Semi-Annual Management Report of Fund Performance

Transcription

1 Semi-Annual Management Report of Fund Performance BMO Private U.S. Special Equity Portfolio For the period ended June 30, 2017 This semi-annual management report of fund performance contains financial highlights, but does not contain the semi-annual or annual financial statements of the Portfolio. If the semi-annual or annual financial statements of the Portfolio do not accompany the mailing of this report, you may obtain a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling , by ing us at contact.centre@bmo.com, by writing to us at BMO Private Investment Counsel Inc., 1 First Canadian Place, 100 King St. W., 41st Floor, Toronto, Ontario, M5X 1A1 or by visiting our website at or SEDAR at You may also contact us using one of these methods to request a copy of the Portfolio s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. Management Discussion of Fund Performance BMO Private Investment Counsel Inc. ( BPIC or the Manager ), the manager and portfolio manager, is responsible for the management of the overall business, investments and operations of the BMO Private Portfolios and has engaged William Blair Investment Management, LLC ( William Blair or the sub-advisor ) as the sub- advisor of BMO Private U.S. Special Equity Portfolio (the Portfolio ). William Blair replaced BMO Asset Management Corp. as sub- advisor of the Portfolio on January 16, Results of Operations Effective January 16, 2017, the Portfolio s benchmark changed to the Russell 2500 Growth Index from the Russell 2000 Growth Index as a result of the subadvisor change made to enhance the Portfolio s performance. The investment strategies of the Portfolio did not change as a result of this sub-advisor change. Over the six-month period ended June 30, 2017, the Portfolio returned 11.16% in C$ (15.15% in US$), after expenses. The Russell 2500 Growth Index generated a 6.93% total return in C$ (10.64% in US$) over the same six-month period. The Russell 2000 Growth Index generated a 6.34% total return in C$ (9.97% in US$) over the same six-month period. U.S. equities rose significantly during the six-month period ended June 30, 2017, with particular strength among growth-style indices. Robust first-quarter returns were driven by improved economic data, corporate earnings growth and continued optimism for the pro-u.s. growth initiatives of the new administration. In the latter part of the first quarter of 2017, markets shifted as investors became more cautious about the likelihood for success of the new administration s progrowth initiatives, given the Republican Party s failure to quickly overhaul the U.S. health system. Despite that shift, U.S. growth equity indices continued their upward trajectories during the second quarter. Underpinning the market s second-quarter advance was strong corporate earnings growth. Corporations in the S&P 500 Index reported first-quarter earnings growth of 14% as compared to the same period in the prior year, the fastest pace of growth since However, as expectations for an acceleration in U.S. economic growth tempered, 10-year U.S. Treasury yields declined. Despite muted inflation and wage growth, the U.S. Federal Reserve Board (the Fed ) enacted its second interest rate increase of the year in June, compelled by tight labour markets as unemployment levels fell to 4.3% in May. In the final week of the quarter, a sense of caution crept into the market as the European Central Bank (the ECB ) signaled a forthcoming reduction in monetary stimulus. As investors digested the potential shift in global central banks monetary policies, the market retreated, paring back some of the strong gains achieved in the quarter overall. Stock selection was a significant contributor to the Portfolio s performance, with positive contributions from several sectors. Health Care sector holdings

2 were a standout for the period, with holdings in Exact Sciences Corp., Veeva Systems Inc. and Akorn Inc. among the Portfolio s top individual contributors. Exact Sciences Corp. stock outperformed after the company reported strong operating and financial results as the company has taken significant strides in becoming the standard of care in colorectal cancer screening. Some Information Technology sector holdings also contributed to performance, including CoStar Group Inc. and Arista Networks Inc. CoStar Group Inc. provides information, marketing and analytic services to the real estate industry in the United States and the United Kingdom. The company s shares outperformed after it announced sales and earnings that exceeded expectations and it raised 2017 forecasts. In addition to stock specific drivers, the Portfolio s higher growth bias was a tailwind during the quarter as higher growth stocks within the Russell 2500 Growth benchmark outperformed. Stock selection in Consumer Discretionary, due to a position in Tractor Supply Co., detracted from performance. Tractor Supply Co., a specialty retailer focused on the lifestyle needs of recreational farmers and ranchers, underperformed after it lowered forward-looking forecasts for 2017 amid a slow start to the year. The company s stock came under pressure, along with the rest of the retail sector, as a result of less foot traffic in physical store locations. Other individual detractors included holdings in Akamai Technologies, Carrizo Oil & Gas Inc., Booz Allen Hamilton Holding Corp. and Bank of the Ozarks. Akamai Technologies Inc., which provides solutions for accelerating and improving the delivery of internet content and increasing the speed and reliability of internet-based applications, saw its share price decline after the company's second-quarter outlook disappointed investors. The sub-advisor introduced a number of new positions to the Portfolio during the period, including Grand Canyon Education Inc., TransUnion, National Instruments Corp., Acadia Healthcare Co. Inc. and Euronet Worldwide Inc. Positions in TransDigm Group Inc., Akamai Technologies Inc., Ulta Salon, Cosmetics & Fragrance Inc., Imax Corp. and Akorn Inc. were eliminated. Existing holdings of Ligand Pharmaceuticals Inc. and Copart Inc. were increased, while Mettler- Toledo International Inc. and Old Dominion Freight Line Inc. were reduced. The sub-advisor trimmed both Exact Sciences Corp. and Veeva Systems Inc. after strong performance. During the period, the Portfolio s sub-advisor was changed. As a result, the Portfolio was repositioned, with a number of holdings being added and others eliminated. As well, positions in select holdings were increased or reduced. Due to the Portfolio being repositioned, its trading expense ratio and portfolio turnover rate were higher than in previous periods. Also, as a result of the sub-advisor change, the Portfolio s management expense ratio was higher due to a moderate increase in sub-advisory fees payable by the Portfolio, which took effect on March 20, For information on the Portfolio s longer term performance and composition, please refer to the Past Performance section and Summary of Investment Portfolio section of this report. Recent Developments Fiscal and monetary forces are diverging in the United States as the current administration works to implement business-friendly legislation, such as tax reform and infrastructure spending, and the Fed has embarked on a path toward raising interest rates. With better global economic stability, other central banks, namely the ECB and People s Bank of China, have also signaled a shift toward less stimulative monetary policy. The pace at which these various groups enact policy change may have an impact on the U.S. economy as well as the U.S. equity market. Furthermore, as a result of being in the latter stages of the economic cycle and a prolonged environment of low interest rates, there are likely excesses (such as high corporate debt issuance used broadly for share buybacks rather than capital investment) building in the economy that will eventually need to unwind. The sub-advisor will remain mindful of these issues and keep focused on identifying businesses with growth drivers that should be able to help thrive in a variety of economic or market scenarios, and whose stocks present attractive risk-reward opportunities. The sub-advisor has positioned the Portfolio in high-quality companies with more durable growth opportunities than the market expects, which should be rewarded over the long run.

3 Related Party Transactions BMO Trust Company, an indirect, wholly-owned subsidiary of Bank of Montreal, is the trustee (the trustee ) and BPIC is the manager of the Portfolio. From time to time, BPIC may, on behalf of the Portfolio, enter into transactions or arrangements with or involving other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Portfolio (each, a related party and collectively, the related parties ). The purpose of this section is to provide a brief description of any transaction involving the Portfolio and a Related Party. In each instance where a conflict of interest is identified, it will be referred to the Portfolio s independent review committee (the IRC ). The primary focus of the IRC is to determine whether the proposed action of the Manager in respect of the conflict of interest matter achieves a fair and reasonable result for the Portfolio. The IRC has reviewed the related party relationships described below and has provided a positive recommendation that each relationship achieves a fair and reasonable result for the Portfolio. Sub-advisor BPIC has hired William Blair to provide investment advice and make investment decisions for the Portfolio s investment portfolio. William Blair receives a sub-advisory fee based on assets under management, which is paid quarterly. William Blair is paid by BPIC, and BPIC charges a portion of the sub-advisory fee as an expense to the Portfolio. Brokerage Commissions The Portfolio pays standard brokerage commissions at market rates to BMO Nesbitt Burns Inc., an affiliate of the Manager, for executing a portion of its trades. The brokerage commissions charged to the Portfolio during the periods were as follows: Period ended Period ended June 30, 2017 June 30, 2016 Total Brokerage Commissions Brokerage Commissions paid to BMO Nesbitt Burns Inc. 0 Wealth Management Fee Units of the Portfolio are only available through the wealth management service offered by BMO Financial Group. The trustee, a related party, and the Manager receive an annual fee from each investor for the wealth management service offered by BMO Financial Group. A tiered schedule is applied to calculate the annual fee for this service. The fee schedule starts at 1.95% and declines to 0.20% (depending on the nature and size of the investor s investment portfolio), and is calculated as a percentage of the assets under management. The actual wealth management fee payable by each investor is set out in BPIC s Investment Management Fee Schedule that is provided to the investor when the investor enters into an investment management agreement with the trustee and BPIC. The wealth management fee is paid directly by the investor to the trustee and the Manager. The trustee may compensate financial institutions and securities registrants within BMO Financial Group for client referrals to the wealth management service. Unitholder Services The Portfolio is provided with certain facilities and services by related parties. BPIC is the registrar of the Portfolio. The trustee and BPIC are paid by the Portfolio for fees relating to the custodial and administrative services they provide, respectively. Administrative services include fund accounting, record keeping and purchases/redemption order processing. The fees charged to the Portfolio during the periods were as follows: Period ended Period ended June 30, 2017 June 30, 2016 Unitholder Services Management Fee There is no management fee charged to the Portfolio. The trustee and the Manager receive an annual wealth management fee from investors for the wealth management service offered by BMO Financial Group.

4 Financial Highlights The following tables show selected key financial information about the Portfolio and are intended to help you understand the Portfolio s financial performance for the periods indicated. Six months ended Years ended December 31 The Portfolio s Net Assets Per Unit (1) June 30, Net assets, beginning of period $ Increase (decrease) from operations: Total revenue $ Total expenses (2) $ (0.04) (0.07) (0.08) (0.11) (0.08) (0.07) Realized gains (losses) for the period $ 1.14 (0.47) Unrealized gains (losses) for the period $ (0.17) 0.10 (0.12) Total increase (decrease) from operations (3) $ 0.96 (0.36) Distributions: From income (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ (1) This information is derived from the Portfolio s unaudited and audited financial statements. The financial information presented for the periods ended June 30, 2017, December 31, 2016, December 31, 2015, December 31, 2014 and December 31, 2013 is derived from the financial statements determined in accordance with IFRS. Information for periods prior to January 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. (2) Includes commissions and other portfolio transaction costs. Prior to 2013, withholding taxes were not included in expenses as they were included in revenue. (3) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (4) Distributions were paid in cash or reinvested in additional units of the Portfolio, or both. Six months ended Years ended December 31 Ratios and Supplemental Data June 30, Total net asset value (000s) (1) $ 211, , , , ,458 30,749 Number of units outstanding (000s) (1) 22,584 22,823 33,575 25,940 23,291 6,575 Management expense ratio (2) % Management expense ratio before waivers or management absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ (1) This information is provided as at June 30 or December 31 of the period shown, as applicable. (2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (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 period. (4) The portfolio turnover rate indicates how actively the Portfolio s sub-advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Portfolio buying and selling all of the securities in its portfolio once in the course of the year. The higher a portfolio turnover rate in a year, the greater the trading costs payable by the Portfolio 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 portfolio.

5 Past Performance BMO Private U.S. Special Equity Portfolio (C$) General The Portfolio s performance information assumes that all distributions made by the Portfolio in the periods shown were reinvested in additional units of the Portfolio and is based on the net asset value of the Portfolio. 60% 30% 0% The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember, how the Portfolio has performed in the past does not necessarily indicate how it will perform in the future. Year-by-Year Returns The following bar charts show the performance for each of the financial years and for the six-month period ended June 30, 2017 shown and illustrate how the performance has changed from year to year. The bar charts show in percentage terms how an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year % % (1) (2),(3) BMO Private U.S. Special Equity Portfolio (US$) 60% % % % -60% (1) (2),(3) (1) On October 26, 2012, the Portfolio s investment objectives, investment strategies, sub-advisor and benchmark were changed. Accordingly, the Portfolio s performance prior to this date would have been different under the current investment objective, investment strategies, sub-advisor and benchmark. (2) On January 16, 2017, the Portfolio s sub-advisor and benchmark were changed. Accordingly, the Portfolio s performance prior to this date would have been different under the current sub-advisor and benchmark. (3) For the six-month period ended June 30, 2017.

6 Summary of Investment Portfolio as at June 30, 2017 Portfolio Allocation % of Net Asset Value Top 25 Holdings % of Net Asset Value United States 93.8 Cash/Receivables/Payables 2.9 Canada 2.1 Switzerland 1.2 Total portfolio allocation Sector Allocation % of Net Asset Value Information Technology 22.1 Health Care 20.2 Industrials 17.9 Consumer Discretionary 13.3 Financials 10.1 Materials 6.4 Real Estate 5.3 Cash/Receivables/Payables 2.9 Energy 1.2 Consumer Staples 0.6 Total sector allocation Issuer Cash/Receivables/Payables 2.9 CoStar Group, Inc. 2.8 Ligand Pharmaceuticals Incorporated 2.8 Copart, Inc. 2.6 BWX Technologies, Inc. 2.5 Six Flags Entertainment Corporation 2.3 Guidewire Software, Inc. 2.3 j2 Global, Inc. 2.2 SBA Communications Corporation 2.2 Old Dominion Freight Line, Inc. 2.1 Ball Corporation 2.1 Middleby Corporation, The, 1.9 Booz Allen Hamilton Holding Corporation 1.8 Vantiv, Inc., Class A 1.8 Centene Corporation 1.8 Tractor Supply Company 1.7 2U, Inc. 1.7 Celanese Corporation, Series A 1.6 Grand Canyon Education, Inc. 1.6 MAXIMUS, Inc. 1.6 Bank of the Ozarks, Inc. 1.6 CSRA Inc. 1.6 HealthSouth Corporation 1.6 Arista Networks, Inc. 1.6 Wabtec Corporation 1.5 Top holdings as a percentage of total net asset value 50.2 Total Net Asset Value $211,469,290 The summary of investment portfolio may change due to the Portfolio s ongoing portfolio transactions. Updates are available quarterly.

7 Manager BMO Private Investment Counsel Inc. 1 First Canadian Place 100 King St. W., 41st Floor Toronto, Ontario M5X 1A1 Trustee BMO Trust Company 1 First Canadian Place 100 King St. W., 41st Floor Toronto, Ontario M5X 1A1 BMO (M-bar roundel symbol) registered trademark, and BMO (M-bar roundel symbol) Private Banking trademark are owned by Bank of Montreal, used under licence. BMO Private Banking is part of BMO Wealth Management. Banking services are offered through Bank of Montreal. Investment management services are offered through BMO Private Investment Counsel Inc., an indirect subsidiary of Bank of Montreal. Estate, Trust, Planning and Custodial Services are offered through BMO Trust Company, a wholly-owned subsidiary of Bank of Montreal. This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, the effects of competition in the geographic and business areas in which the Portfolio may invest and the risks detailed from time to time in the simplified prospectus of the BMO Private Portfolios. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Portfolio, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, BMO Private Investment Counsel Inc. does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. (06/17)