Semi-Annual Management Report of Fund Performance

Transcription

1 Semi-Annual Management Report of Fund Performance BMO Private Emerging Markets Equity Portfolio For the period ended June 30, 2017 This semi-annual management report of fund performance contains financial highlights, but does not contain the semi-annual or annual financial statements of the Portfolio. If the semi-annual or annual financial statements of the Portfolio do not accompany the mailing of this report, you may obtain a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling , by ing us at contact.centre@bmo.com, by writing to us at BMO Private Investment Counsel Inc., 1 First Canadian Place, 100 King St. W., 41st Floor, Toronto, Ontario, M5X 1A1 or by visiting our website at or SEDAR at You may also contact us using one of these methods to request a copy of the Portfolio s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. Management Discussion of Fund Performance BMO Private Investment Counsel Inc. ( BPIC or the Manager ), the manager and portfolio manager, is responsible for the management of the overall business, investments and operations of the BMO Private Portfolios and has engaged Comgest S.A. ( Comgest or the subadvisor ) as the sub-advisor of BMO Private Emerging Markets Equity Portfolio (the Portfolio ). Results of Operations Over the six-month period ended June 30, 2017, the Portfolio returned 16.53% in C$ (20.69% in US$), after expenses. The Portfolio s benchmark is the MSCI Emerging Markets Index, which generated a 14.52% total return in C$ (18.43% in US$) over the same sixmonth period. Emerging market equities delivered good returns for the six-month period ended June 30, Some of the top-performing countries are ones that experienced political difficulties in 2016, including Turkey, Mexico and South Korea. All rebounded in what appears to be a more benign geopolitical environment. Despite the generally positive tone in emerging markets, pressure persists in Russia and Qatar. Both countries are subject to sanctions, driven more by friction with the United States as it attempts to gain influence as a new, world gas producing power. Earnings of emerging companies started to grow again after four years of declines, as a result of a more stable economic situation and slowly recovering margins. Measured by return on equity, corporate profitability had deteriorated from about 20% in 2008 to just below 8% in 2016, indicating significant value destruction in most emerging economies. More recently, returns on equity have been improving, rebounding to above 10% in the first half of Underweight exposures to the Energy and Financials sectors contributed to the Portfolio s performance. From a geographic perspective, overweight exposures to China and Mexico, and an underweight allocation to Russia contributed to performance. A lack of weighting in Qatar also had a positive impact. Holdings in Hangzhou Hikvision Digital Technology Co., Ltd. have been one of the best performers this year (+105%), progressively becoming the world s largest video surveillance provider, with an approximate 10% global market share. Its competitive advantage comes from an extensive distribution network in China and increasingly overseas, very strong research and development, good cost control and pricing power with suppliers. The company s growth has been fueled by increased penetration of surveillance systems worldwide and the growing connectivity of surveillance networks. Going forward, Hangzhou Hikvision Digital Technology Co., Ltd. is making progressive inroads into artificial intelligence, automation and robotics, which should add to its growth opportunities.

2 Other top contributors to performance included holdings in NetEase Inc. (+36.2%) and Taiwan Semiconductor Manufacturing Co. Ltd. (+21.7%). Taiwan Semiconductor Manufacturing Co. Ltd. continues to dominate its industry, having moved from a sector follower to market leader. The company is better funded and more profitable than all other independent semiconductor manufacturers. It has the independence and management stability that more integrated companies do not have. A significant weighting in the Information Technology sector detracted from performance. While the sector has possible vulnerability because of the inflows they have attracted, Internet companies represent, in the sub-advisor s view, one of the best investment opportunities in the current environment. An overweight allocation to Brazil and underweight positions in South Korea and Turkey detracted from performance. Brazil was impacted by increased corruption accusations against President Temer, the replacement of the recently impeached President Rousseff. Stock selection in India was another detractor, impacted by weak performance results from Infosys Ltd. While the company has done well adapting its business model from corporate operating system maintenance to products and services related to mobility, cloud and automation, their contribution is relatively small at present. The talk of protectionism by U.S. President Trump is adding to the pressure on the stock price, as 13% of Infosys Ltd. employees are based in the United States. Individual detractors from performance include holdings in BRF S.A., MTN Group Ltd. and OdontoPrev S.A. MTN Group Ltd. s stock price deteriorated as many territories in which it operates continued to be under pressure. South Africa is suffering from weakening economic fundamentals, while the subadvisor s recent trip to Nigeria confirmed its difficult environment on the ground. MTN Group Ltd. s thirdlargest territory, Iran, faces geopolitical challenges that limit its growth opportunity in the short term. However, the company is pursuing an aggressive capital expenditure campaign in its key markets to maintain its competitive advantage in places where the mobile data growth opportunity is significant. OdontoPrev S.A. share price declined, especially in the first quarter of 2017 after disappointing first-quarter results. The leading dental insurer has been impacted by a higher unemployment rate in Brazil, which affects its corporate segment. The sub-advisor purchased several new positions for the Portfolio during the year. Cognizant Technology Solutions Corp. was added for its strong cash generation and greater exposure to vertical Health Care services relative to its competitors. This sector is highly profitable and gives the company significant access to the United States. LG Household & Health Care Ltd. was purchased for its positive domestic track record, and expansion into China, which represents a large growth opportunity. The company has transformed itself from an average Korean household goods firm to clear leader across its segments. The sub-advisor introduced a position in Ultrapar Participacoes S.A., a Brazilian company with leading market positions in fuel distribution, specialty chemicals, liquid bulk storage services and drugstores. Its management has an excellent track record of disciplined capital allocation, and is poised to enter a new growth cycle. Existing positions in BRF S.A., BB Seguridade Participacoes S.A. and Inner Mongolia Yilli Industrial Group Co. Ltd. were marginally increased to take advantage of share price weakness. The Portfolio s position in Cielo SA was sold following potentially negative outcomes of regulatory changes that affect its business model. OdontoPrev S.A. was eliminated after weak performance, the proceeds redeployed to investments with better risk-reward profiles. After almost doubling in value in a few months, Largan Precision Co. Ltd. was sold on valuation. In the sub-advisor s view, the market became overly optimistic about the company s prospects, leaving little potential for further price appreciation. Weifu High-Technology Group Co. Ltd. was also eliminated as its results have proved to be more cyclical and less visible than initially anticipated. Holdings in Kweichow Moutai Co., Ltd. were trimmed on the grounds of its price appreciation. For information on the Portfolio s longer term performance and composition, please refer to the Past Performance section and Summary of Investment Portfolio section of this report.

3 Recent Developments The outlook for emerging markets remains uncertain. While the sub-advisor believes that the rebound in growth looks increasingly solid, especially in non- Asian emerging economies where conditions have been the toughest, the strength of the rebound is impacted by each country s domestic credit cycles and reforms. These reforms are acutely needed to restore international investors confidence and the corresponding foreign direct investments, notably in places such as Brazil, Mexico and South Africa. The Chinese economy has shown signs of some weakness amid slightly tougher monetary and credit conditions. Debt has been fuelling Chinese growth since 2008 and, in the sub-advisor s view, there are limits to how much more liquidity can be injected into the economy. Slower growth in China could have a negative impact on the overall emerging markets recovery. A potentially weaker China could further weaken commodities, triggering renewed U.S. dollar strength and emerging markets currencies weakness. Concerns over inflation, perhaps as a result of the high level of employment in the United States, could cause more aggressive-than-expected interest rate increases, further supporting U.S. dollar appreciation. Domestic demand in most emerging market countries (excluding China) remains weak. Without a broader economic recovery, fueled by the stronger participation of consumers, the sub-advisor does not expect further improvement to corporate earnings. From a global perspective, the debt load of most economies remains the biggest risk, a risk that is underappreciated by investors who have grown used to low interest rates. Markets have increasingly become complacent, as illustrated by the depressed levels of the VIX volatility Index and other confidence indicators. Despite the strong returns of the last 12 months, the sub-advisor believes that investors would be wise to avoid becoming overly optimistic for emerging markets in the short-to-medium term, as important challenges remain. In this context, the sub-advisor believes that a low risk, reasonably valued Portfolio of solid, quality companies represents the best way to participate in the emerging markets rebound. Related Party Transactions BMO Trust Company, an indirect, wholly-owned subsidiary of Bank of Montreal, is the trustee (the trustee ) and BPIC is the manager of the Portfolio. From time to time, BPIC may, on behalf of the Portfolio, enter into transactions or arrangements with or involving other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Portfolio (each, a related party and collectively, the related parties ). The purpose of this section is to provide a brief description of any transaction involving the Portfolio and a Related Party. In each instance where a conflict of interest is identified, it will be referred to the Portfolio s independent review committee (the IRC ). The primary focus of the IRC is to determine whether the proposed action of the Manager in respect of the conflict of interest matter achieves a fair and reasonable result for the Portfolio. The IRC has reviewed the related party relationships described below and has provided a positive recommendation that each relationship achieves a fair and reasonable result for the Portfolio. Sub-advisor BPIC has hired Comgest to provide investment advice and make investment decisions for the Portfolio s investment portfolio. Comgest receives a sub-advisory fee based on assets under management, which is paid quarterly. Comgest is paid by BPIC, and BPIC charges a portion of the sub-advisory fee as an expense to the Portfolio. Wealth Management Fee Units of the Portfolio are only available through the wealth management service offered by BMO Financial Group. The trustee, a related party, and the Manager receive an annual fee from each investor for the wealth management service offered by BMO Financial Group. A tiered schedule is applied to calculate the annual fee for this service. The fee schedule starts at 1.95% and declines to 0.20% (depending on the nature and size of the investor s investment portfolio), and is calculated as a percentage of the assets under management. The actual wealth management fee payable by each investor is set out in BPIC s Investment Management

4 Fee Schedule that is provided to the investor when the investor enters into an investment management agreement with the trustee and BPIC. The wealth management fee is paid directly by the investor to the trustee and the Manager. The trustee may compensate financial institutions and securities registrants within BMO Financial Group for client referrals to the wealth management service. Unitholder Services The Portfolio is provided with certain facilities and services by related parties. BPIC is the registrar of the Portfolio. The trustee and BPIC are paid by the Portfolio for fees relating to the custodial and administrative services they provide, respectively. Administrative services include fund accounting, record keeping and purchases/redemption order processing. The fees charged to the Portfolio during the periods were as follows: Period ended Period ended June 30, 2017 June 30, 2016 ($000s) ($000s) Unitholder Services Management Fee There is no management fee charged to the Portfolio. The trustee and the Manager receive an annual wealth management fee from investors for the wealth management service offered by BMO Financial Group.

5 Financial Highlights The following tables show selected key financial information about the Portfolio and are intended to help you understand the Portfolio s financial performance for the periods indicated. Six months ended Years ended December 31 The Portfolio s Net Assets Per Unit (1) June 30, Net assets, beginning of period $ Increase (decrease) from operations: Total revenue $ Total expenses (2) $ (0.10) (0.21) (0.21) (0.19) (0.19) (0.08) Realized gains (losses) for the period $ (0.18) (0.79) Unrealized gains (losses) for the period $ 1.66 (0.68) (0.76) Total increase (decrease) from operations (3) $ Distributions: From income (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ (1) This information is derived from the Portfolio s unaudited and audited financial statements. The financial information presented for the periods ended June 30, 2017, December 31, 2016, December 31, 2015, December 31, 2014 and December 31, 2013 is derived from the financial statements determined in accordance with IFRS. Information for periods prior to January 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. (2) Includes commissions and other portfolio transaction costs. Prior to 2013, withholding taxes were not included in expenses as they were included in revenue. (3) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (4) Distributions were paid in cash or reinvested in additional units of the Portfolio, or both. Six months ended Years ended December 31 Ratios and Supplemental Data June 30, Total net asset value (000s) (1) $ 281, , , , , ,334 Number of units outstanding (000s) (1) 15,964 16,078 19,045 17,775 16,857 10,213 Management expense ratio (2) % Management expense ratio before waivers or management absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ (1) This information is provided as at June 30 or December 31 of the period shown, as applicable. (2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (4) The portfolio turnover rate indicates how actively the Portfolio s sub-advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Portfolio buying and selling all of the securities in its portfolio once in the course of the year. The higher a portfolio turnover rate in a year, the greater the trading costs payable by the Portfolio in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a portfolio.

6 Past Performance General The Portfolio s performance information assumes that all distributions made by the Portfolio in the periods shown were reinvested in additional units of the Portfolio and is based on the net asset value of the Portfolio. The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember, how the Portfolio has performed in the past does not necessarily indicate how it will perform in the future. Year-by-Year Returns The following bar charts show the performance for each of the financial years and for the six-month period ended June 30, 2017 shown and illustrate how the performance has changed from year to year. The bar charts show in percentage terms how an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year. BMO Private Emerging Markets Equity Portfolio (C$) 80% 60% 40% % 0% % -40% % (1) BMO Private Emerging Markets Equity Portfolio (US$) 80% 60% % 20% 0% % -40% -60% (1) (1) For the six-month period ended June 30, 2017.

7 Summary of Investment Portfolio as at June 30, 2017 Portfolio Allocation % of Net Asset Value Top 25 Holdings % of Net Asset Value China 30.1 Brazil 14.7 India 12.2 South Africa 10.5 Mexico 7.1 Hong Kong 6.2 South Korea 5.9 Taiwan 4.9 Cash/Receivables/Payables 3.4 United States 2.0 Malaysia 1.6 Russia 1.4 Total portfolio allocation Sector Allocation % of Net Asset Value Information Technology 24.8 Financials 21.6 Consumer Staples 13.4 Telecommunication Services 10.3 Industrials 9.7 Consumer Discretionary 8.6 Utilities 6.1 Cash/Receivables/Payables 3.4 Energy 2.1 Total sector allocation Issuer China Life Insurance Company Limited, H Shares 5.1 Taiwan Semiconductor Manufacturing Company, Ltd., ADR 4.9 NetEase, Inc., ADR 4.3 Ping An Insurance (Group) Company of China, Ltd., H Shares 4.1 Power Grid Corporation, Equity Linked Notes, Jan 31, MTN Group Limited 3.9 Cash/Receivables/Payables 3.4 Inner Mongolia Yili Industrial Group Co., Ltd., Equity Linked Notes, Jul 10, Infosys Limited, ADR 3.3 SAIC Motor Corporation Ltd., Equity Linked Notes, Nov 11, Bharti Infratel Service Ltd. 3.0 Baidu, Inc., ADR 2.9 China Mobile Limited 2.8 Fomento Economico Mexicano, S.A.B. de C.V. 2.8 Sanlam Limited 2.6 Samsung Life Insurance Co., Ltd. 2.6 BRF S.A. 2.5 BB Seguridade Participacoes S.A. 2.4 CCR S.A. 2.4 Weg S.A. 2.4 Hangzhou Hikvision Digital Technology Co., Ltd., Equity Linked Notes, Apr 16, NCSoft Corporation 2.3 Coca-Cola FEMSA, S.A.B. de C.V., ADR 2.3 Discovery Limited 2.1 Ultrapar Participacoes S.A. 2.1 Top holdings as a percentage of total net asset value 77.0 Total Net Asset Value $281,297,551 The summary of investment portfolio may change due to the Portfolio s ongoing portfolio transactions. Updates are available quarterly.

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