the TSX while the Class U Units are not but may be converted into Class A Units on a weekly basis. Accordingly, the market value return for the Class A Units was (1.4)%,7.7%, 8.7% and 8.9% for 2011, 2012, 2013 and 2014, respectively. This performance from inception reflects the payment of upfront costs related to the establishment of the Fund and assumes that distributions are reinvested in additional Units at the then market price on the Toronto Stock Exchange,which price may reflect a premium or discount to net asset value. The following chart show performance data for the Moneda Fund for the past ten years including the year ended ended December 31, 2014 indicating, in percentage terms, how much an investment made on the first day of each financial year/period would have increased or decreased by the Management Report of Fund Performance 4 Moneda Latam Corporate Bond Fund

5 last day of each financial year or period assuming reinvestment of any dividends. There are differences between holding the Fund and the Moneda Fund including additional fees and expenses, the use of leverage and currency hedging. Annual Compound Returns 1 yr 3 yr 5 yr From inception (1) Class A Unit % 11.0% 8.0% Class U Unit % 10.8% 7.8% CEMBI Broad Latam HY Index (2) % 3.4% 3.3% (1) The return for the Fund is for the period from November 3, 2011, the date of inception, to December 31, 2014, based on a price of $ (2) The CEMBI Broad Latam HY Index tracks USD denominated debt issued by emerging market corporations. The annual compound returns based on market value for the Class A Units for one year, three year and from inception to December 31, 2014 are 8.9%, 8.4% and 7.5%, respectively. The following chart show performance data for the Moneda Fund for the past ten years including the year ended ended December 31, 2014 indicating, in percentage terms, how much an investment made on the first day of each financial year/period would have increased or decreased by the last day of each financial year or period assuming reinvestment of any dividends. There are differences between holding the Fund and the Moneda Fund including additional fees and expenses, the use of leverage and currency hedging. Year by Year Returns 100.0% 80.0% 80.2% 60.0% 40.0% 20.0% 0.0% -20.0% 24.6% 22.1% 14.7% 14.1% 14.5% 13.3% 13.4% 2.5% 5.9% -40.0% -34.9% -60.0% MAR Annual Compound Returns One Year Three Year Five Year Ten Year Moneda Fund units % 10.8% 11.2% 11.6% CEMBI Broad Latam HY Index % 3.4% 4.8% 6.8% Moneda Latam Corporate Bond Fund 5 Management Report of Fund Performance

6 Summary of Investment Portfolio Below is a summary of the investment portfolio of the Moneda Fund as at December 31, 2014, upon which the Unitholders return is based. This summary of the investment portfolio may change due to ongoing portfolio transactions. Weekly updates of the investment portfolio are available on the internet at or by contacting investor relations at Net Asset Value of the Moneda Fund (1)... US$937,135,876 Top 25 investments Issuer % of Net Assets of the Moneda Fund Long Positions 1. Bio Pappel Sab De CV 6.0% % 2. BBVA Paraguay S.A. 9.75% % 3. CorpGroup Banking S.A. 6.75% % 4. Banco do Brasil 9% % 5. Republic of Argentina 8.28% % 6. Mastellone Hermanos SA % % 7. Aes Andres/IT 9.5% % 8. Cemex Espana 9.875% % 9. Autopistas No 9.39% % 10. Aeropuertos Dominicana 9.25% % 11. Grupo Posadas S.A.B. de C.V % % 12. Terminales Portuarios 8.125% % 13. Andino Investment Holding S.A. 11% % 14. Bantrab Senior Trust 9% % 15. BBVA Bancomer 6.75% % 16. GOL LuxCo S.A % % 17. Tam Capital Inc. 9.5% % 18. Regional S.A.E.C.A 8.125% % 19. Maestro Peru 6.75% % 20. Banco Continental 8.875% % 21. JBS Finance Inc. 8.25% % 22. Avianca Holdings S.A % % 47.5% Short Positions 1. US Treasury 2.5% % 2. Brazil Republic of 4.25% % 3. Mexico 6.75% % 13.9% (1) As a result of the Forward Agreement, the total fair value of the Fund s investment is referable to a Notional Portfolio of units of the Moneda Fund. Management Report of Fund Performance 6 Moneda Latam Corporate Bond Fund

7 Notes Moneda Latam Corporate Bond Fund 7 Management Report of Fund Performance

8 Notes Management Report of Fund Performance 8 Moneda Latam Corporate Bond Fund