Brookfield Investment Management

Transcription

1 Brookfield Investment Management 2014 New Horizons Master Fund Interim Management Report of Fund Performance For the period from January 1, 2014 to June 30, 2014

2 In Profile New Horizons Master Fund (the Fund ) is managed by Brookfield Investment Management (Canada) Inc. ( BIM Canada ). BIM Canada is a subsidiary of Brookfield Asset Management Inc., a global alternative asset manager with approximately US$200 billion of assets under management as at June 30, 2014 and over a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. BIM Canada is also the investment manager of the Fund Interim Management Report of Fund Performance 1

3 MANAGEMENT REPORT OF FUND PERFORMANCE This interim management report of fund performance contains financial highlights but does not contain the complete condensed interim financial statements of New Horizons Master Fund (the Fund ). The condensed interim financial statements may contain information not included in the management report of fund performance. You can get a copy of the condensed interim financial statements at your request, and at no cost, by contacting us (see contact information at end of this report) or by visiting our website at or by viewing our filings on SEDAR at Unitholders may also contact us to request a free copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. This report may contain forward-looking statements. The use of any of the words anticipate, may, will, expect, estimate, should, believe and similar expressions are intended to identify forward-looking statements. Such statements reflect the opinion of Brookfield Investment Management (Canada) Inc. ( Investment Manager or BIM Canada ) regarding factors that might be reasonably expected to affect the performance and the distribution on units of the Fund and are based on information available at the time of writing. The Investment Manager believes that the expectations reflected in these forwardlooking statements and in the report are reasonable but no assurance can be given that these expectations or the report will prove to be correct and accordingly, they should not be unduly relied on. These statements speak only as at the date of the report. Actual events and outcomes may differ materially from those described in these forward-looking statements or report. Unless otherwise indicated, all information is presented as at June 30, 2014 and expressed in Canadian dollars. None of the websites referred to in this interim management report of fund performance, nor any of the information on such websites, are incorporated by reference in this interim management report of fund performance. Investment Objectives and Strategies The Fund is an investment fund created to invest in a portfolio of securities (the Portfolio ) that focuses on, but is not limited to, investments in high yield corporate debt, and publicly-listed securities in infrastructure and real estate companies across a global universe. BIM Canada is the manager (the Manager ) of the Fund. The investment objective of the Fund is to provide holders of the units (the Units ) with the opportunity to preserve the net asset value of the Fund. Risk At June 30, 2014, approximately 52% of the Portfolio was invested in high yield fixed income securities of companies domiciled in the United States and to a lesser extent, Canada, Mexico and Brazil. The remainder of the Portfolio was invested in high yielding equities which represented approximately 48% of the Portfolio holdings as at June 30, 2014, an increase from approximately 26% at December 31, The Portfolio holdings are exposed to various risks including risks related to the credit quality of the issuer of the securities, the trading liquidity of the securities and the currency in which the securities are denominated. The Fund seeks to minimize potentially adverse effects of these risks on the Portfolio s performance by employing experienced portfolio managers and by continuously monitoring the Portfolio s securities positions and markets. Over the period ended June 30, 2014 there was no material change in the overall level of risk created by the credit quality, trading liquidity or currency denomination of the investments employed by the Fund Interim Management Report of Fund Performance 2

4 As at June 30, 2014, the Fund had exposure to forward currency contracts and equity total return swaps. The Investment Manager seeks to mitigate the counterparty risk arising from such arrangements through the careful selection of its derivative contract counterparties. As at June 30, 2014 the Fund held five positions through equity total return swaps representing $22.4 million of gross exposure as compared to two positions representing $7.85 million of gross exposure at December 31, The Fund also had US$80 million and 6.2 million of forward currency contracts in place to protect against a strengthening in the Canadian dollar against the U.S. dollar and the British Pound, respectively. At December 31, 2013 there were no forward currency contracts in place. For discussion of the Fund s use of leverage, please see Results of Operations. Results of Operations The Fund s net asset value was $193.4 million as at June 30, 2014, an increase of $26.1 million from $167.3 million as at December 31, The increase in net asset value was largely comprised of operating profit of $32.0 million, reduced by withholding taxes of $1.0 million, and offset by the redemption of 339,174 Units for $5.8 million. As at June 30, 2014, the net asset value per Unit of the Fund was $19.20 compared to $16.07 on December 31, The Fund s total return was 19.46% for the six June 30, Following uneven performance during the first few months of the year, global equity markets regained momentum in the second quarter amid signs of rebounding economic growth and ongoing central bank liquidity. In particular, economic data-points in the U.S. demonstrated signs of renewed growth, as employment, manufacturing activity, home sales and consumer confidence exceeded expectations. While the U.S. economy contracted by nearly 3% during the first quarter of the year due to extreme winter weather conditions, investors remained firmly focused on the forward outlook. Furthermore, during her June 18 th speech, Federal Reserve Chairwoman Janet Yellen stated that interest rates are likely to stay low for a considerable time. Accordingly, investors now expect the U.S. Federal Reserve will remain accommodative for a longer period of time in order to protect the health of the economic recovery. Investor confidence during the second quarter was also supported by further easing of monetary policy by the European Central Bank as well as continued signs of economic stabilization within China. Chinese government officials expressed confidence that the country would achieve the 7.5% annual GDP growth target established late last year. Although geopolitical volatility in Ukraine and the Middle East challenged investor confidence in the period, market performance was not significantly impacted by these concerns. As the first half came to a close, investors remained keenly focused on the outlook for global economic growth, early signs of inflation and the forward trajectory of interest rates. Within this environment, both high and low yielding instruments have performed well as credit strength boosted riskier bonds, and declining interest rates boosted safer bonds. Recent announcements and policy activity by central banks across the globe indicate that interest rates are likely to remain low in the near term, particularly as the global economic recovery gains momentum. This environment of low rates and improving growth is expected to continue to benefit income-producing asset classes, particularly those with upside potential and exposure to the broader economy. However, over time, we do not believe that rates in the United States can stay at these low levels. We expect that rates will rise over the medium term, and when they do, there is a risk that rates could rise at a very rapid pace. We believe that investors should be positioned for this eventual rise in rates as seemingly safe investments, such as investment grade corporate bonds, could suddenly produce negative returns. The Fund s total return of 19.46% over the period was primarily driven by: (1) investment income generated in the Portfolio, (2) price changes in individual holdings of the Portfolio, and (3) the positive impact of currency translation Interim Management Report of Fund Performance 3

5 The Portfolio, as at June 30, 2014, was comprised of 52% fixed income securities and 48% high yielding equities. While the Fund does not have a specific benchmark index due to its ability to obtain exposure to a variety of asset classes, the performance of the Merrill Lynch Global High Yield Index and the S&P/Toronto Stock Exchange Composite Index help to explain general trends in high yielding corporate credit and Canadian equities, respectively. For the six June 30, 2014, the corporate high yield debt market, as measured by the Merrill Lynch Global High Yield Index, had a total return of 6.11% in Canadian dollar terms. The index return was comprised of a 2.39% impact from price increases, coupon payments of 3.47% and a positive impact of 0.26% from the weakening of the Canadian dollar. The S&P/Toronto Stock Exchange Composite Index had a total return 12.9% over the Period. The Portfolio s holdings of high yield corporate bonds and equities had a greater average income return than these indices and also had stronger price performance due to some single name outperformers. Some of the most notable outperformers during the Period within our fixed income investments included: BlackBerry Ltd. convertible bonds which experienced significant price appreciation as the company s stock price rebounded amid restructuring progress made by new management; SuperMedia Inc. loans, which rallied on the back of renewed strength in its online advertising business; First Data Corp. bonds, which benefitted from a large common equity injection; and, Edison Mission Energy and Texas Competitive Electric Holdings Co. LLC bonds, which despite being in bankruptcy, experienced strong price appreciation as the attractiveness of power generating assets became more evident to potential suitors. These company-specific events were important contributors to the Portfolio s performance. Fixed income investments which lagged during the Period were Arch Coal Inc. and Walter Energy Inc. Weak power prices in the U.S. and low demand for steel negatively impacted demand for the thermal and metallurgical coal produced by Arch and Walter, respectively. We believe that Arch Coal and Walter Energy bonds continue to offer an attractive risk / reward profile. The equity positions in the Portfolio also had some notable outperformers. Several investments including Man Group PLC, Banco do Brasil S.A. and British American Tobacco PLC appreciated in value due in a large part to renewed strength in emerging markets following a period of capital outflows that ended in March. In addition, Canadian Oil Sands Ltd. stock exhibited strength, benefitting from a higher oil price realization as the discount between Alberta and West Texas oil prices narrowed. Our investment in AGF Management Ltd. was a relative laggard in the Portfolio with weak stock performance over the Period; however, the stock s high dividend yield significantly mitigated the weaker stock performance. The Fund is exposed to currency risk as the Units of the Fund are denominated in Canadian dollars and the investments in the Portfolio may be in currencies other than the Canadian dollar. The Investment Manager may hedge such currency exposures from time to time. As at June 30, 2014 the Portfolio held forward currency contracts to protect against a rise in the Canadian dollar covering US$80 million (or approximately two-thirds) of its U.S. Dollar exposure (at December 31, 2013 there were no forward currency contracts in place). During the Period the Canadian dollar dropped slightly in value relative to the U.S. dollar from CAD/USD to CAD/USD. The weakness in the Canadian dollar relative to the U.S dollar, netted with the currency hedging activities undertaken by the Fund, had a positive impact on the Portfolio with realized and unrealized foreign exchange gains of approximately $1.5 million for the Period. This tailwind added approximately 0.9% to the Fund s total return during the Period. Leverage is restricted to 25.00% of the total assets of the Fund. Accordingly, at the time of borrowing, the maximum amount of leverage that the Fund could employ is 1.33:1 (total long positions, inclu ding leveraged positions, divided by net assets of the Fund). As at June 30, 2014, the Fund had employed leverage equal to 17.98% (December 31, %) of the net assets of the Fund, equating to $34.8 million (December 31, $31.6 million) which includes both margin payable and leverage obtained through derivatives. The minimum and maximum amounts of borrowings outstanding during the six month period ended June 30, 2014 were $14,320,121 and $39,348,069 million, respectively. The 2014 Interim Management Report of Fund Performance 4

6 borrowings were used to grow the Fund s investments and for working capital needs. Adding leverage to the Fund is consistent with the Fund s objectives. Recent Developments Consistent with the Investment Manager s strategy, the Portfolio is focused on, but not limited to, investments in high yield corporate debt and publicly-listed securities in infrastructure and real estate companies across a global universe. Allocations across these asset classes are based on trends and risk and return expectations, and the Investment Manager s assessment of the macro-economic environment and investment landscape. At the current time, of the three focus asset classes, the Investment Manager believes that equities are becoming increasingly attractive relative to high yield corporate debt. We intend to continue to take profits as appropriate in our high yield debt positions and redeploy capital into other high yielding securities that have attractive risk-reward characteristics. Transition to IFRS In accordance with IAS 34, Interim Financial Reporting, the financial statements for the fiscal year beginning January 1, 2014 have been prepared in accordance with International Financial Reporting Standards. The Fund adopted this basis of accounting as required by Canadian securities legislation and the Canadian Accounting Standards. Previously, the Fund prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in Part V of the Chartered Professional Accountants of Canada Handbook. Under Canadian GAAP, the Fund measured the fair value of its investments in accordance with Section 3855, Financial Instruments Recognition and Measurement, which required the use of bid prices for long positions and ask prices for short positions; to the extent such prices are available. Under IFRS, the Fund measures the fair values of its investments using the guidance in Fair Value Measurement ( IFRS 13 ), which requires that if an asset or a liability has a bid price and an ask price, then its fair value is to be based on a price within the big-ask spread that is most representative of fair value. It also allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread. As a result, upon adoption of IFRS an adjustment was recognized. Please refer to Note 14 in the financial statements. Related Party Transactions The Manager is a wholly owned subsidiary of Brookfield Asset Management Inc. ( Brookfield ) and it manages the investment and trading activities of the Fund pursuant to a management agreement. Due to Brookfield s ability to control the Fund, Brookfield, and its affiliates over which it has the ability to exercise control or significant influence, are related parties of the Fund by virtue of common control or common significant influence. Transactions with related parties, including investment transactions, are conducted in the normal course of operations and are recorded at exchange amounts, which are equivalent to normal market terms. Please refer to the section titled Management Fees, which outlines the fees paid to the Manager by the Fund. During the Period, the Fund entered into inter-fund trades with Brookfield Select Opportunities Income Fund ( BSO ) which is a rel ated party of the Fund due to common control. The Investment Manager determined that these inter fund trades complied with the Fund s and BSO s investment restrictions and that owning the securities was consistent with the Fund s and BSO s investment objectives. The Manager sought the approval of the Fund s and BSO s Independent Review Committee (t he IRC ) of the proposed inter-fund trades. The IRC provided its approval on the proposed inter fund trades on the Manager s recommendation Interim Management Report of Fund Performance 5

7 Financial Highlights The following tables provide selected financial information about the Fund and are intended to help you understand the Fund s performance since inception: The Fund s Net Assets attributable to For the six For the twelve For the twelve For the nine Holders of redeemable units per unit (1) June 30, 2014 December 31, 2013 December 31, 2012 December 31, 2011 (2) Net assets, beginning of period (3) $16.07 $12.62 $9.88 $10.00 Increase (decrease) from operations Total revenue $1.25 $0.77 Total expenses (0.06) (0.09) (0.07) (0.04) Realized gains (losses) for the period Unrealized gains (losses) for the period (0.89) Total increase (decrease) from operations $2.74 ($0.14) Net assets attributable to holders of redeemable units per unit, end of period (4)(5) $19.20 $16.07 $12.62 $9.88 Notes: (1) This information is derived from the Fund s unaudited condensed interim financial statements and the audited financial statements as at December 31 of the year, with the exception of 2013 information, which was re-stated in accordance with the IFRS requirements. (2) Results are for the period from April 1, 2011 (the inception date of the Fund) to December 31, (3) The beginning of period net assets per Unit in 2011 reflects the issue price of $ (4) 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. Accordingly, totals may not sum in the above table due to the different basis for computing the per unit amounts. (5) This is not a reconciliation of the beginning and ending net assets per Unit. For the six For the twelve For the twelve For the nine Ratios and Supplemental Data June 30, 2014 December 31, 2013 December 31, 2012 December 31, 2011 (2) Total net asset value (1) $193,376,519 $167,296,460 $142,182,310 $121,545,454 Number of Units outstanding 10,071,711 10,410,885 11,268,811 12,303,740 Management expense ratio (3) 0.62% 0.55% 0.56% 0.47% Management expense ratio before waivers and absorptions (3) 0.62% 0.55% 0.56% 0.47% Trading expense ratio (4) 0.11% 0.06% 0.04% 0.00% Portfolio turnover rate (5) 45.69% 52.08% 36.09% 39.45% Net asset value per Unit $19.20 $16.07 $12.62 $ Interim Management Report of Fund Performance 6

8 Notes: (1) This information is provided as at June 30, 2014, December 31, 2013, December 31, 2012 and December 31, (2) Results are for the period from April 1, 2011 (the inception date of the Fund) to December 31, (3) Management expense ratio ( MER ) is based on total expenses (excluding commissions and other portfolio transaction costs but including interest expense) for the stated period, and is expressed as an annualized percentage of daily average net asset value during the period. (4) 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. (5) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio adviser 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 a fund s portfolio turn-over 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. Management Fees The Manager is responsible for providing or arranging for all investment advisory and portfolio management services required by the Fund including, without limitation, managing the Portfolio in a manner consistent with the investment objectives, guidelines and restrictions of the Fund and for arranging for the execution of all portfolio transactions. The Manager is also responsible for the operational and administrative functions of the Fund. As compensation for the management services rendered to the Fund, the Manager is entitled to receive an annual management fee of 0.30% of the net asset value of the Fund. The management fee is calculated daily and payable monthly in arrears, plus applicable taxes and totalled $302,682 and $249,560 for the six June 30, 2014 and 2013, respectively. Past Performance Note that the performance information shown in this section assumes that all distributions made by the Fund in the period shown were reinvested in additional Units of the Fund. Also note that the performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns on performance. The performance of the Fund in the past does not necessarily indicate how it will perform in the future Interim Management Report of Fund Performance 7

9 Year-by-Year Returns The bar chart below shows the Fund s performance for the periods shown. The bar chart shows, in percentage terms, how much an investment made on the first day of the period would have grown or decreased by the last day of the period % 27.69% 27.39% 25.00% 20.00% 19.46% 15.00% 10.00% 5.00% 0.00% -5.00% -1.21% (1) (2) (3) (4) 12/31/ /31/ /31/2013 6/30/2014 Notes: (1) Represents period from April 1, 2011 (the Fund s inception date) to December 31, (2) Represents period from January 1, 2012 to December 31, (3) Represents period from January 1, 2013 to December 31, (4) Represents period from January 1, 2014 to June 30, Interim Management Report of Fund Performance 8

10 Summary of Investment Portfolio The following is a summary of the Fund s Portfolio as at June 30, This is a summary only and will change due to ongoing portfolio transactions of the Fund. Quarterly updates will be posted to As at June 30, 2014 Top 25 Positions Cash and cash equivalents 1 % of Net Asset Value of the Fund BlackBerry Ltd. Bonds 7.16 First Data Corp. Bonds 6.53 M an Group PLC Equity 5.61 Lightstream Resources Ltd. Bonds 5.21 Niska Gas Storage Canada ULC Bonds 4.99 SuperM edia Inc. Term Loan 4.92 AGF M anagement Ltd. Class B Equity 4.67 Forbes Energy Services Ltd. Bonds 4.23 Hexion US Finance Corp. Bonds 4.16 EV Energy Partners LP Equity Total Return Swap 4.07 Canadian Oil Sands Ltd. Bonds 3.88 Sun Life Financial Inc. Bonds 3.88 Just Energy Group Inc. Bonds 3.57 Lightstream Resources Ltd. Equity 3.51 British American Tobacco PLC Equity 3.47 M ark West Energy Partners LP Equity Total Return Swap 3.38 M BIA Inc. Bonds 3.30 Unilever PLC Equity 3.25 Walter Energy Inc. Bonds 2.91 China M obile LTD., ADR Equity 2.84 Arch Coal Inc. Bonds 2.81 Banco Do Brasil S.A. Bonds 2.72 Empresas ICA SAB de CV Bonds 2.49 Texas Competitive Electric Holdings Co LLC Bonds 2.44 Total Cash and cash equivalents was impacted by pending trade settlements and margin loan repayments. As at June 30, 2014, the Fund had employed leverage of 17.98% of net assets Interim Management Report of Fund Performance 9

11 As at June 30, 2014 % of Net Asset Value Sector Allocation of the Fund Basic M aterials 9.88 Consumer Cyclical 1.97 Consumer Non-Cyclical 8.77 Energy & Infrastructure Financials M edia 4.92 Technology Telecom 2.84 Cash and cash equivalents Other Liabilities and Accrued Investment Income (19.41) Total Cash and cash equivalents was impacted by pending trade settlements and margin loan repayments. As at June 30, 2014, the Fund had employed leverage of 17.98% of net assets. 2 Table includes notional value of equity derivatives therefore total does not sum to 100% of NAV Interim Management Report of Fund Performance 10

12 FUND INFORMATION MANAGER AND INVESTMENT MANAGER Brookfield Investment Management (Canada) Inc. George E. Myhal Director, President & Chief Executive Officer Jonathan Tyras Managing Director, Chief Financial Officer, and General Counsel Gail Cecil Director, Managing Director Craig Noble Director INDEPENDENT REVIEW COMMITTEE John P. Barratt (Chair) Corporate Director James L. R. Kelly President Earth Power Inc. Frank Lochan Corporate Director CONTACT INFORMATION New Horizons Master Fund welcomes inquiries from Unitholders, analysts, media representatives or other interested parties. Manager, Investment Manager, Transfer Agent, Registrar, and Trustee Unitholder inquiries relating to distributions, address changes and Unitholder account information should be directed to the Fund s Transfer Agent: Brookfield Investment Management (Canada) Inc. Brookfield Place 181 Bay Street, Suite 300 Toronto, Ontario M5J 2T3 t w Interim Management Report of Fund Performance 11

13