2015 Semi-Annual Management Report of Fund Performance

Transcription

1 BMO SelectTrust Conservative Portfolio (the Fund ) For the six-month period ended June 30, 2015 (the period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio Manager: BMO Asset Management Inc. (the portfolio manager ) 2015 Semi-Annual Management Report of Fund Performance This semi-annual management report of fund performance contains financial highlights but does not contain the complete semi-annual or annual financial statements of the Fund. If the semi-annual financial statements of the Fund 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 writing to us at BMO Investments Inc., First Canadian Place, 43rd Floor, 100 King Street West, 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 Fund s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Results of Operations During the period, the Fund s total net asset value increased from approximately $725 million to approximately $1,044 million. Advisor Series units of the Fund returned 3.87%. Please see the Past Performance section for information on the performance returns of the Fund s other series. U.S. equites were volatile, falling almost 2% in the first week of January, rising 6% in February, and then staying mostly range bound, before being driven down again in June by concerns over an imminent Greek default risk, ending the period up 1.23% (in U.S. dollar terms). Among sectors, Health Care led the markets, rising 9.6%, followed by Consumer Discretionary, which rose 6.8%. Among the detractors, the interest rate sensitive Utilities sector fell 10.7%, while Energy stocks continued to struggle, falling 4.7% (all in U.S. dollar terms). A negative first quarter gross domestic product ( GDP ) was mostly attributed to cold weather, and shortly forgotten as recoveries in residential housing starts, retail spending and continued strong job creation pushed expectations for the second quarter GDP back over 3% (annualized). With this renewed momentum, consensus estimates for the U.S. Federal Reserve Board s first interest rate increases moved back to September, despite continued lower energy prices and modest wage inflation. The first quarter marked a welcome resurgence of international equity performance, with Europe, Australasia and Far East ( EAFE ) equities rising a sharp. In the second quarter, European equities were almost singularly influenced by the dramatics of Greece s debt negotiations. European equities gave back more than half of their peak gains over the period to the middle of June, until rebounding on news of positive progress in negotiations, only to end in yet another stalemate, with the announcement of Greece s July 5th referendum, which ultimately would reject creditors demands. Fortunately for Canadian investors, the euro strengthened versus the Canadian dollar by 2.4%, mitigating some of the damage. In sharp contrast, Japanese equities, as indicated by the Nikkei 225 Index, thundered ahead 20.5% in local terms, with the Japanese yen weakness and stronger earnings growth being the primary drivers. The S&P/TSX Total Return Composite Index rose 3.3% in a fairly uninspiring manner, although a look beneath the surface told a more intriguing story. The relatively small Health Care sector drove the majority of any gains, delivering a massive 44.3% return, which was solely the result of Valeant Pharmaceuticals International, Inc. soaring. Offsetting this were losses in the Gold and Materials sectors, while other heavier weighted Financials and Energy sectors delivered comparatively unexciting returns of 3.2% and 1.5%, respectively. In Canada, bond markets cheered the late January surprise interest rate cut announced by the Bank of Canada ( BoC ), which sent the benchmark FTSE TMX Canada Universe Bond Index up sharply by roughly 3%, only to then trade in a volatile range and then downward in the second quarter, ending the period only slightly lower. The benchmark yield on Government of Canada bonds started the period at 1.57%, falling to 1.24% in January, a result of the BoC interest rate cut, peaked at 1.9% by mid-june, and ultimately finished the period at 1.68%.

2 Global fixed income was even more volatile, as the benchmark German 10-year yield moved from 43 basis points to a low of 8 basis points in April, before tracing a volatile path all the way up to 99 basis points by mid-june, before volatility returned again thanks to Greece, leaving the yield at 80 basis points by the period s end. As a result, the Fund s exposure to international bonds detracted from performance. U.S. high yield and emerging market bond exposures also underperformed, but primarily on yield sensitivity, as opposed to an impact on credit spreads. During the period, all of the underlying holdings of the Fund, except BMO Preferred Share Fund, delivered positive returns, contributing to the Fund s overall performance. The Manager confirms that the Fund did not borrow money during the period. Recent Developments The key themes of low oil, low inflation and economic divergence persist, but market focus has evolved somewhat. Certainly oil prices are likely to remain meaningfully below the levels of a year ago, but a firming appears to be emerging at or near the current pricing level as the supply/demand equation is more equally balanced. Inflation remains subdued, but the beginning of interest rate normalization in the U.S. is likely only months away. Finally, economic divergence has given way to slightly better economic prospects across most major regions. The portfolio manager s outlook centres on persistently low oil prices, improving sentiment and central bank actions and reactions. No longer is oil the guaranteed wealth creating liquid asset that it once was. While the portfolio manager has seen some behavioural change on the part of producers, with meaningful cut-backs in capital expenditures and production here in North America, the market remains well supplied, with inventories significantly higher than their prior peaks. As a result, and without clear visibility on sharply stronger demand levels, oil is likely to remain range bound within about US$55-US$65 per barrel. This should spur economic activity in economies that are net oil importers, such as the eurozone, Japan and the U.S., and supress headline inflation. In contrast, net exporters and oil-focused economies, such as Canada, Russia and Saudi Arabia, should see limited GDP and earnings growth. Canada s continued struggles amid lower oil prices are now bringing the possibility of a return to recession back into view, which may, in addition to the July 15, 2015 interest rate cut, see another interest rate cut from the BoC. Given the anemic ex-energy trade balance that exists, a softening of the Canadian dollar to below US$0.80 for an extended period would be necessary to counteract the loss of oil revenue, capital investment, and job creation that had been fueling the Canadian economy up to last October. As a result, the portfolio manager continues to underweight Canadian equities versus foreign markets. U.S. economic data continues to reassure investors, as retail sales, consumer confidence and home construction are all positive. While valuations are still remaining above average, the potential for additional upgrades of earnings estimates and low inflation pressures would seem to indicate that any volatility should be seen as a buying opportunity as opposed to a reversal of the U.S. bull market. In Europe, while the political impact is significantly higher, the economic impact of Greece s departure from the European Union is far lower than markets seem to realize, with the majority of Greece s outstanding public debt having already been absorbed into public institutions, and direct economic ties limited to specific industries, companies, and a handful of very small peripheral European countries. With consumer confidence and disposable income rising, margin expansion and top line revenues both stand to keep rising, stoked by the European Central Bank s commitment to quantitative easing (i.e., monetary policy used by central banks to increase money supply) for the next nine months or more, as needed. Japanese equities perhaps offer the most upside, with the weakening Japanese yen and an increased focus on shareholder-friendly cash practices. The portfolio manager remains bullish on a global recovery, and therefore bullish on equities. Within the Fund s equity exposure, the portfolio manager continues to favour both U.S and EAFE equities over Canadian equities. The portfolio manager does seek too opportunistically equalize the Fund s international allocations, shifting assets from U.S. to European and Asian markets. Within fixed income markets, the portfolio manager continues to favour credit strategies (i.e., high yield and corporate bonds) as continued strong earnings and low interest rate obligations should support a stable credit environment. RELATED PARTY TRANSACTIONS BMO Investments Inc., an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ), is the Manager of the Fund. From time to time, the Manager may, on behalf of the Fund, 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 Manager (each a Related Party ). The purpose of this section is to provide a brief description of any transaction involving the Fund and a Related Party.

3 Buying and Selling Securities Conducting Inter-Fund Trades During the period, the Manager relied on an approval and standing instruction provided by the Fund s Independent Review Committee ( IRC ) with respect to conducting interfund trades (each, a Related Party Transaction ). In accordance with the IRC s approval and standing instruction, in making a decision to cause the Fund to make a Related Party Transaction, the Manager, as Manager and portfolio manager of the Fund, is required to comply with the Manager s written policies and procedures governing the Related Party Transaction and report periodically to the IRC, describing each instance that the Manager relied on the approval and standing instruction and its compliance or non-compliance with the governing policies and procedures. The governing policies and procedures are designed to ensure the Related Party Transaction (i) is made free from any influence of BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of BMO and/or BMO Nesbitt Burns Inc. and without taking into account any considerations relevant to BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of BMO and/or BMO Nesbitt Burns Inc., (ii) represents the business judgment of the Manager, uninfluenced by considerations other than the best interests of the Fund, and (iii) achieves a fair and reasonable result for the Fund. Portfolio Manager The Fund s portfolio manager is BMO Asset Management Inc. ( BMOAM ), an affiliate of the Manager. BMOAM provides portfolio management services to the Fund. BMOAM receives from the Fund a management fee based on assets under management, calculated daily and payable monthly. Brokerage Commissions The Fund 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 Fund (excluding exchange and other fees) during the periods indicated, were as follows: June 30, 2015 June 30, ($) ($) Administration Fees and Operating Expenses Other than in respect of Series T5, Series T8, Series F, Series C and Series I, the Fund pays a fixed administration fee to the Manager in respect of each series. The Manager, in return, pays the operating expenses, other than certain specified expenses that are paid directly by the Fund ( Fund Expenses ). Fund Expenses include interest or other borrowing expenses, costs and expenses related to the operation of the Fund s Independent Review Committee ( IRC ), including fees and expenses of IRC members, taxes to which the Fund is or might be subject, and costs associated with compliance with any new governmental or regulatory requirement introduced after December 1, 2007 (e.g., cost associated with the production of fund facts, filed in compliance with the relevant amendments to NI ). Fund Expenses are allocated proportionately among the relevant series. If the Fund Expenses are specific to a series, the Fund Expenses are allocated to that series. The fixed administration fee is calculated as a fixed annual percentage of the average net asset value of each relevant series of the Fund. The Fund pays all the operating expenses of Series T5, Series T8, Series F and Series C. These operating expenses are allocated proportionately among the series. Separate fees and expenses are negotiated and paid by each Series I investor. Further details about the fixed administration fee and/or Fund Expenses can be found in the Fund s most recent simplified prospectus at or The expenses charged to the Fund in respect of such services during the period amounted to $1,261,906 ( $513,967). Distribution Services The Manager markets and distributes the Fund through Bank of Montreal branches and/or (depending on the series) through registered dealers and brokers, including BMO InvestorLine Inc. and BMO Nesbitt Burns Inc., both affiliates of the Manager. The Manager pays to these affiliates a service fee called a trailing commission based on the average daily value of the units and/or shares that are held in investor accounts. This service fee is paid monthly or quarterly and varies by purchase option and by series. Total brokerage commissions $ 15,863 29,385 Brokerage commissions paid to BMO Nesbitt Burns Inc. $ 7,375 12,312

4 Management Fees The Manager is responsible for the day-to-day management of the business and operations of the Fund. The Manager monitors and evaluates the Fund s performance, pays for the investment advice provided by the Fund s portfolio manager and provides certain administrative services required by the Fund. As compensation for its services, the Manager is entitled to receive a management fee payable monthly, calculated based on the daily net asset value of each series of the Fund at the maximum annual rate set out in the table below. As a Percentage of Management Fees General Maximum Annual Administration, Management Dealer Investment Fee Rate* Compensation Advice and Profit % % % Series A Units Advisor Series Units Series T5 Units Series T6 Units Series T8 Units Series F Units Series I Units Series C Units * For Series I Units, separate Series I fees are negotiated and paid by each Series I investor. Because the Manager pays no distribution, service or trailing fees on Series I Units, Series I Units will have lower Series I fees than the management fees for Advisor Series Units. FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the periods indicated. The Fund s Net Assets per Unit (1) Series A Units ) Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Advisor Series Units ) Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Series T5 Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $

5 Series T6 Units (6) ) Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Series T8 Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Series F Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Series I Units ) Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $

6 Series C Units Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (4) $ Net assets, end of period $ * Initial net assets. (1) The information is derived from the Fund s unaudited semi-annual and audited annual financial statements. The financial information presented for the periods ended June 30, 2015, December 31, and December 31, 2013 is derived from the financial statements determined in accordance with IFRS. Information for years prior to January 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. An explanation of these differences can be found in the notes to the Fund s financial statements. (2) Includes commissions and 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 Fund, or both, where applicable. The information shown in this column is for the period beginning August 12, 2013 (the series inception date) and ending December 31, (6) The information shown in this column is for the period beginning November 4, 2013 (the series inception date) and ending December 31, Ratios and Supplemental Data Series A Units ) Total net asset value (000s) (1) $ 999, , ,558 outstanding (000s) (1) 87,579 62,500 17,336 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Advisor Series Units ) Total net asset value (000s) (1) $ 5,345 2, outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series T5 Units Total net asset value (000s) (1) $ outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series T6 Units (6) ) Total net asset value (000s) (1) $ 34,994 31,142 1,488 outstanding (000s) (1) 3,401 3, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series T8 Units Total net asset value (000s) (1) $ 1,078 1,182 1,321 1,328 1,340 1,306 outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $

7 Series F Units Total net asset value (000s) (1) $ outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series I Units ) Total net asset value (000s) (1) $ outstanding (000s) (1) % before waivers or absorptions + % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series C Units Total net asset value (000s) (1) $ 3,428 3,694 4,611 4,213 4,179 3,731 outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Operating expenses are paid by BMOII and management fees are paid directly to BMOII as negotiated with the investor. (1) This information is provided as at June 30 or December 31 of the period shown. PAST PERFORMANCE The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional units or shares of the Fund and is based on the net asset value of the Fund. 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 Fund has performed in the past does not indicate how it will perform in the future. The returns of each series may differ from one another for a number of reasons, including if the series was not issued and outstanding for the entire reporting period and because of the different levels of fees and expenses allocated and payable by each series. On July 14, 2008, BMO Asset Management Inc. (formerly Jones Heward Investment Counsel Inc.) was appointed portfolio manager of the Fund. This change could have affected the performance of the Fund, had it been in effect throughout the performance measurement periods presented. Year-by-Year Returns The following bar charts show the performance for each series of the Fund for each of the financial years shown and for the six-month period ended June 30, The 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 the financial year. Series A Units (2) The management expense ratio of a particular series is calculated based on all expenses allocated to the series, as applicable, including all taxes and interest expenses but excluding brokerage commissions and other portfolio transaction costs, divided by the average daily net asset value of that series, annualized. (3) BMOII absorbed certain expenses or waived certain fees otherwise payable by a series. In doing so, BMOII attempts to maintain the overall MER of the Fund at a relatively consistent level. BMOII may discontinue the absorption or waiver at any time. (3) The trading expense ratio represents the total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 10 is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher a fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. The information shown in this column is for the period beginning August 12, 2013 (the series inception date) and ending December 31, (6) The information shown in this column is for the period beginning November 4, 2013 (the series inception date) and ending December 31, (3)

8 Advisor Series Units Series F Units (3) 2006 (1) Series T5 Units Series I Units (2) (3) Series T6 Units Series C Units (4) 2006 (1) Series T8 Units (1) Return from July 17, 2006 to December 31, (2) Return from January 8, 2008 to December 31, (3) Return from August 12, 2013 to December 31, (4) Return from November 4, 2013 to December 31, For the six-month period ended June 30, (1)

9 SUMMARY OF INVESTMENT PORTFOLIO As at June 30, 2015 % of Net Portfolio Allocation Asset Value Fixed Income Funds 52.6 Canadian Equity Funds 16.9 U.S. Equity Fund 15.1 International Equity Funds 10.9 Global Equity Fund 4.0 Cash/Receivables/Payables 0.5 Total Portfolio Allocation % of Net Holdings* Asset Value Issuer BMO Bond Fund, Series I 17.7 BMO U.S. Equity Fund, Series I 15.1 BMO Canadian Large Cap Equity Fund, Series I 13.0 BMO European Fund, Series I 6.0 BMO Laddered Corporate Bond Fund, Series I 5.0 BMO Asian Growth and Income Fund, Series I 4.9 BMO Mortgage and Short Term Income Fund, Series I 4.9 BMO Global Equity Fund, Series I 4.0 BMO Preferred Share Fund, Series I 3.9 BMO Mid-Term US IG Corporate Bond Index ETF** 3.3 BMO High Yield US Corporate Bond Hedged to CAD Index ETF** 3.2 BMO Emerging Markets Bond Fund, Series I 3.0 BMO World Bond Fund, Series I 3.0 BMO Mid-Term US IG Corporate Bond Hedged to CAD Index ETF** 2.9 BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF** 2.8 BMO Floating Rate High Yield ETF** 2.5 BMO Core Bond Fund, Series I 2.5 BMO U.S. High Yield Bond Fund, Series I 1.8 Cash/Receivables/Payables 0.5 Total Holdings as a Percentage of Total Net Asset Value Total Net Asset Value $1,044,035,029 *Represents entire portfolio. The prospectus and other information about the underlying investment funds held in the portfolio are available on the internet at and at **The prospectus and other information about the underlying exchange traded funds held in the portfolio are available on the internet at and at The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

10 BMO Investments Inc. First Canadian Place, 43rd Floor, 100 King Street West Toronto, ON M5X 1A1 For more information please call 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 Fund may invest in and the risks detailed from time to time in BMO Mutual Funds simplified prospectus. 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 Fund, 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 Investments 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. Registered trade-mark of Bank of Montreal, used under licence. Trade-mark of Bank of Montreal, used under licence. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal.