PRINCIPAL HIGH QUALITY CANADIAN FIXED INCOME PLUS FUND

Transcription

1 Financial Statements of PRINCIPAL HIGH QUALITY CANADIAN FIXED INCOME PLUS FUND

2 KPMG LLP Bay Adelaide Centre 333 Bay Street, Suite 4600 Toronto ON M5H 2S5 Canada Tel Fax INDEPENDENT AUDITORS' REPORT To the Unitholders of Principal High Quality Canadian Fixed Income Plus Fund We have audited the accompanying financial statements of Principal High Quality Canadian Fixed Income Plus Fund, which comprise the statement of financial position as at December 31, 2016, the statements of comprehensive income, changes in net assets attributable to holders of redeemable units and cash flows for the year then ended, and notes, comprising 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 these 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. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit 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 our 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, we consider 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 is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.

3 Page 2 Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Principal High Quality Canadian Fixed Income Plus Fund as at December 31, 2016, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March 22, 2017 Toronto, Canada

4 Statement of Financial Position December 31, 2016, with comparative information for 2015 Assets Cash $ 634,243 $ 676,920 Receivable for portfolio securities sold 325,736 Subscriptions receivable 1,397 15,354 Accrued interest receivable 234, ,249 Investments, at fair value 38,576,344 47,184,223 Derivative assets 72,870 27,739 Total assets 39,844,819 48,147,485 Liabilities Accounts payable relating to margin 54,721 41,606 Redemptions payable 10,572 56,728 Accrued expenses 53, ,962 Derivative liabilities 262, ,140 Total liabilities 381, ,436 Net assets attributable to holders of redeemable units $ 39,462,830 $ 47,629,049 Redeemable units (note 3) 3,973,772 4,616,215 Net assets attributable to holders of redeemable units per unit $ 9.93 $ See accompanying notes to financial statements. On behalf of the Manager, Integra Capital Limited: Graham Rennie Director Craig Honey Director 1

5 Statement of Comprehensive Income, with comparative information for Income: Interest income for distribution purposes $ 1,420,715 $ 1,830,306 Revenue from securities lending (note 7) 1,800 1,074 Other changes in fair value of investments and derivatives: Net realized gain on sale of investments 892,545 2,364,393 Net realized gain (loss) on sale of derivatives 102,717 (1,793,073) Net foreign exchange gain (loss) on cash (40,419) 107,671 Net other gain (loss) 236,466 (809,689) Net change in unrealized depreciation of investments and derivatives (1,418,175) (83,052) Total income 1,195,649 1,617,630 Expenses: Custodial fees 46,290 54,960 Operating fees 10,000 7,535 Audit fees 23,755 25,000 Legal fees 495 2,000 Filing fees Investment performance monitoring fees 2,250 8,000 Securityholder reporting costs 8,000 1,495 Commission on futures 3,080 3,100 Harmonized sales tax 10,950 10,150 Alternative minimum tax 109,435 Total expenses 105, ,625 Increase in net assets attributable to holders of redeemable units $ 1,090,579 $ 1,395,005 Increase in net assets attributable to holders of redeemable units per unit (based on the weighted average number of units outstanding during the year) $ 0.26 $ 0.28 See accompanying notes to financial statements. 2

6 Statement of Changes in Net Assets Attributable to Holders of Redeemable Units, with comparative information for Net assets attributable to holders of redeemable units, beginning of year $ 47,629,049 $ 50,495,678 Increase in net assets attributable to holders of redeemable units 1,090,579 1,395,005 Distributions paid or payable to holders of redeemable units: From net investment income (1,628,736) From net realized capital gains (826,729) (770,191) Total distributions to holders of redeemable units (2,455,465) (770,191) Redeemable unit transactions (note 3): Issuance of units 3,463,326 6,673,543 Reinvestment of distributions 2,455, ,191 Redemptions of units (12,720,124) (10,935,177) Net decrease from redeemable unit transactions (6,801,333) (3,491,443) Net decrease in net assets attributable to holders of redeemable units (8,166,219) (2,866,629) Net assets attributable to holders of redeemable units, end of year $ 39,462,830 $ 47,629,049 See accompanying notes to financial statements. 3

7 Statement of Cash Flows, with comparative information for Cash flows from (used in) operating activities: Increase in net assets attributable to holders of redeemable units $ 1,090,579 $ 1,395,005 Change in non-cash operating working capital: Net foreign exchange loss (gain) on cash 40,419 (107,671) Net realized gain on sale of investments (892,545) (2,364,393) Net change in unrealized depreciation of investments and derivatives 1,418,175 83,052 Purchase of investments (14,454,496) (34,059,160) Proceeds from the sale of investments 22,198,443 38,025,034 Accounts payable relating to margin 13, ,880 Accrued interest receivable 9,020 68,712 Accrued expenses (135,971) 118,798 Cash provided by operating activities 9,286,739 3,267,257 Cash flows from (used in) financing activities: Amount received from the issuance of units 3,477,283 6,658,189 Amount paid on redemptions of units (12,766,280) (10,934,601) Cash used in financing activities (9,288,997) (4,276,412) Decrease in cash (2,258) (1,009,155) Net foreign exchange gain (loss) on cash (40,419) 107,671 Cash, beginning of year 676,920 1,578,404 Cash, end of year $ 634,243 $ 676,920 Supplemental cash flow information: Interest received $ 1,429,735 $ 1,899,018 See accompanying notes to financial statements. 4

8 Schedule of Investments December 31, 2016 Bonds % Canadian Bonds % Par Average Fair value cost value Government of Canada % Canada Housing Trust No. 1, 2.00%, 2019/12/15 900,000 $ 938,035 $ 922,526 Canada Housing Trust No. 1, 1.15%, 2021/12/15 500, , ,693 Canada Housing Trust No. 1, 2.90%, 2024/06/15 2,000,000 2,064,360 2,132,145 Canada Housing Trust No. 1, 2.55%, 2025/03/15 700, , ,560 Canada Housing Trust No. 1, 1.90%, 2026/09/15 1,000,000 1,002, ,930 Canada Housing Trust No. 1, Series '23', 4.10%, 2018/12/15 1,000,000 1,072,217 1,061,395 Government of Canada, 4.00%, 2041/06/01 1,500,000 1,781,609 1,960,092 8,045,149 8,265,341 Provincial Government %: Hydro-Québec, Series '0049', 5.50%, 2018/08/15 1,000,000 1,130,909 1,071,641 Muskrat Falls / Labrador Transmission Assets Funding Trust, Series 'A', Callable, 3.63%, 2029/06/01 1,200,000 1,220,388 1,311,639 Province of Alberta, 4.00%, 2019/12/01 500, , ,609 Province of British Columbia, 5.70%, 2029/06/18 1,000,000 1,257,519 1,306,677 Province of British Columbia, 5.40%, 2035/06/18 800,000 1,117,600 1,060,350 Province of British Columbia, 3.20%, 2044/06/18 500, , ,800 Province of Manitoba, 1.85%, 2018/09/05 500, , ,151 Province of Nova Scotia, 4.15%, 2019/11/25 750, , ,236 Province of Ontario, 1.90%, 2017/09/08 1,500,000 1,513,238 1,512,125 Province of Ontario, 5.50%, 2018/06/02 1,400,000 1,593,085 1,489,837 5

9 Schedule of Investments (continued) December 31, 2016 Par Average Fair value cost value Province of Ontario, 4.20%, 2020/06/02 1,400,000 1,564,780 1,529,578 Province of Ontario, 3.45%, 2045/06/02 500, , ,790 Province of Ontario, Real Return, 2.00%, 2036/12/01 500, , ,436 Province of Quebec, 4.25%, 2043/12/01 2,000,000 2,064,654 2,349,451 Province of Quebec, Series 'B112', 3.50%, 2045/12/01 400, , ,736 Province of Saskatchewan, 3.20%, 2024/06/03 500, , ,516 15,670,326 16,142,572 Corporate %: Bell Canada, Series 'M-26', Callable, 3.35%, 2023/03/22 500, , ,774 Ford Credit Canada Ltd., Restricted, 2.45%, 2020/05/07 250, , ,767 GE Capital Canada Funding Co., 4.60%, 2022/01/26 500, , ,953 Hydro One Inc., Callable, 2.78%, 2018/10/09 175, , ,475 Hydro One Inc., Callable, 4.17%, 2044/06/06 200, , ,468 Loblaw Cos. Ltd., Callable, 4.86%, 2023/09/12 250, , ,450 Manulife Financial Corp., Callable, 7.77%, 2019/04/08 500, , ,185 Rogers Communications Inc., 6.11%, 2040/08/25 250, , ,526 Royal Bank of Canada, Variable Rate, Callable, 2.99%, 2024/12/06 750, , ,056 Suncor Energy Inc., Series '5', Callable, 3.10%, 2021/11/26 500, , ,365 Toronto-Dominion Bank (The), Variable Rate, Callable, 2.69%, 2025/06/24 500, , ,067 4,589,314 4,666,086 6

10 Schedule of Investments (continued) December 31, 2016 Par Average Fair value cost value Maple Bonds %: Bank of America Corp., 3.23%, 2022/06/22 250, , ,167 BP Capital Markets PLC, 3.50%, 2020/11/09 250, , ,445 Metropolitan Life Global Funding I, 3.03%, 2020/06/11 500, , ,140 Wells Fargo & Co., Series 'O', Restricted, 3.87%, 2025/05/21 750, , ,607 1,758,804 1,804,359 Total Canadian Bonds % 30,063,593 30,878,358 United States Bonds %: Corporate %: Abbott Laboratories, Callable, 4.90%, 2046/11/30 250, , ,339 Anheuser-Busch InBev Finance Inc., Callable, 3.65%, 2026/02/01 250, , ,897 Anheuser-Busch InBev Finance Inc., Callable, 4.90%, 2046/02/01 250, , ,941 Apple Inc., Callable, 4.65%, 2046/02/23 250, , ,689 BPCE SA, 4.63%, 2024/07/11 500, , ,565 Capital One Financial Corp., Callable, 3.75%, 2026/07/28 400, , ,702 Ford Motor Co., Callable, 4.35%, 2026/12/08 250, , ,098 Gilead Sciences Inc., Callable, 4.15%, 2047/03/01 250, , ,612 Goldman Sachs Group Inc. (The), 4.25%, 2025/10/21 200, , ,437 Microsoft Corp., Callable, 2.00%, 2023/08/08 500, , ,638 Microsoft Corp., Callable, 3.70%, 2046/08/08 300, , ,092 Morgan Stanley, 4.35%, 2026/09/08 500, , ,456 Verizon Communications Inc., Callable, 4.13%, 2046/08/15 250, , ,042 Wells Fargo & Co., 3.00%, 2026/10/23 300, , ,382 5,627,004 5,908,890 7

11 Schedule of Investments (continued) December 31, 2016 Par Average Fair value cost value U.S. Yankee Bonds %: ABN AMRO Bank NV, 4.80%, 2026/04/18 200, , ,681 Manulife Financial Corp., 4.15%, 2026/03/04 500, , , , ,518 Total United States Bonds % 6,555,379 6,883,408 Foreign Bonds %: Netherlands %: Cooperatieve Centrale Raiffeisen- Boerenleenbank BA, 3.88%, 2023/07/25 500, , ,578 Total Bonds % 37,413,951 38,576,344 Total investment portfolio % $ 37,413,951 38,576,344 Other assets, net of liabilities % 886,486 Net assets attributable to holders of redeemable units % $ 39,462,830 See accompanying notes to financial statements. 8

12 Risk Disclosures 1. Financial instruments risk: Investment activities of the Principal High Quality Canadian Fixed Income Plus Fund (the "Fund") expose the Fund to some financial instrument risks. The Fund's overall risk management program seeks to minimize the potentially adverse effect of risk on the Fund's financial performance in a manner consistent with the Fund's investment objectives and longterm investment time horizon. 2. Risk management: The investment objective of the Fund is to provide relatively stable rates of return through a portfolio of debt and fixed-income instruments, including futures and derivatives, issued by governments and corporations around the world. The Fund has the flexibility to invest in the full spectrum of fixed-income securities available in Canada, the United States and internationally, including investment-grade corporate bonds, treasuries, agencies, asset-backed securities, mortgages, bank loans and emerging markets debt. This flexibility provides the Fund with a greater investment opportunity set in comparison to the limited opportunities that are available in the Canadian bond universe. The Fund may invest up to 10% in cash and short-term investments. The Fund will not invest in securitized securities, hybrid and preferred securities or any assetbacked commercial paper. The duration of the portfolio will be maintained within a maximum range of between +/-1.0 years of the duration of the FTSE TMX Bond Universe Index. The Fund is sub-advised by Principal Global Investors, LLC (the "Sub-Advisor"). The Fund may enter into securities lending transactions. Securities lending transactions will be used in conjunction with the Fund's other investment strategies in a manner considered most appropriate by Integra Capital Limited (the "Trustee" and "Manager") to achieve the Fund's investment objectives and to enhance the Fund's returns. 9

13 Risk Disclosures (continued) 2. Risk management (continued): To assist with managing risk, the Manager also maintains a governance structure that oversees the Fund's investment activities and monitors compliance with the Fund's stated investment strategy and securities regulations. The Fund invests in a range of investment strategies that exposes it to various types of risks, as follows: (a) Credit risk: Credit risk on financial instruments is the risk of a loss occurring as a result of the default of an issuer on its obligation to an investment fund. Credit risk is managed by dealing with issuers that are believed to be creditworthy and by regular monitoring of credit exposures. Additionally, credit risk is reduced by diversification of issuer, industry and geography. The carrying amount of the Fund's assets on the statements of financial position, represents the maximum exposures to credit risk relating to financial assets and liabilities. The Fund's activities may give rise to settlement risk. Settlement risk is the risk of loss due to the failure of an entity to honour its obligations to deliver cash, securities or other assets as contractually agreed. For the majority of transactions, the Fund mitigates this risk by conducting settlements through a broker to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. The table below summarizes the Fund's direct exposure to the credit ratings of debt securities, whose credit ratings were primarily based on ratings issued by Standard & Poor's: As a % of total bonds Debt securities by credit rating AAA AA A BBB

14 Risk Disclosures (continued) 2. Risk management (continued): (b) Counterparty credit risk: Counterparty credit risk primarily emanates from the use of over-the-counter derivatives. This risk is minimized by selecting counterparties who have a minimum of "A" credit rating. Ongoing monitoring of credit events/rating developments occurs to ensure the sustainable credit quality of the counterparty. Various factors are considered in the assessment process including fundamental components of the counterparty's profile (such as capital adequacy, asset quality, profitability and liquidity) and credit ratings assigned to the counterparty. See Derivatives section below for exposures from foreign exchange forward contracts and futures. (c) Currency risk: Changes in the value of the Canadian dollar compared to foreign currencies will affect the value, in Canadian dollars, of any foreign securities and account balances held in the Fund. From time to time, the Fund may manage currency risk through foreign currency hedging strategies. Currency risk arises on financial instruments denominated in foreign currencies. Fluctuations in foreign exchange rates impact the valuation of assets and liabilities denominated in foreign currencies. 11

15 Risk Disclosures (continued) 2. Risk management (continued): The tables below indicate the currencies to which the Fund had direct exposure on its trading monetary and non-monetary assets and liabilities as well as the underlying principal amount of foreign exchange contracts: Currency risk exposed holdings Foreign (including exchange Net % of 2016 derivatives)* contracts exposure net assets Euro $ 833,512 $ (820,711) $ 12, U.S. Dollar 7,384,453 (7,360,375) 24, *Amounts reflect the carrying value of monetary and non-monetary items (including notional amount of forward foreign currency contracts). Currency risk exposed holdings Foreign (including exchange Net % of 2015 derivatives)* contracts exposure net assets Euro $ 856,136 $ (854,666) $ 1,470 U.S. Dollar 10,058,845 (10,069,778) (10,933) (0.02) *Amounts reflect the carrying value of monetary and non-monetary items (including notional amount of forward foreign currency contracts). As at December 31, 2016, had the Canadian dollar strengthened or weakened by 5% in relation to all currencies, with all other variables held constant, net assets attributable to holders of redeemable units would have decreased or increased, respectively, by $1,844 ( $473). In practice, the actual trading results may differ from this sensitivity analysis and the difference could be material. 12

16 Risk Disclosures (continued) 2. Risk management (continued): (d) Derivatives: (i) Foreign exchange forward contracts: The Fund utilizes foreign exchange forward contract hedging in the management of currency risk associated with its investment in foreign securities. The objective is to protect the Fund from the possibility of capital losses on foreign-currency-denominated investments due to increases in the value of the Canadian dollar. However, credit and market risks associated with foreign exchange forward contracts potentially expose the Fund to losses. In order to minimize the possibility of losses arising from credit risk, the Fund deals only with large financial institutions with a minimum of "A" credit rating. Currency risk relates to the possibility that foreign exchange forward contracts change in value due to fluctuations in currency prices. The foreign exchange forward contracts are marked to market daily and the resulting unrealized gains or losses are recognized in the statements of financial position. The result of employing foreign exchange forward contracts is that the foreign exchange gains and losses in the securities portfolio move substantially in opposite directions from the gains and losses in the hedging portfolio. 13

17 Risk Disclosures (continued) 2. Risk management (continued): As at December 31, 2016, the Fund directly held the following foreign exchange forward contracts: Fair value Currency Fair value Unrealized Expiry Currency to purchase Amount to purchase to deliver Amount to deliver gain dates CAD $ 148,176 $ 148,176 USD $ 110,000 $ 147,492 $ 684 January 2017 Fair value Currency Fair value Unrealized Expiry Currency to purchase Amount to purchase to deliver Amount to deliver loss dates CAD $ 796,234 $ 796,234 EUR $ 579,903 $ 820,711 $ (24,477) January 2017 CAD 7,033,497 7,033,497 USD 5,379,421 7,212,884 (179,387) January 2017 $ (203,864) As at December 31, 2015, the Fund directly held the following foreign exchange forward contracts: Fair value Currency Fair value Unrealized Expiry Currency to purchase Amount to purchase to deliver Amount to deliver loss dates CAD $ 842,489 $ 842,489 EUR $ 566,256 $ 854,666 $ (12,177) January 2016 CAD 9,851,815 9,851,815 USD 7,249,312 10,069,778 (217,963) January 2016 $ (230,140) 14

18 Risk Disclosures (continued) 2. Risk management (continued): The Fund may enter into various master netting arrangements or other similar agreements that do not meet the criteria for offsetting in the statements of financial position but still allow for the related amounts to be set off in certain circumstances, such as bankruptcy or the termination of the contracts. The following tables show financial instruments that may be eligible for offset, if such conditions were to arise as at December 31, 2016 and The net column below displays what the net financial assets and liabilities would be on the Fund's statements of financial position if all amounts were set off. 2016: Amounts offset Amounts not offset Gross Gross assets Collateral Financial assets assets (liabilities) Financial received and liabilities (liabilities) offset Net amounts instruments (pledged) Net Derivative assets $ 684 $ $ 684 $ $ $ 684 Derivative liabilities (203,864) (203,864) (203,864) Total $ (203,180) $ $ (203,180) $ $ $ (203,180) 2015: Amounts offset Amounts not offset Gross Gross assets Collateral Financial assets assets (liabilities) Financial received and liabilities (liabilities) offset Net amounts instruments (pledged) Net Derivative assets $ $ $ $ $ $ Derivative liabilities (230,140) (230,140) (230,140) Total $ (230,140) $ $ (230,140) $ $ $ (230,140) 15

19 Risk Disclosures (continued) 2. Risk management (continued): (ii) Futures contracts: As at December 31, 2016, the Fund held the following long and short futures contract positions: Unrealized Contracted appreciation Fair value Number of (depreciation) value (CAD$) Currency Expiry date contracts Name of future contract (CAD$) (CAD$) 3,481,250 CAD March Ten-Year Government of Canada Bond $ (43,000) $ 3,438,250 3,329,502 USD March United States 5-Year Treasury Future (15,841) 3,313,661 (10,905,565) USD March 2017 (65) United States 10-Year Treasury Future 72,186 (10,833,379) $ 13,345 $ (4,081,468) As at December 31, 2015, the Fund held the following long and short futures contract positions: Unrealized Contracted appreciation Fair value Number of (depreciation) value (CAD$) Currency Expiry date contracts Name of future contract (CAD$) (CAD$) 8,907,018 USD March United States 5-Year Treasury Future $ (31,645) $ 8,875,373 (12,651,923) USD March 2016 (72) United States 10-Year Treasury Future 59,384 (12,592,539) $ 27,739 $ (3,717,166) The Fund maintains accounts with futures commission merchants ("FCMs") to conduct its futures trading activities. These merchants require the maintenance of minimum margin deposits. These requirements are met by the collateral pledged by the Fund. As of December 31, 2016, the Fund has collateral of approximately $588,105 ( $611,168) with FCMs. 16

20 Risk Disclosures (continued) 2. Risk management (continued): (e) Interest rate risk: Changes in market interest rates expose fixed-income securities, such as bonds, to interest rate risk. Funds that hold income investments are exposed to this risk since changes in prevailing market interest rates will affect the value of fixed-income securities. Cash and cash equivalents comprise deposits with banks and highly liquid financial assets with maturities of three months or less, as a result, there is no significant risk of changes in their fair value and not subject to interest rate risk. The Sub-Advisor of the Fund uses combinations of Canadian interest rate swaps and futures to synthetically create portfolios that track the published FTSE TMX Bond Universe Index. This strategy may add minimal active interest rate risk to the Fund. The table below summarizes the Fund's exposure to interest rate risk as at December 31, 2016 and It includes the Fund's assets at fair values, categorized by the earlier of contractual re-pricing or maturity dates. The interest rate risk associated with short-term notes is minimal and therefore not included in the table below: Bonds Less than 1 year $ 1,512,125 $ 505, years 7,145,055 9,322, years 3,569,988 8,276,517 More than 5 years 26,349,176 29,079,150 $ 38,576,344 $ 47,184,222 17

21 Risk Disclosures (continued) 2. Risk management (continued): As at December 31, 2016, had the prevailing interest rate been raised or lowered by 1%, assuming a parallel shift in the yield curve, with all other factors remaining constant, net assets attributable to holders of redeemable units could possibly have increased or decreased, respectively, by $3,176,291 ( $3,697,194). The Fund's interest rate sensitivity was determined based on portfolio weighted duration. In practice, actual results may differ from this sensitivity analysis. (f) Liquidity risk: Liquidity risk is the possibility that investments of the Fund cannot be readily converted into cash when required. The Fund may be subject to liquidity constraints because of insufficient volume in the markets for the securities of the Fund or the securities may be subject to legal or contractual restrictions on their resale. In addition, holders of redeemable units may redeem their units on each valuation date. Liquidity risk is managed by investing in securities that are traded in active markets and can be readily disposed of, and by retaining sufficient cash and cash equivalent positions to maintain liquidity. These liabilities are all current and are due within 90 days, with the exception of net assets attributable to holders of redeemable units which are due upon request by the unitholder (note 3). (g) Other market risk: Other market risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices, other than those arising from interest rate risk or currency risk, whether caused by factors specific to an individual investment, its issuer, or all factors affecting all instruments traded in a market or market segment. All securities present a risk of loss of capital. The Sub-Advisor moderates this risk through a careful selection of investment strategies and selection of securities and other financial instruments within the parameters of the investment strategy developed by the Manager of the Fund. 18

22 Risk Disclosures (continued) 2. Risk management (continued): The impact on net assets attributable to holders of redeemable units of the Fund as at December 31, 2016, due to a 5% increase or decrease in the Fund's benchmark (DEX Universe Bond Index), with all other variables held constant, would have been $1,756,688 ( $2,279,764). This calculation is based on the beta of the Fund over the past 36 months. In practice, the actual trading results may differ from the sensitivity analysis indicated above and the difference could be material. (h) Concentration risk: Concentration risk arises as a result of the concentration of exposures within the same category, whether it is geographical location, product type, industry sector or counterparty type. The following is a summary of the Fund's concentration risk: Investments at fair value % of net assets Canadian bonds: Government of Canada Provincial Government Corporate Maple Bonds United States bonds: Corporate U.S. Yankee Bonds Foreign bonds Total bonds Total investment portfolio Other assets, net of liabilities Net assets attributable to holders of redeemable units

23 Risk Disclosures (continued) 3. Capital risk management: The capital of the Fund is represented by issued redeemable units with no par value. The units of the Fund are entitled to distributions, if any, and any redemptions are based on the Fund's net asset value ("NAV") per unit. The Fund has no restrictions or specific capital requirements on the subscriptions and redemptions of units. The relevant movements are shown on the statements of changes in net assets attributable to holders of redeemable units. The Fund endeavours to invest its subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions. 4. Fair value measurements: The Fund measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and Level 3 - inputs for the asset or liability not based on observable market data (unobservable inputs). If inputs of different levels are used to measure an asset's or liability's fair value, the classification within the hierarchy is based on the lowest level input that is significant to the fair value measurement and changes in valuation methods may result in transfers into or out of an investment's assigned level. 20

24 Risk Disclosures (continued) 4. Fair value measurements (continued): The tables below summarize the inputs used in valuing the Fund's financial assets and liabilities carried at fair values: 2016 Level 1 Level 2 Level 3 Total Financial assets: Bonds $ $ 38,576,344 $ $ 38,576,344 Derivative assets 72, ,870 Financial liabilities: Derivative liabilities (58,841) (203,864) (262,705) Total financial assets and liabilities $ 13,345 $ 38,373,164 $ $ 38,386, Level 1 Level 2 Level 3 Total Financial assets: Bonds $ $ 47,184,223 $ $ 47,184,223 Derivative assets 27,739 27,739 Financial liabilities: Derivative liabilities (230,140) (230,140) Total financial assets and liabilities $ 27,739 $ 46,954,083 $ $ 46,981,822 21

25 Risk Disclosures (continued) 4. Fair value measurements (continued): All fair value measurements above are recurring. Fair values are classified as Level 1 when the related security or derivative is actively traded and a quoted price is available. 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. (a) Bonds and short-term investments: Bonds include primarily government and corporate bonds, which are valued using models with inputs including interest rate curves, credit spreads and volatilities. The inputs that are significant to valuation are generally observable and therefore the Fund's bonds and shortterm investments have been classified as Level 2. (b) Derivative assets and liabilities: Derivative assets and liabilities consist of foreign currency forward and futures contracts which are valued based primarily 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 counterparty credit spreads are observable and reliable, or for which the credit-related inputs are determined not to be significant to its fair value, are classified as Level 2. For the year ended December 31, 2016, no investments were transferred from any level as a result of the securities no longer being traded in an active market and no investments were transferred from any level as a result of the securities now being traded in an active market. 22

26 Notes to Financial Statements 1. Establishment of the Fund: The Principal High Quality Canadian Fixed Income Plus Fund is an open-ended investment unincorporated trust created under the laws of the Province of Ontario by a Declaration of Trust. The address of the Fund's registered office is 2020 Winston Park Drive, Oakville, Ontario. The Fund was established on May 16, 2009 and commenced operations on this date. Integra Capital Limited is the Manager and Trustee of the Fund and is the corporate entity registered with the Canadian regulatory authorities. The Fund's assets are custodied at the Canadian Imperial Bank of Commerce. The Manager is registered in every province as a portfolio manager and exempt market dealer and is registered in the provinces of Newfoundland and Labrador, Ontario and Quebec as an investment fund manager. In the Province of Ontario, the Manager is additionally registered as a commodity trading manager. The Fund is not a reporting issuer and is exempt, pursuant to National Instrument , Investment Fund Continuous Disclosure ("NI ") from the requirement to file its financial statements with the regulatory authorities and has notified the Ontario Securities Commission that it is relying on this exemption. 2. Basis of presentation and adoption of International Financial Reporting Standards: (a) Basis of accounting: The financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS"). These financial statements were authorized for issue by the Manager on March 22, (b) Basis of measurement: These financial statements have been prepared on a historical cost basis, except for financial assets and financial liabilities at fair value through profit or loss ("FVTPL"), which are presented at fair value. (c) Functional and presentation currency: These financial statements are presented in Canadian dollars, which is the Fund's functional currency. 23

27 Notes to Financial Statements (continued) 3. Significant accounting policies: (a) Financial instruments: (i) Recognition, initial measurement and classification: Financial assets and financial liabilities at FVTPL are initially recognized on the trade date, which is the date on which the Fund becomes a party to the contractual provisions of the instrument. Other financial assets and financial liabilities are recognized on the date on which they are originated. Financial assets and financial liabilities at FVTPL are initially recognized at fair value, with transaction costs recognized in the statements of comprehensive income. Financial assets or financial liabilities not at FVTPL are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue. The Fund classifies financial assets and financial liabilities into the following categories: Financial assets at FVTPL: Held for trading ("HFT"): derivative financial instruments; Designated as FVTPL: debt securities and equity investments; and Financial assets at amortized cost: all other financial assets are classified as loans and receivables. Financial liabilities at FVTPL: HFT: derivative financial instruments; and Financial liabilities at amortized cost: all other financial liabilities are classified as other financial liabilities. 24

28 Notes to Financial Statements (continued) 3. Significant accounting policies (continued): (ii) Fair value measurement: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Fund has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Fund measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The Fund measures instruments quoted in an active market at last sale or close price, where the close price falls within the day's bid-ask spread. In circumstances where the close price is not within the day's bid-ask spread, the Manager determines the point within the bid-ask spread that is most representative of fair value based on specific facts and circumstances. Investments held include equities, listed warrants, options, short-term notes, treasury bills, bonds, asset-backed securities and other debt instruments. Investments held that are not traded in an active market are valued based on the results of valuation techniques using observable market inputs where possible, on such basis and in such manner established by the Manager. Investments in other pooled funds are valued at the NAV per unit reported by each pooled fund. See risk disclosures for more information about the Fund's fair value measurements. The fair value of a forward contract is the gain or loss that would be realized if, on the valuation date, the positions were closed out. The forward contract is valued using an interpolation of the foreign exchange rate based on the length of the forward contract. The change in fair value on forward contracts are reflected in the statements of comprehensive income as change in unrealized appreciation (depreciation) on derivatives. When the forward contracts are closed out, any gains or losses realized are included in net realized gain (loss) on derivatives. The fair values of foreign currency denominated investments and other foreign currency denominated assets and liabilities are translated into Canadian dollars at exchange rates prevailing on the reporting date. 25

29 Notes to Financial Statements (continued) 3. Significant accounting policies (continued): The fair values of other financial assets and liabilities approximates their carrying values due to the short-term nature of these instruments. (iii) Offsetting: Financial assets and liabilities are offset and the net amount presented in the statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. In the normal course of business, the Fund may enter into master netting agreements or similar agreements that do not meet the criteria for offsetting in the statements of financial position but still allow for the related amounts to be set off in certain circumstances, such as bankruptcy or termination of such contracts. Income and expenses are presented on a net basis for gains and losses from financial instruments at FVTPL and foreign exchange gains and losses. (b) Cash and cash equivalents: Cash and cash equivalents consist of cash on deposit and short-term, interest-bearing notes with a term to maturity of less than three months from the date of purchase. (c) Investment transactions and income recognition: The Fund follows the accrual method of recording investment income and expenses. Security transactions are recorded on the trade date. The interest for distribution purposes shown on the statements of comprehensive income represents the coupon interest received by the Fund accounted for on an accrual basis. The Fund does not amortize premiums paid or discounts received on the purchase of fixed income securities except for zero-coupon bonds which are amortized on a straight-line basis. 26

30 Notes to Financial Statements (continued) 3. Significant accounting policies (continued): Realized gain (loss) on sale of investments and unrealized appreciation (depreciation) in investments are determined on an average cost basis. Average cost does not include amortization of premiums or discounts on fixed income securities with the exception of zero-coupon bonds. The Fund generally incurs withholding taxes imposed by certain countries on investment income and capital gains. Such income and gains are recorded on a gross basis and the related withholding taxes are shown as a separate expense in the statements of comprehensive income. (d) Cost of investments: The cost of investments represents the amount paid for each security and is determined on an average cost basis excluding commissions and other transaction costs. (e) Transaction costs: Commissions and other transaction costs are incremental costs that are directly attributable to the acquisition, issue, or disposal of an investment, which include fees and commissions paid to agents, advisors, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Commissions and transaction costs are included as expenses in the statements of comprehensive income. (f) Securities lending transactions: The Fund is permitted to enter into securities lending transactions. These transactions involve the temporary exchange of securities for collateral with a commitment to redeliver the same securities at a future date. Income is earned from these transactions in the form of fees paid by the counterparty. Income earned from these transactions is recognized on an accrual basis and included in the statements of comprehensive income. 27

31 Notes to Financial Statements (continued) 3. Significant accounting policies (continued): (g) Foreign currency translation: The fair values of foreign currency denominated investments are translated into Canadian dollars, using the prevailing rate of exchange on each valuation date. Income, expenses and investment transactions in foreign currencies are translated into Canadian dollars at the rate of exchange prevailing on the respective dates of such transactions. Foreign exchange gains and losses are presented as net realized gain (loss) on foreign exchange, except for those arising from financial instruments at FVTPL which are recognized as a component within net realized gain (loss) on sale of investments and change in net unrealized appreciation (depreciation) in the statements of comprehensive income. (h) Income taxes: The Fund presently qualifies as a unit trust under the provisions of the Income Tax Act (Canada), and accordingly, is not subject to income tax on the portion of its income, including net realized capital gains, that is distributed to unitholders at the end of the taxation year other than alternative minimum tax. A unit trust may be subject to alternative minimum tax in certain circumstances. The Fund has elected for a December 31 taxation year end. The Fund pays out sufficient net income and net realized capital gains so that it will not be subject to income taxes. Accordingly, no provision for income taxes has been made in these financial statements. The Fund may be subject to alternative minimum tax in a year in which it has a net investment loss for tax purposes as well as a net realized capital gain. This alternative minimum tax can be carried forward indefinitely to be applied against future taxes otherwise payable. The alternative minimum tax available for carryforward as at December 31, 2016 is $98,093 ( $109,435). Capital losses and non-capital losses incurred by the Fund cannot be allocated to unitholders but capital losses may be carried forward indefinitely to reduce future realized capital gains and non-capital losses may be carried forward for 20 taxation years to reduce future net income for tax purposes. As at December 31, 2016, the Fund had non-capital losses of nil ( nil) and net capital losses carryforward of nil ( nil). Certain dividend and interest income received by the Fund are subject to withholding tax imposed in the country of origin. 28

32 Notes to Financial Statements (continued) 3. Significant accounting policies (continued): (i) Redeemable units: For each Fund unit sold, the Fund receives an amount equal to the NAV per unit at the date of sale, which amount is included in net assets attributable to holders of redeemable units. Units are redeemable at the option of unitholders at their net asset value on the redemption date. For each unit redeemed, net assets attributable to holders of redeemable units are reduced by the NAV of the unit at the date of redemption. The redeemable shares are measured at the present value of the redemption amounts and are considered a residual amount of the net assets attributable to holders of redeemable units. The capital of the Fund is represented by issued redeemable units with no par value. The units of the Fund are entitled to distributions, if any, and any redemptions are based on the Fund's net asset attributable to holders of redeemable units per unit. The Fund has no restrictions or specific capital requirements on the subscriptions and redemptions of the units. The relevant movements are shown on the statements of changes in net assets attributable to holders of redeemable units. The Fund endeavours to invest its subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions. Redeemable unit transactions during the year were as follows: Number of Number of Fund units Amount Fund units Amount Redeemable units issued 332,300 $ 3,463, ,336 $ 6,673,543 Redeemable units redeemed (1,216,725) (12,720,124) (1,050,287) (10,935,177) Redeemable units issued on reinvestments 241,982 2,455,465 74, ,191 The number of issued and outstanding units as at December 31, 2016 is 3,973,772 (2015-4,616,215). 29

33 Notes to Financial Statements (continued) 3. Significant accounting policies (continued): Net assets attributable to holders of redeemable units is calculated for each unit of the Fund by taking the proportionate share of the Fund's net assets attributable to holders of redeemable units and dividing by the number of units outstanding on the valuation date. The increase in net assets attributable to holders of redeemable units per unit in the statements of comprehensive income represents the change in net assets attributable to holders of redeemable units divided by the weighted average number of units outstanding during the reporting year. Income, expenses other than management fees, and realized and unrealized capital gains (losses) are distributed in proportion to the amount invested in them. The weighted average number of units outstanding for the year ended December 31, 2016 is 4,127,754 (2015-5,030,431). The Fund's units are classified as a liability under International Accounting Standard ("IAS") 32, Financial Instruments - Presentation, as there is a requirement to make cash distributions to unitholders, if requested. The units are measured at the present value of the redemption amount and are considered a residual amount. As at December 31, 2016 and 2015, there is no difference between net assets attributable to holders of redeemable units and NAV attributable to holders of redeemable units. (j) Receivable or payable for portfolio securities sold or purchased: In accordance with the Fund's policy of trade date accounting for regular way sale and purchase transactions, sales/purchase transactions awaiting settlement represent amounts receivable/payable for portfolio securities sold/purchased, but not yet settled as at the reporting date. 30

34 Notes to Financial Statements (continued) 3. Significant accounting policies (continued): (k) Future accounting changes: The International Accounting Standards Board has issued the following new standards and amendments to existing standards that are not yet effective. IFRS 9, Financial Instruments ("IFRS 9"): IFRS 9, published in July 2014, replaces the existing guidance in IAS 39, Financial Instruments - Recognition and Measurement ("IAS 39"). IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. It also carries forward the guidance on financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. The Manager is currently assessing the impact of this new standard on the Fund's financial statements. 4. Critical accounting estimates and judgments: In preparing these financial statements, the Manager has made judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively. The most significant accounting judgment and estimate that the Fund has made in preparing the financial statements is determining the fair value measurement of derivatives and investments not quoted in an active market, if any. See note 3 for more information on the fair value measurement of the Fund's financial instruments. 31

35 Notes to Financial Statements (continued) 5. Net changes from financial instruments at FVTPL: Net changes in fair value on financial assets and financial liabilities at FVTPL are presented in the statements of comprehensive income and comprise the following: net realized gain on sale of investments, net realized gain (loss) on sale of derivatives, net change in unrealized depreciation of investments and derivatives, net foreign exchange on cash, interest income for distribution purposes and dividends. Their classifications between HFT and designated at fair value are presented in the following table: Total income Financial assets (liabilities) at FVTPL: HFT $ 115,283 $ (1,783,636) Designated at inception 882,519 4,102,210 Total financial assets at FVTPL $ 997,802 $ 2,318, Brokerage commissions: Brokerage commissions on portfolio transactions may also include research services provided to the Sub-Advisors. The value of the research services paid to certain brokers for the year ended December 31, 2016 and 2015 was nil. 7. Securities lending: The Fund lends portfolio securities from time to time in order to earn additional income. The Fund has entered into a securities lending program with the Bank of New York Mellon. The aggregate market value of all securities cannot exceed 50% of the net assets attributable to holders of redeemable units of the Fund. The Fund receives collateral in the form of debt obligations of the Government of Canada and any other Sovereign States and Canadian provincial governments, against the loaned securities. The Fund maintains a minimum collateral requirement of 102% for North American equities and 105% for Non-North American equities of the market value of the loaned securities during the period of the loan. As at December 31, 2016, certain securities shown in the statements of financial position with a market value of $414,871 ( $2,500,227) had been loaned as part of the securities lending program. The counterparty has pledged securities with a market value of $436,787 ( $2,625,577) as collateral for such loans. Under the terms of the program, the Fund may instruct that securities be returned within three days. 32