Moneda Latam Corporate

Transcription

1 Moneda Latam Corporate Bond Fund Annual Report to Unitholders December 31, 2014

2 REPORT TO UNITHOLDERS The following presents the financial results of Moneda Latam Corporate Bond Fund (the Fund ) for the year ended December 31, Adoption of International Financial Reporting Standards ( IFRS ) The Fund s financial statements have been prepared in compliance 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. Fund Structure 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 of the 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 partially pre-settles 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 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%. As at December 31, 2014 the Fund had leveraged exposure of $4.0 million or 9.7% (December 31, 2013 $4.6 million or 9.6%) to the net assets of the Fund. 1

3 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. Tax Changes Affecting Forward Agreement Structures In the budget announced March 21, 2013, the Federal 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, 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 2

4 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. Financial Performance 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. Distributions The Fund does not have fixed distributions but intends to pay quarterly distributions 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 expected expenses of the Fund for the period. The Fund declared and paid cash distributions of $0.75 per Class A Unit and US$0.75 per Class U Unit for the year ended December 31, 2014 (2013 $0.75 per Class A Unit and US$0.75 per Class U Unit). It is expected that the quarterly distributions received by Unitholders will be characterized as return of capital. Amounts distributed on the Units that represent returns of capital are generally non-taxable to the Unitholder but reduce the Unitholder s adjusted cost base of the Units for tax purposes. This report, along with the accompanying audited financial statements of the Fund, is respectfully submitted to you on behalf of the Board of Directors of MLCB Ltd., as general partner of MLCB Limited Partnership, Trustee for Moneda Latam Corporate Bond Fund. Toronto, Canada March 23, MAY Brian D. McChesney President and Chief Executive Officer 3

5 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying financial statements of Moneda Latam Corporate Bond Fund and all the information in this annual report are the responsibility of management and have been reviewed and approved by the Board of Directors of MLCB Ltd. (the Board ), as general partner of MLCB Limited Partnership,, Trustee of Moneda Latam Corporate Bond Fund. The financial statements have been prepared by management in accordance with International Financial Reporting Standards. Financial statements are not precise since they include certain amounts based on estimates and judgements. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Management has ensured that the other financial information presented in this annual report is consistent with the financial statements. The financial statements have been audited by PricewaterhouseCoopers LLP on behalf of the Unitholders. The Board has oversight responsibility for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out these responsibilities through its Audit Committee (the Committee ). The Committee is appointed by the Board. The Committee meets periodically with management and the external auditors to discuss internal controls, the financial reporting process, various auditing and financial reporting issues, and to review the semi-annual and annual reports, the financial statements and the external auditors report. The Committee reports its findings semi-annually to the Board for consideration when approving the financial statements for issuance to the Unitholders. The Committee also considers, for review by the Board, the engagement or re-appointment of the external auditors. PricewaterhouseCoopers LLP has full and free access to the Committee. 6MAY Brian D. McChesney President and Chief Executive Officer 18NOV Stephen D. Pearce Chief Financial Officer and Secretary Toronto, Canada March 23,

6 INDEPENDENT AUDITOR S REPORT To the Unitholders and Trustee of Moneda Latam Corporate Bond Fund (the Fund ) We have audited the accompanying financial statements of the Fund, which comprise the statements of financial position as at December 31, 2014, December 31, 2013, and January 1, 2013 and the statements of comprehensive income, cash flows, and changes in net assets attributable to unitholders for the years ended December 31, 2014 and December 31, 2013 and the related notes, which comprise a summary of significant accounting policies and other explanatory information. MANAGEMENT S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR S RESPONSIBILITY Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2014, December 31, 2013, and January 1, 2013 and its financial performance and its cash flowsfor the years ended December 31, 2014 and December 31, 2013 in accordance with International Financial Reporting Standards. Toronto, Canada March 31, 2015 PricewaterhouseCoopers LLP Chartered Professional Accountants 31MAR

7 STATEMENTS OF FINANCIAL POSITION As at December 31, December 31, January 1, (note 13) (note 13) Assets Current assets Forward Agreement, at fair value (note 4) $ 43,701,017 $ 50,185,457 $ 49,438,979 Cash 263,030 36,621 1,446,028 Unrealized gain on foreign exchange contracts (note 6) 139,873 44,103,920 50,222,078 50,885,007 Liabilities Current liabilities Distributions payable 747, , ,232 Accrued liabilities (note 9) 120, , ,257 Unrealized loss on foreign exchange contracts (note 6) 2,541,848 1,188,932 1,065,581 3,409,974 2,207,520 2,184,070 Net assets attributable to Unitholders $ 40,693,946 $ 48,014,558 $ 48,700,937 Net assets attributable to Unitholders per class Class A $ 36,209,572 $ 43,659,082 $ 44,819,171 Class U (in equivalent CAD$) $ 4,484,374 $ 4,355,476 $ 3,881,766 Class U USD $ 3,866,027 $ 4,084,481 $ 3,893,127 Number of Units outstanding (note 7) Class A 3,547,111 4,207,043 4,600,224 Class U 381, , ,390 Net assets attributable to Unitholders per Unit Class A $ $ $ 9.74 Class U (in equivalent CAD$) $ $ $ 9.70 Class U USD $ $ $ 9.72 See accompanying notes to the financial statements. On behalf of the Board of Directors of MLCB Ltd. 6MAY Brian D. McChesney President and Chief Executive Officer 20APR D. Anthony Ross Chairman of the Board 6

8 STATEMENTS OF COMPREHENSIVE INCOME For the years ended December (note 13) Income Forward Agreement Realized gain on partial pre-settlements of Forward Agreement $ 5,241,683 $ 2,279,712 Unrealized appreciation on Forward Agreement 1,923,517 7,952,334 Forward Agreement fees (note 9) (214,457) (225,723) Net gain on Forward Agreement 6,950,743 10,006,323 Foreign exchange contracts Realized loss on foreign exchange contracts (2,199,000) (2,404,537) Unrealized gain (loss) on foreign exchange contracts (1,213,043) (123,351) Net gain (loss) on foreign exchange contracts (3,412,043) (2,527,888) Foreign exchange gain (loss) on cash 14,551 (485) Total income, net 3,553,251 7,477,950 Expenses Management fee (note 9) 216, ,571 Directors fees 41,230 33,000 Unitholders information costs 9,762 20,400 Insurance premiums 20,717 24,100 Audit fees 29,538 22,400 Filing fees 1,172 11,701 Listing fees 11,372 11,600 Legal fees 223 9,469 Transfer agent fees 8,700 8,700 Independent Review Committee fees 7,500 7,500 Other (recovery) 8,291 (15,568) 355, ,873 Increase in net assets attributable to Unitholders $ 3,197,763 $ 7,113,077 Increase in net assets attributable to Unitholders per class Class A $ 2,573,821 $ 6,272,502 Class U 623, ,575 $ 3,197,763 $ 7,113,077 Increase in net assets attributable to Unitholders per Unit Class A $ 0.62 $ 1.37 Class U $ 1.60 $ 2.10 See accompanying notes to the financial statements. 7

9 STATEMENTS OF CASH FLOWS For the years ended December (note 13) Operating activities Increase in net assets attributable to Unitholders $ 3,197,763 $ 7,113,077 Adjustments for: Foreign exchange gain (loss) on cash (14,551) 485 Realized gain on partial pre-settlements of Forward Agreement (5,241,683) (2,279,712) Proceeds on partial pre-settlements of Forward Agreement 13,649,640 9,485,568 Unrealized appreciation on Forward Agreement (1,923,517) (7,952,334) Unrealized loss on foreign exchange contracts 1,213, ,351 Accrued liabilities (30,830) (30,295) Net cash flow provided by operating activities 10,849,865 6,460,140 Financing activities Distributions paid to Unitholders (3,483,900) (3,755,844) Proceeds paid on Units retracted (7,154,107) (4,113,218) Net cash flow used in financing activities (10,638,007) (7,869,062) Foreign exchange gain (loss) on cash 14,551 (485) Net decrease in cash 211,858 (1,408,922) Cash, beginning of year 36,621 1,446,028 Cash, end of year $ 263,030 $ 36,621 See accompanying notes to the financial statements. 8

10 STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS For the years ended December Net assets attributable to Unitholders, beginning of year Class A $ 43,659,082 $ 44,819,171 Class U 4,355,476 3,881,766 48,014,558 48,700,937 Increase in net assets attributable to Unitholders Class A 2,573,821 6,272,502 Class U 623, ,575 3,197,763 7,113,077 Unit transactions: Redemption of redeemable units: Class A (7,069,246) (4,058,479) Class U (84,861) (54,739) (7,154,107) (4,113,218) Conversion of Units Class A 80,333 2,379 Class U (80,333) (2,379) Financing unit transactions: Distributions to Unitholders (return of capital) Class A (3,034,418) (3,376,491) Class U (329,850) (309,747) (3,364,268) (3,686,238) Net assets attributable to Unitholders, end of year Class A 36,209,572 43,659,082 Class U 4,484,374 4,355,476 $ 40,693,946 $ 48,014,558 See accompanying notes to the financial statements. 9

11 NOTES TO FINANCIAL STATEMENTS December 31, 2014 and GENERAL INFORMATION Moneda Latam Corporate Bond Fund (the Fund ) is a closed-end investment fund established as a trust under the laws of the Province of Ontario and is governed by a declaration of trust dated October 26, 2011(the Declaration of Trust ). The address of the Fund s registered office is 40 King Street West, Toronto, Ontario M5W 2X6. Pursuant to this Declaration of Trust, MLCB Limited Partnership acts as the trustee (the Trustee ) and is responsible for managing the affairs of the Fund. Scotia Managed Companies Administration Inc. ( SMCAI or the Manager ), a wholly-owned subsidiary of Scotia Capital Inc. which in turn is a wholly-owned subsidiary of the Bank of Nova Scotia, manages the administration of the Fund. The Fund provides holders of units (the Unitholders ) of Class A Units and Class U Units (collectively, the Units and each, a Unit ) with investment exposure, on a tax-advantaged basis, to a diversified portfolio of high yield 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 the Forward Agreement (defined below) to the total return performance of the Moneda Deuda Latinoamericana Fondo de Inversion (the Moneda Fund ), a Chilean listed investment fund which is actively managed by Moneda S.A. Administradora de Fondos de Inversion ( Moneda or the Portfolio Manager ). 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. The Forward Agreement is scheduled to terminate on October 31, In order to provide this return, the Counterparty purchased U.S. denominated redeemable 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. The Forward Agreement allows the Fund to leverage its exposure to the Moneda Fund. 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. These financial statements were authorized for issuance by the Board of Directors of MLCB Ltd. as general partner of the Trustee on March 23, BASIS OF PRESENTATION Statement of compliance These financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) including IFRS 1, First-time Adoption of International Financial Reporting Standards. 10

12 The Fund adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Fund prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in 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. Note 13 discloses the impact of the transition to IFRS on the Fund s reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Fund s financial statements for the year ended December 31, 2013 under Canadian GAAP. Basis of measurement The financial statements have been prepared on the historical cost basis except for financial assets and liabilities held at fair value through profit or loss that have been accounted for based on fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets and is computed on an average cost basis. Functional currency and presentation currency These financial statements are presented in Canadian dollars, which is the functional and presentation currency of the Fund. Critical accounting estimates and judgments The preparation of the financial statements requires management to use judgment in applying its accounting policies and to make estimates and assumptions about the future. The following discusses the most significant accounting judgments and estimates that the Fund has made in preparing the financial statements: Classification and measurement of investments and application of the fair value option The Fund invests on a total return basis for the purpose of applying the fair value option for financial assets under IAS 39, Financial Instruments Recognition and Measurement (IAS 39). The most significant judgment made in preparing the financial statements is that certain investments are held-for-trading and that the fair value option could be applied to those which are not. The most significant estimate is the fair value of the Forward Agreement which is based on the fair value of the underlying security, other assets and liabilities and the credit risk associated with the Counterparty. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Foreign currency translation Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing at the end of period. Purchases and sales of investments and income and expenses are translated into Canadian dollars at the exchange prevailing on the transaction date. Foreign exchange gains and losses relating to cash are presented as Foreign exchange gain (loss) on cash. Foreign exchange gains and losses relating to financial assets and liabilities are recorded in the Statements of Comprehensive Income 11

13 in net realized gain (loss) on partial pre-settlements of Forward Agreement and unrealized appreciation (depreciation) on Forward Agreement. Realized gains or losses on foreign exchange contracts arise as a result of the closing of a position on the settlement date. The net realized gain or loss is reported as Net realized gain (loss) on foreign exchange contracts in the Statements of Comprehensive Income. Open foreign exchange contracts are valued at the gain or loss that would arise as a result of closing the position on the valuation date. The unrealized gain or loss, for the reporting period, is reflected in the Statements of Comprehensive Income as Unrealized gain/(loss) on foreign exchange contracts. Financial instruments The Fund recognizes financial assets and liabilities at fair value on the trade date when the Fund becomes a party to the contractual provisions of the instrument. The Fund s investment in the Forward Agreement is held-for-trading. The Fund s obligation for net assets attributable to Unitholders is presented at the redemption amount. All other financial assets and liabilities are carried at amortized cost which approximates their fair values due to their short-term nature. The Fund s accounting policies for measuring the fair value of its investments and derivatives are identical to those used in measuring its net asset value for transactions with Unitholders. Cash Cash is comprised of demand deposits. Income Taxes The Fund qualifies as a mutual fund trust as defined in the Income Tax Act (Canada) (the Act ). All of the Fund s net income for tax purposes and net capital gains realized in any period are required to be distributed to Unitholders such that no income tax is payable by the Fund. As a result, the Fund does not record income taxes and therefore, the tax benefit of unused capital and non-capital losses has not been reflected in the Statements of Financial Position as a deferred income tax asset. Increase (decrease) in net assets attributable to Unitholders per Unit The increase (decrease) in net assets attributable to Unitholders per Unit amounts are calculated by dividing the increase (decrease) in net assets attributable to Unitholders by the weighted average number of units outstanding (see note 7) during the year. Classification of units The Fund has two classes of units with different features that are equally subordinate and contain multiple contractual obligations and therefore are classified as financial liabilities in accordance with the requirements of International Accounting Standard 32 Financial Instruments: Presentation. 12

14 Accounting standards issued but not yet adopted The final version of IFRS 9 Financial Instruments, was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement and applies to the classification and measurement of financial assets and liabilities as defined in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however is available for early adoption. The Fund is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 4. FORWARD AGREEMENT Pursuant to the Forward Agreement, the Counterparty will deliver, on the scheduled settlement date of the Forward Agreement, a specified portfolio of securities of Canadian public issuers with an aggregate value equal to the redemption proceeds that would be received by Unitholders on the redemption of the relevant number of units of the Moneda Fund comprising the Notional Portfolio net of any amount owing by the Fund to the Counterparty including any leveraged exposure. The Fund partially pre-settles 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. Settlement of the Forward Agreement is unconditionally guaranteed by The Bank of Nova Scotia, a company with a current credit rating of AA (December 31, 2013 AA) as rated by the Dominion Bond Rating Service ( DBRS ). The Fund is fully exposed to the credit risk associated with the Counterparty. To secure obligations of the Counterparty under the Forward Agreement, the Counterparty pledges collateral in favour of the Fund with an aggregate value equal to the exposure under the Forward Agreement with the amount of collateral re-set on a weekly basis. As at December 31, 2014, collateral of $43.5 million (December 31, 2013 collateral of $50.7 million and January 1, 2013 collateral of $48.0 million) consisting of liquid securities listed on the Toronto Stock Exchange ( TSX ) with no more than 10% of the value in any one issuer was held in trust for the Fund. The Forward Agreement provides exposure to an additional number of units of the Moneda Fund with a cost of $3,952,755 (the Funded Amount ) (December 31, 2013 $4,609,929 and January 1, 2013 $4,937,015). A pro-rata portion of the Funded Amount is reduced on any unwinds that result in the reduction of the number of notional units referred to under the Forward Agreement. Such reduction will be treated as a deduction from the unwind amount. The Fund pays an incremental fee on the Funded Amount under the Forward Agreement which is calculated based on the quarterly London Inter-Bank Offered Rate (LIBOR) plus 135bps, currently 1.58%. For the year ended December 31, 2014, total fees on the Funded Amount of $69,078 (2013 $79,783) were deducted from cash held under the Forward Agreement in favour of the Counterparty. The ratio of the Funded Amount to net assets as of December 31, 2014 was 9.7% (December 31, % and January 1, %). The Manager will instruct the Counterparty to sell Moneda units comprising the Notional Portfolio, if at any time the Funded Amount exceeds 18% of the net assets of the Fund in order to reduce such percentage to no more than 18%. 13

15 The assets and liabilities as reported by the Moneda Fund as at December 31, 2014, December 31, 2013 and January 1, 2013 are listed below for informational purposes: Moneda Fund December 31 December 31 January 1 (in USD) Assets Bonds $ 1,051,715,173 $ 1,135,130,770 $ 1,098,365,679 Cash 146,526,997 90,878, ,266,915 Equity securities 27,826,481 70,274,149 35,871,263 Other assets 5,701,152 7,931,426 8,154,537 1,231,769,803 1,304,214,820 1,259,658,394 Liabilities Margin loan 141,033, ,827, ,513,899 Bonds short 150,997,630 91,805, ,858,342 Other liabilities 1,874, ,602 1,558,553 Equities short 1,211, ,905, ,657, ,930,794 Net assets for valuation purposes $ 937,863,949 $ 938,557,007 $ 921,727,600 Outstanding units 9,097,411 9,430,904 9,988,378 Net asset value Unit $ $ $ The total fair value of the Fund s investment determined with reference to the Notional Portfolio of units of the Moneda Fund is as follows: Number of units attributable to the Fund 396, , ,381 Aggregate value of units of the Moneda Fund comprising the Notional Porfolio $ 40,869,927 $ 50,188,080 $ 53,280,719 Cash held 219,740 1,346,039 1,392,018 Funded Amount including interest (3,419,624) (4,349,598) (4,980,326) Fair value of Forward Agreement (USD) $ 37,670,043 $ 47,184,521 $ 49,692,411 Fair value of Forward Agreement (CAD) $ 43,701,017 $ 50,185,457 $ 49,438,979 14

16 Concentration As at December 31, 2014, December 31, 2013 and January 1, 2013, the Moneda Fund investment portfolio s concentration can be summarized as follows: December 31 December 31 January Bonds Argentina 20.7% 12.3% 10.8% Brazil 28.2% 29.2% 32.3% Chile 4.3% 3.4% 0.5% Colombia 3.1% 5.6% 6.6% Dominican Republic 9.1% 6.2% 6.7% El Salvador 0.1% 0.2% 0.2% Guatamala 4.4% 2.2% 2.2% Mexico 22.9% 39.0% 34.5% Panama 0.9% 2.1% 1.3% Paraguay 6.4% 4.6% 4.7% Peru 9.5% 11.0% 11.6% Trinidad 0.0% 0.0% 0.2% Venezuela 1.1% 2.9% 7.0% United States 0.0% 0.1% 0.0% Other 1.4% 2.1% 0.6% Short sales (16.0)% (9.8)% (13.1)% Equities Brazil 0.9% 0.5% 0.0% Colombia 2.0% 1.5% 1.4% Mexico 0.0% 5.5% 2.5% Short sales 0.0% (0.1)% Liabilities less other assets 1.0% (18.5)% (10.0)% Total (% of Net Assets) 100.0% 100.0% 100.0% 15

17 5. OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements: Gross amounts Amounts Gross amounts of recognized Net amounts not set-off of recognized financial liabilities of financial financial financial assets offset assets instruments Net amount December 31, 2014 Forward Agreement $ 43,701,017 $ $ 43,701,017 $ 43,701,017 Foreign exchange contracts 139, , ,873 December 31, 2013 Forward Agreement 50,185,457 50,185,457 50,185,457 January 1, 2013 Forward Agreement $ 49,438,979 $ $ 49,438,979 $ $ 49,438,979 The Counterparty has pledged collateral in respect of its obligations under the Forward Agreement as indicated in note 4. Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements: Gross amounts Gross amounts Amounts of recognized of recognized Net amounts not set-off financial financial assets of financial financial liabilities offset liabilities instruments Net amount December 31, 2014 Foreign exchange contracts $ 2,541,848 $ $ 2,541,848 $ 139,873 $ 2,401,975 December 31, 2013 Foreign exchange contracts 1,324, ,701 1,188,932 1,188,932 January 1, 2013 Foreign exchange contracts $ 1,451,282 $ 385,701 $ 1,065,581 $ $ 1,065,581 16

18 6. FOREIGN EXCHANGE CONTRACTS The foreign exchange contracts have been entered into with The Bank of Nova Scotia whose current credit rating is AA as rated by DBRS. As at December 31, 2014 Canadian Dollars US Dollars Contract Price Unrealized (Sold) Purchased (Sold) Purchased Delivery Date (USD/CAD) Gain (Loss) $ 42,539,040 $(38,700,000) January 12, $(2,364,920) (45,081,630) 38,700,000 January 12, (176,928) (2,541,848) 37,116,960 (31,800,000) April 15, $ 139,873 As at December 31, 2013 Canadian Dollars US Dollars Contract Price Unrealized (Sold) Purchased (Sold) Purchased Delivery Date (USD/CAD) Gain (Loss) $ 44,233,357 $(42,700,000) January 13, $(1,194,234) (45,291,890) 42,700,000 January 13, ,701 (1,058,533) 41,557,044 (39,100,000) April 11, (130,399) $(1,188,932) As at January 1, 2013 Canadian Dollars US Dollars Contract Price Unrealized (Sold) Purchased (Sold) Purchased Delivery Date (USD/CAD) Gain (Loss) $ 40,050,675 $(41,300,000) January 14, $(1,048,566) (40,713,540) 41,300,000 January 14, ,701 (662,865) 40,948,050 (41,500,000) March 14, (402,716) $(1,065,581) 7. NET ASSETS ATTRIBUTABLE TO UNITHOLDERS The Fund is authorized to issue an unlimited number of Units of each class. Each Class A Unit and Class U Unit represents an undivided ownership interest in the assets of that class of Units of the Fund, with all Units of the same class having equal rights and privileges. The Class A Units of the Fund are listed for trading on the TSX 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. 17

19 The Class A Units and Class U Units both have the same investment objectives and restrictions and differ with respect to certain expenses allocable only to Class A Units including hedging costs and listing fees. Accordingly, the net assets per Unit of each class will not be the same as a result of the different expenses and hedging amounts allocable to each class of Units. The Fund does not have a fixed termination date but may be terminated at any time with the prior approval of the Unitholders that has been obtained by a two-thirds majority vote at a meeting of Unitholders called for that purpose. The Manager may also, in its discretion, terminate the Fund on not less than 21 days prior notice by way of press release to Unitholders without the approval of Unitholders if, in the opinion of the Manager, it is no longer economically feasible to continue the Fund or it would be in the best interest of the Unitholders to terminate the Fund. Retraction of Fund Units Units may be surrendered for retraction, by delivery of a retraction notice to the Fund s registrar, 45 days prior to the last business day of November each year (the Retraction Notice Date ). Units surrendered for retraction by a Unitholder no later than the Retraction Notice Date will be retracted, and the Unitholder will receive payment on the 15th day after the Retraction Notice Date of each year. A holder who surrenders Units for retraction on or before the Retraction Notice Date will receive payment of the retraction price in cash in an amount per Unit equal to 100% of the Net Asset Value per Unit of the applicable class determined on the valuation date being the last business day of November each year less any costs associated with the retraction, including any brokerage costs. Conversion of Class U Units to Class A Units A holder of Class U Units may convert such Class U Units into Class A Units on a weekly basis for liquidity purposes. Class U Units may be converted in any week on the first business day of such week (the Conversion Date ) by delivering a notice to the Manager and surrendering such Class U Units at least 5 business days prior to the applicable Conversion Date. For each Class U Unit so converted, a holder will receive that number of Class A Units equal to the Net Asset Value per Class U Unit as at the close of trading on the business day immediately preceding the Conversion Date divided by the Net Asset Value per Class A Unit as at the close of trading on the business day immediately preceding the Conversion Date. No fraction of a Class A Unit will be issued upon any conversion of Class U Units and any fractional amounts will be rounded down to the nearest whole number of Class A Units. 18

20 The number of Units issued and outstanding for the years ended December 31 is summarized as follows: Class A Balance, beginning of year 4,207,043 4,600,224 Units, retracted for cash (667,565) (393,416) Units, converted from U Units 7, Balance, end of year 3,547,111 4,207,043 Class U Balance, beginning of year 395, ,390 Units, retracted for cash (7,000) (5,000) Units, converted from U Units (7,000) (225) Balance, end of year 381, ,165 The weighted average number of units outstanding for the year ended December 31, 2014 are Class A 4,182,579 (2013 4,579,937) and Class U 390,466 ( ,946). The market value of the Class A Units on December 31, 2014 was $10.06 per Unit (December 31, 2013 $9.95 and January 1, 2013 $9.86) 8. INCOME TAXES The Fund did not realize any income, gain or loss as a result of entering into the Forward Agreement and no amount is expected to be included in the Fund s income by virtue of the acquisition of the Canadian securities through partial pre-settlements or final settlement of the Forward Agreement. The cost to the Fund of such Canadian securities will be that portion of the aggregate amount paid by the Fund under the Forward Agreement attributable to the Canadian securities. The resulting gain or loss realized by the Fund on the sale of Canadian securities acquired pursuant to the Forward Agreement is expected to be taxed as capital gains or capital losses. Given the investment structure, the Fund s net income for tax purposes will be ordinarily comprised of realized gains on partial pre-settlements of the Forward Agreement, offset by expenses and issue costs of the Fund. To the extent the Fund has net income in any year, distributions paid or payable to Unitholders will be characterized for tax purposes as capital gains, with any excess characterized as return of capital. The Federal government has eliminated the tax benefits associated with forward agreements as used by the Fund to achieve capital gains treatment on income that would otherwise be treated as ordinary income (the Character Conversion Rules ). 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. Based on the Fund s legal structure and the Forward Agreement in place, this measure does not immediately affect the Fund as the Character Conversion Rules include grandfathering rules such that the Fund s distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on October 31,

21 The Fund has unused capital losses of $373,000 and unused non-capital losses of $1,255,000 to offset future income for tax purposes for which no benefit has been recognized in these financial statements. The capital losses do not have an expiry date and the non-capital loss amounts by year of expiry are as follows: 2031 $ 229, , ,019,300 $1,255, RELATED PARTY INFORMATION For its services to the Fund which include the provision of key management personnel, SMCAI is entitled to receive a management fee equal to 0.40% per annum of the Net Asset Value. The total management fee paid or payable to SMCAI for the period ended December 31, 2014 was $216,983 (2013 $231,571). The ongoing management fee 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 for the period ended December 31, 2014 was $214,457 (2013 $225,723). Fees charged on the Funded Amount totaled $69,077 for the period ended December 31, 2014 (2013 $79,783). At December 31, 2014, the Fund had accrued liabilities of $44,670 (December 31, 2013 $52,293 and January 1, 2013 $73,812) payable to SMCAI and SCI, and had cash on deposit with The Bank of Nova Scotia, of $262,306 (December 31, 2013 $35,899 and January 1, 2013 $1,445,306). 10. CAPITAL MANAGEMENT The Fund s capital is represented by net assets attributable to Unitholders. The Manager with oversight from the Trustee, is responsible for providing all administrative services required by the Fund, including the receipt of cash from partial unwinds of the Forward Agreement to fund operating expenses and the payment of distributions to the Unitholders. The Fund makes cash distributions funded from proceeds received from partial unwinds of the Forward Agreement after deduction of operating expenses of the Fund subject to maintaining a minimum level of cash on hand. The Manager will instruct the Counterparty to sell Moneda units comprising the Notional Portfolio, if at any time the Funded Amount exceeds 18% of the net assets of the Fund and reduce such percentage to no more than 18%. 20

22 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table outlines the fair value hierarchy of the financial instruments as at December 31, 2014, December 31, 2013 and January 1, Level 1 Level 2 Level 3 Total As at December 31, 2014 Forward Agreement $ $ 43,701,017 $ $ 43,701,017 Foreign exchange contract receivable 139, ,873 Foreign exchange contracts payable (2,541,848) (2,541,848) As at December 31, 2013 Forward Agreement 50,185,457 50,185,457 Foreign exchange contracts payable (1,188,932) (1,188,932) As at January 1, 2013 Forward Agreement 49,438,979 49,438,979 Foreign exchange contracts payable (1,065,581) (1,065,581) All fair value measurements above are recurring. The carrying amounts of cash and all current liabilities approximate their fair value due to their short-term nature. Instruments are classified as Level 1 when the related security or derivative is actively traded and a quoted price is available. Instruments are classified as Level 2 when the related security or derivative has inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified into Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is classified as Level 3. The Fund s policy is to recognize transfers into and out of fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer. There were no transfers between levels during any of the years presented. Forward Agreement The fair value is based on the Notional Portfolio, the difference between the contract rate and current market rates. The inputs that are significant to the valuation are observable and therefore the Forward Agreement has been classified as Level 2. Foreign exchange contracts The fair value is based on the contract notional amount, the difference between the contract rate and the forward market rate for the same currency, interest rates and credit spreads. Contracts for which the counterparty credit spreads are observable and reliable, or for which the credit-related inputs are determined not to be significant to fair value, are classified as Level 2. 21

23 12. FINANCIAL INSTRUMENT RISK MANAGEMENT In the normal course of business, the Fund is exposed to a variety of financial risks: market risk (including price risk, interest rate risk and currency risk), credit risk and liquidity risk. The Manager seeks to reduce these risks by employing an experienced Portfolio Manager, who invests within the limits as outlined in the Fund s investment objectives and strategies. The Fund s overall risk management program focuses on compliance and execution of the Fund s investment objectives and strategies. The Manager meets at least quarterly with the Portfolio Manager to review operations and statistics, including performance and levels of risk. The risks associated with an investment in the Fund s Units are best defined in conjunction with financial risks associated with an investment in the units of the Moneda Fund comprising the Notional Portfolio. Price Risk Price risk is the risk that securities will fluctuate in value because of changes in market prices (other than those arising from interest rate risk or currency risk). All investments present a risk of loss of capital. By virtue of the Forward Agreement, the value of a Unit is dependent on the net asset value of the Moneda Fund, which varies principally because of fluctuations in the value of high yield fixed income securities of companies held by it. The value of the fixed income securities can fluctuate on a daily basis as a result of factors outside of the Moneda Fund s control, including financial performance of the issuers of the fixed income securities, operational risks relating to the specific business activities of the respective issuers, quality of assets owned by respective issuers, commodity prices, exchange rates, interest rates, environmental risks, political risks, issues relating to government regulation and taxation, composition of the portfolio and other financial market conditions. The Portfolio Manager seeks to reduce this risk by following the Moneda Fund s investment strategy including active management and diversification of the Portfolio by country, industry sector, maturity and credit rating. In addition, the Portfolio Manager may, from time to time, hold a portion of the portfolio, in other credit securities in the public and private market in the form of promissory notes, loans and other debt securities. If the prices for the fixed income securities held by the Moneda Fund had increased or decreased by 5% as at December 31, 2014, with all other variables held constant, the Fund s net assets would have increased or decreased, respectively, by approximately $2.1 million or 5.9% of Class A Net Assets and $0.2 million or 5.5% of Class U Net Assets of which $0.2 million or 0.6% of Class A Net Assets and.02 million or 0.6% of Class U Net Assets is the result of leverage to which Unitholders are exposed through the Funded Amount (December 31, 2013 $2.4 million or 5.6% of Class A Net Assets and $0.2 million or 5.5% of Class U Net Assets of which $0.3 million or 0.6% of Class A Net Assets and $0.02 million or 0.6% of Class U Net Assets and January 1, 2013 $2.4 million or 5.4% of Class A Net Assets and $0.2 million or 5.7% of Class U Net Assets of which $0.2 million or 0.5% of Class A Net Assets and $0.02 million or 0.5% of Class U Net Assets). In practice, the actual results may differ materially from this sensitivity analysis. Interest Rate Risk Interest rate risk arises from changes in the prevailing levels of market interest rates, which will affect the future cash flows and the fair values of interest bearing financial instruments. By virtue of the Forward Agreement, the Fund s indirect exposure to interest rate risk is concentrated in its investments in fixed income securities held by the Moneda Fund. Short-term investments, and other assets and liabilities are 22