Next Edge GLG Emerging Markets Income Fund (formerly, Man GLG Emerging Markets Income Fund)

Transcription

1 Semi-Annual Management Report of Fund Performance For the six months ended June 30th, 2014

2 This semi-annual management report of fund performance contains financial highlights but does not contain the complete semi-annual financial statements of the Next Edge GLG Emerging Markets Income Fund (the Fund ). You may obtain a copy of the semi-annual financial statements at your request, and at no cost, by calling (416) or toll-free at (877) , by writing to us at Next Edge Capital Corp., 1 Toronto Street, Suite 200, Toronto, Ontario, M5C 2V6, Canada or by visiting our website at or SEDAR at Unitholders may also contact us using one of these methods to request a copy of the investment fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. Caution Regarding Forward-looking Statements Certain portions of this report, including but not limited to, Results of Operations and Recent Developments, may contain forward-looking statements about Next Edge GLG Emerging Markets Income Fund (the Fund ), including its strategies, risks, expected performance and condition. All statements, other than statements of historical fact, that address activities, events or developments that Next Edge Capital Corp. (the Manager ) and GLG Partners LP, (the Investment Manager ), (together, the Companies ) believe, expect or anticipate will or may occur in the future (including, without limitation, statements regarding any targeted returns, projections, forecasts, statements and future plans and objectives of the Fund) are forward-looking statements. These forward-looking statements reflect the current expectations, assumptions or beliefs of the Companies based on information currently available to the Fund. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the Fund to differ materially from those discussed in the forward-looking statements, and even if such actual results are realized or substantially realized, there can be no assurance that they will have the expected consequences to, or effects on the Fund. Factors that could cause actual results or events to differ materially from current expectations include, among other things, changes in international financial and commodities markets, fluctuations in currency exchange and interest rates, illiquidity of portfolio investments, reduction in availability of leverage, default by counterparties, special risks arising from short sales and investments in forward contracts and other derivatives, unintentional trades, accuracy of analytical models, valuation risks, limitations on redemptions, tax consequences, changes in applicable laws and other risks associated with investing in securities and those factors discussed under the section entitled Risk Factors in the Fund s Prospectus. Any forward-looking statement speaks only as of the date on which it is made and, except as may be required by applicable securities laws, the Companies and the Fund disclaim any intent or obligation to update any forward-looking statement, whether as a result of new information, future events or results or otherwise. Although the Companies believe that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and accordingly undue reliance should not be put on such statements due to the inherent uncertainty therein. 1

3 Management discussion of fund performance Investment Objective and Strategies Next Edge GLG Emerging Markets Income Fund, formerly Man GLG Emerging Markets Income Fund (the Fund ) is closed-ended investment trust established under the laws of the Province of Ontario and governed by a Declaration of Trust dated October 24, The Fund changed its name from Man GLG Emerging Markets Income Fund to Next Edge GLG Emerging Markets Income Fund via an amendment to the Declaration of Trust dated June 16, The Fund s investment objectives are: i) to provide holders of Class L units and Class M units monthly tax-advantaged distributions; and ii) to preserve capital while providing the opportunity for long-term capital appreciation for holders of units (the unitholders ). The Fund s investment objectives are to provide holders of units with monthly tax-advantaged distributions, and to preserve capital while providing the opportunity for long-term capital appreciation for unitholders. To pursue its investment objective, the Fund obtains exposure to an actively managed, liquid and diversified portfolio of securities and other instruments invested across various asset classes primarily within global emerging markets such as countries in Latin America, Central and Eastern Europe, the Middle East, Africa and Asia (the Underlying Assets ). In managing the Underlying Assets, the Underlying Fund Investment Manager will pursue its strategy through both active trading and investment principally in interest rate securities and instruments, sovereign and corporate credit instruments and other fixed income securities, foreign exchange instruments and derivatives (including futures and forward contracts) that provide exposure to these asset classes. GLG Emerging Markets Income Portfolio Ltd. ( GLG Ltd. or the Underlying Fund ) is an exempted company with limited liability in the Cayman Islands which acquired and maintains the Underlying Assets. The Underlying Assets are actively managed by GLG Partners LP, a limited partnership registered under the Limited Partnership Act, 1907 of England and Wales and authorized and regulated in the United Kingdom by the Financial Services Authority (the Investment Manager ). The Investment Manager is a division of Man Group plc. The return to the Fund will be based, through one or more forward agreements (each a Forward Agreement, and collectively, the Forward Agreements ) entered into with one or more Canadian chartered banks and/or their affiliates (each a Counterparty ), on the performance of the Portfolio. In managing the Underlying Assets, the Investment Manager s strategy is to seek to take advantage of changing macroeconomic conditions in emerging market economies that impact the interest rate, foreign exchange and credit environment in those economies. The objective of the investment process is to identify and exploit differences between intrinsic value and market valuation in emerging markets globally. The Investment Manager s macro views on global, country and local conditions and trends are combined with a bottom-up analysis to seek to arrive at the optimal asset or product type to fit an investment theme profile, whether in interest rates, exchange rates or fixed income investments. The Fund s investment activities are managed by Next Edge Capital Corp., formerly Man Investments Canada Corp. (the Manager ). See the Recent Developments section. Risk The overall level of risk associated with an investment in the Fund has not changed over the relevant period. There can be no assurance that the Investment Manager will achieve its investment objective in respect of the Fund. For details of the risks associated with an investment in the Fund, please refer to the Prospectus. 2

4 Management discussion of fund performance (continued) Results of Operations The Fund experienced a decrease in its net assets attributable to holders of redeemable units during the six months ended June 30, 2014: Class of redeemable units June 30, 2014 NAV per unit (CAD) 2 December 31, 2013 NAV per unit (CAD) 2 A (2.02) F (1.79) % return for the six months ended June 30, Classes A and F pay a monthly distribution. The % returns are dividend-adjusted and are net of fees. 2. Net assets attributable to holders of redeemable units ( NAV, or Net Assets ). Transition to IFRS The Fund is required to adopt IFRS for interim and annual financial statements relating to annual periods beginning on or after January 1, As a result, the Fund adopted IFRS on January 1, 2014 and the first interim financial statements prepared in accordance with IFRS are the semi-annual financial statements for The impact of the Fund s transition to IFRS is summarized below: Transition elections The only voluntary exemption adopted by the Fund upon transition was the ability to designate a financial asset or financial liability at fair value through profit and loss upon transition to IFRS. All financial assets designated at FVTPL upon transition were previously carried at fair value under Canadian GAAP as required by Accounting Guideline 18, Investment Companies. Statement of cash flows Under Canadian GAAP, the Fund was exempt from providing a statement of cash flows. IAS 1 requires that a complete set of financial statements include a statement of cash flows for the current and comparative periods, without exception. Reconciliation of equity as previously reported under Canadian GAAP to IFRS Equity December 31, 2013 June 30, 2013 January 1, 2013 Equity as reported under Canadian GAAP 34,066,564 52,892,016 99,465,651 Net assets attributable to holders of redeemable units 34,066,564 52,892,016 99,465,651 There had been no changes to comprehensive income on transition to IFRS. Classification of redeemable units issued by the Fund Under Canadian GAAP, the Fund accounted for its redeemable units as equity. Under IFRS, IAS 32 requires that units or shares of an entity which include a contractual obligation for the issuer to repurchase or redeem them for cash or another financial asset be classified as financial liability. The Fund s units do not meet the criteria in IAS 32 for classification as equity and therefore, have been reclassified as a financial liability on transition to IFRS. Other than presentation, there was no impact on the net assets of the Fund. 3

5 Management discussion of fund performance (continued) Recent Developments On May 27, 2014, the Manager amended its articles of incorporation to rename the company from Man Investments Canada Corp. to Next Edge Capital Corp. On June 5, 2014, the senior leadership team of the Manager acquired 100% of the issued and outstanding shares of the Manager from Man Group Holdings Ltd., a wholly owned subsidiary of Man Group plc. Performance Commentary of the Underlying Fund Market Overview It was a broadly turbulent start to the year for emerging markets ( EM ) assets as the Federal Reserve (the Fed ) announced another $10 billion taper, moving 10 year treasury yields sharply lower to 2.65% by month end. EM weakness was thus accompanied by safe haven demand for US Treasuries, indicating market concern about instability in EMs, both economic and political, and the potential for contagion. Rising political tensions in Turkey, combined with high external financing requirement and persistent inflation, weakened the lira by over 8% against the USD during January, despite the Central Bank of Turkey hiking the top rate to 12% from 7.75% at an emergency midnight meeting. Disappointing US economic data were thought to be largely due to the extreme cold in February, however 10 year yields were much lower than at the end of 2013, signalling that the pace of the taper would not change. The Fed indicated that it would be unlikely to hike the policy rate for a long time after unemployment falls below the threshold of 6.5%. Turmoil in Ukraine intensified, posing an evolving geopolitical risk with negative implications, especially for Russia due partly to speculation and eventual initiation of trade sanctions from the west. By April economic data signalled a strengthening recovery in the US as the weather effects dissipated. In China, quarterly GDP growth at 1.4% was the lowest in 2 years. Russia hiked its policy rate by a further 50 bps against a backdrop of weak economic fundamentals and a downgrade to BBB- by S&P. In Turkey and Hungary, incumbent parties secured parliamentary victories. Declaration of martial law developed into a full coup d etat in Thailand in May. A landslide election victory for reformer Narendra Modi pushed Indian equities up 15% for the year. Poroshenko won Ukraine s presidential election, and despite having an impotent mandate in the conflict ridden east of the country, the news fed a relief rally in Ukrainian and Russian assets. Fed minutes in June contained increasingly accommodative language from the Fed while US Q1 GDP was revised to -2.9%, the worst quarter since the 2009 recession. After sustained disinflation the European Central Bank lowered the deposit rate to -10bps and the refi rate to 15bps. Mexico, Brazil, Chile, Russia and South Africa had notable downward revisions to growth. ISIS militants captured territories in Iraq and Syria, with negative impacts for Turkey and other markets vulnerable to higher oil prices like India. Portfolio Gains for the Fund came largely from our long exposure to Mexican and Brazilian rates, as well as a basket reflecting our long bias for Asian currencies such as the Indian Rupee and Philippines Peso. On the negative side, our short position in 5 year Hungary rates, where we are looking for higher yields, has detracted from performance. Further losses came from our short exposure to the Russian Ruble as well as short positions in Brazilian and Indonesian Credit. We expect the positive environment for the EM carry trade, punctuated by EM-specific idiosyncrasy, to continue. The main risk is from a big upside surprise in US economic indicators, temporarily diluted by the shocking downward revision to Q1 GDP. And weak growth, disinflation in the Eurozone and sharp downward revisions to growth forecasts in the major EMs all spell continued support for the carry trade. The main risk to the easing stance now prevalent among EM central banks is either a big rebound in the US or another round of global risk aversion triggered by further political instability. Political instability remains a threat, heightened by June s occupation of Mosul and surrounding Iraqi and Syrian territories by ISIS forces. There is little sign of resolution in Ukraine notwithstanding Poroshenko s first round 4

6 Management discussion of fund performance (continued) victory, while Thailand s military leaders announced plans for a temporary constitution following May s military coup. Modi s resounding victory in India bodes well for structural reform and medium-run growth; but serious challenges remain on inflation and the fiscal and infrastructure deficits. Decisions to raise energy prices have been put on the backburner and rail fare hikes have been partially rolled back. Related Party Transactions The Manager is responsible for the day-to-day operations of the Fund and provides management services to the Fund, including the marketing, promotion, and distribution of the Fund; transfer agency services; and unitholder reporting and servicing. In consideration of the management services, the Fund pays management fees, which are accrued for weekly, to the Manager based on the average NAV of the applicable class of units of the Fund. Dealer compensation, or service fees, if any, are paid out of management fees and the Manager is not reimbursed for these payments. Total management fees for the six-months ended June 30, 2014 amounted to $64,256 (2013: $181,653) with $6,740 in outstanding accrued fees due to the Manager at June 30, 2014 (December 31, ,846; January 1, 2013 $128,436). The Manager incurs operating expenses on behalf of the Fund and is then reimbursed by the Fund for such expenses. The Manager also provided start-up investment capital to the Fund and sufficient initial capital to each additional series of the Fund to permit that series to be valued effectively on a weekly basis. The Manager s investment in the Fund is recorded at the NAV per unit of each series, as applicable. National Instrument Independent Review Committee for Investment Funds ( NI ) requires all publicly offered investment funds, such as the Fund, to establish an independent review committee ( IRC ). Consequently, the Manager has appointed three independent IRC members. The purpose of the IRC is to: (i) review and provide input on the Manager s written policies and procedures that deal with conflict of interest matters; (ii) consider and, if deemed appropriate, approve the Manager s decision on a conflict of interest matter that the Manager refers to the IRC for approval; and (iii) perform such other duties as may be required of the IRC under applicable Canadian securities laws. Additional information about the IRC is available in the Fund s prospectus. Fees are paid to the IRC members for the performance of their duties. The total remuneration paid to members of the Independent Review Committee during the six-months ended June 30, 2014 was $5,004 (2013: $14,369). The Fund also earns its returns based on the performance of the Underlying Assets which are managed by the Investment Manager. Effective June 5, 2014, the Investment Manager, wholly owned by Man Group plc, was no longer a Related Party. 5

7 Financial highlights The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance from January 1, 2014 to June 30, 2014, from January 1, 2013 to December 31, 2013, from January 1, 2012 to December 31, 2012, and from January 1, 2011 to December 31, Class A Net Assets per unit (CAD) For the periods ended Jun 30, Net Assets per unit, beginning of period Increase (decrease) from operations Total revenue Total expenses (0.10) (0.12) (0.13) (0.02) Realized (losses) gains for the period (0.01) 0.43 (0.39) 0.00 Unrealized gains (losses) for the period (0.12) (1.00) Total (decrease) increase from operations (0.23) (0.69) (0.02) 0.11 Distributions: From income (excluding dividends) (0.23) From dividends From capital gains Return of capital - (0.53) (0.60) - Total distributions 5 (0.23) (0.53) (0.60) - Net Assets per unit, end of period Class F Net Assets per unit (CAD) For the periods ended Jun 30, Net Assets per unit, beginning of period Increase (decrease) from operations Total revenue Total expenses (0.09) (0.08) (0.08) (0.01) Realized (losses) gains for the period (0.01) 0.45 (0.41) 0.00 Unrealized gains (losses) for the period (0.12) (1.01) Total (decrease) increase from operations (0.22) (0.64) Distributions: From income (excluding dividends) (0.23) From dividends From capital gains Return of capital - (0.53) (0.60) - Total distributions 5 (0.23) (0.53) (0.60) - Net Assets per unit, end of period

8 Financial highlights (continued) 1. This information is derived from the Fund s unaudited semi-annual financial statements for the six months ended June 30, This information is derived from the Fund s audited financial statements for the year ended December 31, This information is derived from the Fund s audited financial statements for the year ended December 31, This information is derived from the Fund s audited financial statements for the year ended December 31, Distributions are paid in cash but investors have the option of reinvesting. 6. Net Assets and distributions are based on the actual number of units outstanding at the relevant time. The increase (decrease) from operations is calculated based on the average number of units outstanding over the period. Therefore, the beginning of period Net Assets, the increase (decrease) from operations and distributions, if any, will not sum to the end of period Net Assets. 7

9 Financial highlights (continued) Class A Ratios and Supplement Data: For the periods ended Jun 30, Total NAV (CAD 000s) 1 14,189 31,196 85,596 94,857 Number of units outstanding 1 1,931,005 4,033,065 9,693,357 10,049,921 Management expense ratio 4.57% 4.24% 3.86% 5.64% Management expense ratio before waivers or absorptions % 4.27% 3.86% 5.64% Trading expense ratio % 0.76% 1.35% 0.75% Portfolio turnover rate % 34.81% 21.82% 0% NAV per unit (CAD) Closing market price Class F Ratios and Supplement Data: For the periods ended Jun 30, Total NAV (CAD 000s) 1 2,053 2,870 13,870 18,998 Number of units outstanding 1 256, ,700 1,507,195 1,950,079 Management expense ratio 4.00% 3.68% 3.30% 4.70% Management expense ratio before waivers or absorptions % 3.70% 3.30% 4.70% Trading expense ratio % 0.76% 1.35% 0.75% Portfolio turnover rate % 34.81% 21.82% 0% NAV per unit (CAD) Closing market price 5 n/a n/a n/a n/a 1. This information is provided as at June 30, 2014, December 31, 2013, and December 31, 2012, and December 31, Management expense ratio is based on total expenses of the Fund and the Fund s allocated percentage of the Underlying Fund s expenses for the stated period (excluding commission and other portfolio transaction costs) and is expressed as an annualized percentage of daily average net asset value during the period. The management expense ratio is calculated in accordance with Part 15 of NI 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 Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher the 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 the Fund. 5. Class A units are listed on the TSX. Class F units are not listed on the TSX. 8

10 Financial highlights (continued) Management Fees The Fund will pay the Manager a management fee (the Management Fee ) at an annual rate of: (i) 0.50% of the portion of its Net Asset Value represented by the Class A units; and (ii) 0.00% of the portion of its Net Asset Value represented by the Class F units, calculated daily and paid monthly in arrears, plus applicable taxes. In accordance with the Manager s appointment under the Fund s declaration of trust dated October 24, 2011 (the Declaration of Trust ), the services to be provided by the Manager in relation to the assets of the Fund include the following: 1. to administer and manage the day-to-day operations of the Fund; 2. to act as agent for the Fund, execute documents on behalf of the Fund; and 3. to make decisions which conform to general policies and general principles set forth in the Declaration of Trust or established by the Trustee. As a percentage of management fees General administration, Class of units Annual Rates Dealer Compensation investment advice and profit A 0.50% % - F

11 Past performance Period-By-Period Returns Reported returns are from January 1, 2014 to June 30, 2014, January 1, 2013 to December 31, 2013, January 1, 2012 to December 31, 2012, and from October 24, 2011 (date of commencement of Fund operations) to December 31, The performance information shown assumes that all distributions made by the Fund in the periods shown were reinvested in additional securities of the Fund. The performance information shown does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. How the Fund has performed in the past does not necessarily indicate how it will perform in the future. 1.00% Class A Units 0.00% -1.00% -2.00% -3.00% % -2.02% -4.00% -5.00% -6.00% -7.00% 1.00% -5.62% Class F Units 0.50% -5.83% 0.00% -1.00% % -3.00% -2.53% -2.24% -1.79% -4.00% -5.00% -6.00% -7.00% 10

12 Summary of investment portfolio The following shows the underlying assets allocation by asset class and the top 25 holdings as presented in the GLG Emerging Markets Income Portfolio Ltd. Management Report on Fund Performance posted on SEDAR. The Underlying Assets may change due to ongoing portfolio transactions. For further details, see the GLG Emerging Markets Income Portfolio Ltd. financial statements for the six months ended June 30, 2014 as posted on SEDAR. Portfolio Allocation Asset Class % of Net Assets Government bonds 9.19 Credit default swaps 1.44 Forward currency contracts 1.10 Options 0.23 Volatility swaps 0.09 Interest rate swaps (2.40) Top 25 Holdings Issuer % of Net Assets Long positions South Africa Government Bond 10.5% 21/12/ % Currency Contract US$ Exp :09 July % Republic of Indonesia September 2019 JP 0.82% Currency Contract CAD Exp :31 July % Republic of China September 2019 DB 0.34% Republic of Brazil September 2019 DB 0.29% Currency Contract BRL Exp :13 August % MXN Receive 5.255% vs TIIE 28 days-0bp 09 June % USD PUT/CNH CALL K= December 2014 MS 0.19% Currency Contract US$ Exp :07 July % Currency Contract TRY Exp :07 July % Currency Contract CNH Exp :09 July % USD CALL/HUF PUT K= August 2014 GS 0.13% Currency Contract MYR Exp :09 July % Currency Contract Exp :07 July % Currency Contract US$ Exp :07 July % Short Positions Currency Contract CNH Exp :09 July 2014 (4.68%) HUF Pay 4.55% vs BUBOR 6Month 0BP 05 March 2014 (0.98%) HUF Pay 4.43% vs BUBOR 6Month 0BP 06 March 2014 (0.88%) HUF Pay 4.32% vs BUBOR 6Month 0BP 07 March 2014 (0.82%) Currency Contract US$ Exp :07 July 2014 (0.25%) Currency Contract US$ Exp :09 July 2014 (0.17%) USD PUT/BRL CALL ND K= August 2014 HSBC (0.15%) Currency Contract TRY Exp :07 July 2014 (0.15%) Currency Contract ZAR Exp :10 July 2014 (0.11%) Total Net Asset Value of the Underlying Fund: USD 14,661,451 11

13 Summary of investment portfolio (continued) The total fair value of the Fund s investments is referable to Class A redeemable participating shares issued by GLG Emerging markets Income Portfolio Ltd. 1. The percentage of the Class net assets refer to the amount of margin required in cash terms to be pledged against the relevant investments. The cash requirement has then been converted into a percentage of the Net Asset Value of the Underlying Fund. 2. Cash is comprised of cash in bank deposits and cash held with brokers in order to meet margin requirements. 12

14 General information MANAGER AND PRINCIPAL DISTRIBUTOR Next Edge Capital Corp. 1 Toronto Street, Suite 200 Toronto, ON M5C 2V6 Telephone: (416) Fax: (416) Toll Free: 1 (877) TRANSFER AGENT Canadian Stock Transfer Company Inc. P.O. Box 4202, Postal Station A Toronto, ON M5W 0E4 VALUATION AGENT AND CUSTODIAN CIBC Mellon Trust Company 320 Bay St Toronto, ON, M5H 4A6 BROKER CIBC World Markets 161 Bay Street, 5th Floor Toronto, ON M5J 2S8 AUDITORS Ernst & Young LLP 222 Bay Street, P.O. Box 251 Toronto, ON M5K 1J7 LEGAL COUNSEL Blake, Cassels & Graydon LLP 199 Bay Street Suite 4000, Commerce Court West Toronto ON M5L 1A9 13

15 Next Edge Capital Corp. 1 Toronto St., Suite 200 Toronto, ON M5C 2V6 Tel: Fax: