2016 ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE

Transcription

1 MD Family of Funds 2016 ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE DISCLOSURE This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the investment fund. You can obtain a copy of the annual financial statements at your request, and at no cost, by calling , by writing to us at MD Financial Management Inc., 1870 Alta Vista Drive, Ottawa, Ontario, K1G 6R7, or by visiting our website at md.cma.ca or SEDAR at sedar.com. Security holders may also contact us using one of these methods to request a copy of the investment fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.

2 A Message to MD Family of Funds Investors Dear MD Family of Funds Investor: As part of our commitment to keeping you informed about your MD Fund investments, please find attached the 2016 Annual Management Report of Fund Performance (MRFP). If you also opted to receive the fund s financial statements, they are included in this package. The annual MRFP is a regulatory document that supplements the annual financial statements. The document includes a brief discussion and analysis of the fund s investment activities, performance and financial highlights, as well as an explanation of how the markets and overall asset mix have affected the fund. The report is produced on a fund-by-fund basis, and your report only includes information on the funds you owned as of December 31, If you have any questions regarding these documents, please contact your MD Advisor or the MD Trade Centre at We thank you for your continued investment in the MD Family of Funds. MD Financial Management Inc. wholly owns or has a majority interest in its seven subsidiaries (the MD Group of Companies). It provides financial products and services, is the fund manager for the MD Family of Funds and offers investment counselling services. For a detailed list of the MD Group of Companies, visit md.cma.ca. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund. Standard performance data assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges payable by any securityholder which would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing. You may obtain a copy of the prospectus before investing by calling your MD Advisor or the MD Trade Centre at

3 SERIES A Investment Objectives and Strategies The MD Precision Maximum Growth Portfolio (the Fund ) is a strategic asset allocation fund with the objective to provide growth of capital. The Fund will invest primarily in units of funds managed by MD Financial Management Inc., with an emphasis on equity funds for potential capital appreciation and only a minor exposure to fixed income funds for income generation and capital preservation. The Fund may also invest in other non-affiliated mutual funds and directly in fixed income securities, cash or cash equivalents. The Fund s principal investment strategy is strategic asset allocation. The Fund assets will be invested according to the target weightings for the Fund, which may change at our discretion, but are generally expected to follow an approximate allocation of 18% fixed income, 30% Canadian equity 16% U.S. equity, 16% international equity, 5% emerging market equity and 15% alternatives. The underlying MD proprietary mutual funds may not purchase securities of companies that manufacture tobacco or tobacco related products. The Manager monitors non-affiliated funds for securities in the tobacco manufacturing sector, however cannot guarantee that an underlying fund does not hold securities in this sector from time to time. Risk The investment risks associated with this Fund are detailed in the Simplified Prospectus. The Fund is designed for an investor seeking a single-decision investment fund who is willing to accept a low to medium level of investment risk with exposure to all major asset classes. The Fund is suitable for an investment time horizon of 20 or more years. *The ratings for MD funds and pools have been revised using The Investment Funds Institute of Canada (IFIC) updated guidelines. IFIC developed these guidelines to provide a consistent approach to the measurement and description of fund volatility risk across the industry. The guidelines standardize terminology, categories and volatility risk descriptions. MD clients investment risk assessment will remain the same, the underlying risks of the MD Funds and MDPIM Pools have not changed. Results of Operations For the year ended December 31, 2016, the Fund generated a total return of 8.35%. A commodities rebound in 2016, particularly crude oil prices which jumped by over 20%, boosted the Canadian dollar by 3% relative to the U.S. dollar and helped the TSX finish the year significantly higher. Two major political events, the U.K.'s vote in June to withdraw from the European Union (Brexit) and November's U.S. election dominated headlines throughout the year but had a limited impact on balanced portfolios. The Fund's exposure to Canadian equities provided significant value in 2016, with MD Select and MD Equity delivering double digit returns. Strong Canadian, U.S., and emerging market equity returns helped offset detraction from developed international equities, which as a group declined over the year. Value stocks in underlying funds such as MD American Value performed strongly in 2016 however underperformance by U.S. growth stocks negatively impacted the Fund's performance relative to its benchmark. Global fixed income yields were quite volatile throughout the year, surging in November due to increased inflation expectations and a rate hike by the U.S. Federal Reserve. Higher yields in Q4 lead to losses in both Canadian short and long term bond indices. Over the year the Fund's limited exposure to fixed income funds, MD Short-Term Bond and MD Bond Fund, delivered muted but positive returns which weighed on overall performance. The two Alternative funds delivered positive absolute returns in Strong performance from natural resources, commodities, and U.S. small cap equity was able to offset the impact of a declining U.S. dollar and losses in international real estate in MD Strategic Opportunities. Perceived riskier assets, such as convertible securities, senior loans, and high yield bonds supported the return of MD Strategic Yield. Tactical asset allocation decisions in the second half of 2016 added value to the Fund but were more than offset by detraction in Q1 and Q2. The Fund s overweight position in international equities in the first half of 2016 was primarily responsible for the detraction. The Fund is currently neutral equities relative to fixed income as we took profits in Q4 and reduced our equities as we evaluate potential for slowdown in global economy driven by the tightening financial conditions in the U.S. Within equities, the Fund is positioned with an overweight to U.S. equities and an underweight to International equities. As at December 31, 2016, the total net asset value of the Fund was $238 million, an increase of 19% since the beginning of the year. The growth in the net asset value is attributable mainly to its net contributions supplemented by distribution income from underlying investments and by net investment gains. Recent Developments STRATEGIC CHANGES On June 1, 2016 the Fund's benchmark became a blend of: 25% FTSE TMX Universe Bond Index 30% S&P/TSX Capped Composite Index 45% MSCI World Index The previous benchmark for the Fund was: 4.0% FTSE TMX Short Term Bond Index 14.0% FTSE TMX Universe Bond Index 30.4% S&P/TSX Capped Composite Index 15.8% S&P 500 Index 15.8% MSCI EAFE Index 5.0% MSCI Emerging Markets Index 2.2% Barclays Capital US Aggregate Index 1.5% Merrill Lynch US High Yield Master II Index 0.8% JP Morgan Emerging Market Bond Plus Index 0.5% S&P Preferred Stock Index 4.0% Russell 2000 Total Return Index 2.5% FTSE Global Small Cap Ex USA Total Return Index 2.0% FTSE EPRA/NAREIT Developed Total Return Index 1.5% Bloomberg Commodity Total Return Index The Fund continues to be managed in a manner consistent with its mandate. Overall, we remain confident that the Fund s portfolio management strategies will achieve the stated objectives of the Fund. 1 MD Family of Funds Annual MRFP 2016

4 Related Party Transactions MD Financial Management Inc. is the Manager, Registrar and Trustee of the Fund. As Manager, MD Financial Management Inc. manages the overall business of the MD Fund and is responsible for: setting investment objectives, providing and/or retaining the services of third party service providers for fund accounting services, administration services, and promoting the sales of the Fund s units. As Registrar, MD Financial Management Inc. keeps track of the owners of units of the MD Fund, processes purchase, transfer and redemption orders, issues investor account statements, and issues annual tax reporting information. As the Fund is organized as a Trust, investing in the Fund means purchasing units of the Trust. As Trustee to the Fund, MD Financial Management Inc. holds actual title to the property in the Fund the cash and securities the Fund invests in on behalf of the unitholders. The principal distributor is MD Management Limited. As principal distributor, MD Management Limited markets the units of the MD Fund through its offices across Canada. MD Management Limited is owned by the Fund Manager, MD Financial Management Inc., which is owned by MD Financial Holdings Inc. Management Fees MD Financial Management Inc. provides the Fund with investment management and administrative services, including fund accounting and unitholder record-keeping. In return, MD Financial Management Inc. receives an annual management fee and an annual administration fee, both based on a fixed percentage of the daily net asset value of the Fund. Management fees are paid weekly and administration fees are paid monthly. MD Financial Management Inc. pays MD Management Limited, a related party, a fee for providing financial planning services. The amount shown is an estimate of the compensation paid to MD Management Limited. (As a percentage of management fees) Financial Planning Services 51.8% Investment management, administration and other 48.2% Past Performance The following bar chart shows the Fund s annual performance for each of the years shown, and illustrates how the Fund s performance changed from year to year. The chart shows, in percentage terms, how much an investment made on the first day of each calendar year would have grown or decreased by the last day of each calendar year. The performance information assumes that all distributions made by the Fund were reinvested in additional units of the Fund and does not take into account sales, redemption, distribution or other optional charges that would reduce returns. How the Fund has performed in the past does not necessarily indicate how the Fund will perform in the future. YEAR-BY-YEAR RETURNS Series A % Return % 7.4% 21.2% ANNUAL COMPOUND RETURNS The following table shows the portfolio s historical annual compound return for the past one-, three- and five-year periods ended on December 31 and since inception as compared to the return of a Blended Composite Index; from January 1, 2016 to May 31, 2016 the index was comprised of: 4.0% FTSE TMX Short Term Bond Index, which measures the returns on Canadian bonds with a one- to three-year maturity, 14.0% FTSE TMX Universe Bond Index, which measures the returns on Canadian bonds with greater than one year to maturity, 30.4% S&P/TSX Capped Composite Index, which measures the aggregate common share returns of Canada s largest companies; 15.8% S&P 500 Index, which measures the aggregate common share returns of the U.S. s largest companies, 15.8% MSCI EAFE Index, which measures the aggregate returns of securities listed on exchanges in European, Australasian and Far Eastern markets, 5.0% MSCI Emerging Markets Index, which measures the aggregate returns of securities listed on exchanges in emerging markets, 2.2% Barclays Capital US Aggregate Index, which measures the returns of the total U.S. investment-grade bond market, 1.5% Merrill Lynch US High Yield Master II Index, which measures the returns on U.S. dollar-denominated bonds with a maturity of at least one year that are rated high yield (BB+ or below), 0.8% JP Morgan Emerging Market Bond Plus Index, which measures the returns of U.S. dollar-denominated government bonds issued by emerging market countries; 0.5% S&P Preferred Stock Index, which measures the returns of U.S. preferred stocks; 4.0% Russell 2000 Total Return Index, which measures the returns of the smallcap segment of the U.S. equity universe, 2.5% FTSE Global Small Cap Ex USA Total Return Index, which measures the returns of small-cap stocks in developed and emerging markets excluding the U.S., 2.0% FTSE EPRA/NAREIT Developed Total Return Index, which measures the returns of listed real-estate companies and REITs globally, 1.5% Bloomberg Commodity Total Return Index, which measures the returns of commodity futures price movements. 7.3% 2.1% 8.4% MD Family of Funds Annual MRFP

5 From June 1, 2016 to December 31, 2016 the Blended Composite Index was comprised of: 25% FTSE TMX Universe Bond Index, which measures the returns on Canadian bonds with greater than one year to maturity, 30% S&P/TSX Capped Composite Index, which measures the aggregate common share returns of Canada s largest companies, 45% MSCI World Index, which measures the aggregate common share returns of the world s largest companies. The weightings of these indices within the Blended Composite Index represent the general weightings in the portfolio. The individual indices that make up the Blended Composite Index are shown independently. They serve as a frame of reference only, as opposed to a benchmark, as they do not, independently, reflect performance of a fund MD Precision Maximum Growth Portfolio Series A Blended Composite Index FTSE TMX Short Term Bond Index** FTSE TMX Canada Universe Bond Index S&P/TSX Capped Composite Index 1 year 3 years 5 years Since Inception* 8.35% 5.87% 9.09% 6.64% 8.32% 8.67% 11.40% 8.99% 1.01% 2.22% 2.08% % 4.61% 3.22% % 7.06% 8.25% - S&P 500 Index** 8.09% 17.66% 21.15% - MSCI EAFE Index** -2.00% 6.82% 13.08% - MSCI World Index 4.41% MSCI Emerging Markets Index** Barclays Capital US Aggregate Index** Merrill Lynch US High Yield Master II Index** JP Morgan Emerging Market Bond Plus Index** S&P Preferred Stock Index** Russell 2000 Total Return Index** FTSE Global Small Cap Ex USA Total Return Index** FTSE EPRA/NAREIT Developed Total Return Index** Bloomberg Commodity Total Return Index** 7.74% % % % % % % % % *The Fund started series A units on January 13, **Indices removed from the blended composite index on June 1, MD Family of Funds Annual MRFP 2016

6 Management uses the Blended Composite Index as the benchmark for this portfolio because it best represents the nature of the overall fund. Although index returns are hypothetical as they do not reflect the true cost of owning or managing the underlying securities they are one of several useful indicators. By comparing the Fund s performance to the movements of the benchmark, we are able to assess how the Fund is doing. For example, some short-term deviations can signal the need for change while others confirm the expectations of a longer-term strategy. If management were to ascertain that a fund s over- or underperformance was the result of excessive risk-taking or deviation from the investment mandate, we would, on behalf of all our unitholders, address these issues with the Investment Advisors, and make changes if necessary. As the table above indicates, the Fund outperformed the Blended Composite Index for the most recent one-year period due to a variety of factors. Strong stock selection of Canadian focused MD Equity helped offset the limited detraction of MD Select and MD Strategic Yield which trailed their respective benchmarks. Defensive positioning of international funds helped mitigate losses relative to the MSCI EAFE and emerging market stocks lifted the Fund's return. Tactical asset allocation decisions in the second half of 2016, particularly the Fund's U.S. equity overweight, also contributed to outperformance. Regarding Forward-Looking Statements This document contains forward-looking statements. Such statements are generally identifiable by the terminology used, such as plan, anticipate, intend, expect, estimate, or other similar wording. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market and business conditions; fluctuations in securities prices; fluctuation in interest rates and foreign currency exchange rates; and actions by governmental authorities. Future events and their effects on the Fund may not be those anticipated. Actual results may differ materially from the results anticipated in these forward-looking statements. MD Family of Funds Annual MRFP

7 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 past five years, if applicable. This information is derived from the Fund s audited annual financial statements. Years beginning on or after January 1, 2013 follow International Financial Reporting Standards ( IFRS ) and years prior to January 1, 2013 follow Canadian generally accepted accounting principles ( GAAP ). Net assets attributable to holders of redeemable units are referred to as net assets. THE FUND'S NET ASSETS PER UNIT 1 Year ended December 31 SERIES A Net assets beginning of the year $ $ $ $ $ Increase (decrease) from operations: Total revenue $ 0.52 $ 0.49 $ 0.30 $ 0.23 $ 0.16 Total expenses $ (0.22) $ (0.23) $ (0.24) $ (0.21) $ (0.18) Net realized gains (losses) for the year $ 0.08 $ 0.29 $ 1.69 $ 0.62 $ 0.04 Net unrealized gains (losses) for the year $ 0.70 $ (0.35) $ (0.82) $ 1.67 $ 0.68 Total increase (decrease) from operations 2 $ 1.08 $ 0.20 $ 0.93 $ 2.31 $ 0.70 Distributions: From income (excluding dividends) $ (0.03) $ - $ - $ - $ - From dividends $ (0.10) $ (0.07) $ - $ - $ - From capital gains $ (0.08) $ (0.34) $ (0.14) $ - $ - Return of capital $ - $ - $ - $ - $ - Total annual distributions 3 $ (0.21) $ (0.41) $ (0.14) $ - $ - Net assets end of the year $ $ $ $ $ This information is derived from the Fund s audited annual financial statements. Under GAAP, the Fund measured fair value of its investments in accordance with CICA Handbook Section 3855 which required the use of bid prices for portfolio investments in place of closing price. Net Assets that are calculated in accordance with GAAP differ from the Net Assets calculated for fund pricing purposes as disclosed in the Ratios and Supplemental Data table. There is no significant difference between the two under IFRS. 2 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 year. This table is not intended to be a reconciliation of beginning to ending net assets per unit. 3 Distributions were paid in cash or reinvested in additional units of the Fund, or both. 5 MD Family of Funds Annual MRFP 2016

8 Financial Highlights (continued) RATIOS AND SUPPLEMENTAL DATA Year ended December 31 SERIES A Total net assets, end of the year 1 $ 238,367,075 $ 199,958,664 $ 169,348,065 $ 127,983,201 $ 98,334,703 Number of units outstanding 17,713,287 15,857,568 13,273,304 9,704,391 9,037,253 Management expense ratio % 1.73% 1.73% 1.73% 1.73% Management expense ratio before tax 1.65% 1.58% 1.58% 1.58% 1.58% Management expense ratio before waivers 1.80% 1.73% 1.73% 1.73% 1.73% or absorptions Trading expense ratio % 0.07% 0.11% 0.10% 0.15% Portfolio turnover rate % 36.16% 83.13% 53.33% 25.04% Net assets per unit $ $ $ $ $ This information is provided as at December 31 of the year shown. 2 Management expense ratio is based on total expenses (excluding commissions, withholding taxes 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. The Harmonized Sales Tax (HST) combines the GST rate of 5% with the PST rate of certain provinces. HST is calculated as a weighted average application based on the residency of shareholders and the value of their interests in each Series at a point in time, rather than the physical location of the manager. 3 The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net assets during the period. 4 The Fund's portfolio turnover rate indicates how actively the Fund's portfolio advisor 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. MD Family of Funds Annual MRFP

9 Summary of Investment Portfolio, December 31, 2016 NET ASSETS: $238.4 MILLION PORTFOLIO ALLOCATION 44.3% Foreign Equities 30.4% Domestic Equities 14.2% Domestic Bonds 8.2% Foreign Bonds 2.9% Cash and Other Net Assets DOMESTIC EQUITIES 30.4% FOREIGN EQUITIES 44.3% DOMESTIC BONDS 14.2% FOREIGN BONDS 8.2% CASH & SHORT TERM INVESTMENTS 2.8% OTHER NET ASSETS 0.1% TOTAL NET ASSETS 100.0% TOP 25 HOLDINGS (PERCENTAGE OF NET ASSETS) MD Equity Fund Series I 22.0% MD Select Fund Series I 14.9% MD Bond Fund Series I 14.1% MD Strategic Opportunities Fund Series I 10.0% MD American Value Fund Series I 8.1% MD American Growth Fund Series I 7.6% MD Strategic Yield Fund Series I 5.0% Mackenzie Emerging Markets Class Series O 4.9% MD International Growth Fund Series I 4.1% MD Short-Term Bond Fund Series I 4.0% MD Growth Investments Limited Series I 2.8% MD International Value Fund Series I 2.2% The Cash and Short-Term Investments and Other Net Assets may appear negative due to the timing of cash flows between the trade date and settlement date for transactions on underlying securities. The Prospectus and other information about the underlying investment funds held in this MD Fund are available online at Note: Summary of Investment Portfolio may change due to ongoing portfolio transactions of the investment fund. A quarterly update is available. The Net Assets, Portfolio Allocation and Top 25 Holdings in the tables are based on the net assets as at December 31, Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. To obtain a copy of the prospectus, please call your MD Advisor, or the MD Trade Centre at MD Family of Funds Annual MRFP 2016

10