Moneda Latam Corporate Bond Fund

Transcription

1 Management Report of Fund Performance Moneda Latam Corporate Bond Fund The following is a report on the performance of Moneda Latam Corporate Bond Fund (the Fund ) and contains financial highlights but does not contain the complete financial statements of the Fund. This report should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, You can get a copy of the Fund s financial statements at your request, and at no cost, by calling (416) , by writing us at 40 King St. West, Scotia Plaza, 26th Floor, Box 4085, Station A, Toronto, Ontario M5W 2X6 Attention: Moneda Latam Corporate Bond Fund Investor Relations or by visiting our website located at or SEDAR at Unitholders 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 and quarterly portfolio disclosure. The Fund s proxy voting disclosure record for the annual period ending June 30, 2017 is available on our website. Any references to net assets or net assets per Unit in this report are references to net assets attributable to Unitholders determined in accordance with IFRS as presented in the financial statements of the Fund. Additionally, any references to net asset value or net asset value per Unit are references to values determined for valuation and transactional purposes. There are no differences between net assets per Unit and net asset value per Unit. Investment Objectives and Strategies The Fund is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of Class A Units and Class U Units (collectively, the Units and each, a Unit ) with investment exposure to a diversified portfolio of fixed income securities of companies located in, or with significant operations in Latin America, primarily denominated in U.S. dollars. The Fund s investment objectives are to: (i) preserve and enhance the net asset value (the Net Asset Value or NAV ) of the Fund; and (ii) provide Unitholders with quarterly distributions consisting of ordinary income, capital gains and returns of capital, in each case through direct investment in units of the Moneda Deuda Latinoamericana Fondo de Inversion (the Moneda Fund ), a US$1.9 billion (as at December 31, 2017) Chilean listed investment fund established in 2000 which is actively managed by Moneda S.A. Administradora de Fondos de Inversion ( Moneda or the Portfolio Manager ). The Fund does not have a fixed distribution but intends to pay targeted quarterly distributions based on, among other things, the current yield of the portfolio of the Moneda Fund less the expenses of the Fund for the period. Quarterly distributions are currently targeted to be $0.15 per Class A Unit and US$0.15 per Class U Unit. The NAV for the Class A Units is calculated in Canadian dollars and for the Class U Units, in U.S. dollars. Substantially all of the value of the Moneda Fund units attributable to the Class A Units is hedged back to the Canadian dollar. The Class U Units are designed for investor wishing to make their investment in U.S. dollars. The Class A Units of the Fund are listed for trading on the Toronto Stock Exchange (the TSX ) under the symbol MLD.UN. The Class U Units are not listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes. Risk Changes in the risk exposure of the Fund occurred in the following areas: Use of leverage The Fund has leveraged exposure to the Moneda Fund through a loan facility with The Bank of Nova Scotia in an amount up to 15% of the total assets of the Fund. As at December 31, 2017, the Fund had leverage of $3.7 million or 9.3% to the total assets of the Fund (2016 $3.8 million or 9.9%). Changes in the risk exposure of the Moneda Fund occurred in the following areas: Use of leverage The Moneda Fund may employ leverage in an amount up to 50% of its net assets. The Portfolio Manager targets leverage between 15% and 30% of net assets. As at December 31, 2017, the Moneda Fund had leveraged exposure of US$61.9 million or 3.2% of net assets (2016 US$203.9 million or 16.7%). Short Selling The Moneda Fund is permitted to sell short securities with a value up to the lesser of 50% of the Moneda Fund s net worth or 33% of its total assets. As at December 31, 2017 the Moneda Fund had securities acquired though short selling valued at US$146.7 million or 6.9% of total assets (2016 US$144.4 million or 9.2%). Distressed Securities The Moneda Fund is permitted to invest 15% of its total assets in securities issued or guaranteed by entities in receivership or rated D by Standard & Poors. As at December 31, 2017, the Moneda Fund had distressed securities valued at US$117.0 million or 5.5% of total assets (2016 US$71.1 million or 4.5%). Moneda Latam Corporate Bond Fund 1 Management Report of Fund Performance

2 For full disclosure of the risks associated with an investment in the Fund s units, please refer to the Fund s annual information form available on our website located at or at SEDAR located at Results of Operations The net assets attributable to Unitholders were $11.07 per Class A Unit and US$11.21 per Class U Unit as at December 31, 2017 as compared to $10.05 per Class A Unit and US$10.12 per Class U Unit as at December 31, 2016 representing increases of 10.2% and 10.8%, respectively, based on the positive performance of the Moneda Fund along with the Fund s operating expenses and distributions paid on the Units. The following is a report from the Portfolio Manager for the year ended December 31, 2017: Report from Portfolio Manager The Latin American ( Latam ) high yield corporate debt market, as measured by the CEMBI Broad Latin High Yield Index (the Index ), increased 13.5% on a total return basis for the year. The Moneda Fund posted a total return of 16.6% for The Fund followed this performance posting a total return of 16.4% and 17.0% for the Class A and U Units, respectively, after deduction of administrative and operating expenses. This relative performance can be explained by: (i) At the country level, overweight positions in Argentina, Dominican Republic and Mexico contributed positively to performance versus the benchmark while an underweight in Brazil was the largest detractor despite positive selectivity in that country. Argentina had strong demand for its sovereign issuances and their bonds rallied over the year with 10 year treasuries yielding 5.5% at year-end versus 6.7% a year ago. An underweight in Petrobras was one of the main reasons for the Brazil underperformance. (ii) At the sector level, an overweight and good selectivity in industrials contributed positively to performance versus the benchmark, while underweights in energy and financials were the largest detractors. (iii) Specific overweight positions which performed well during the year included Brazil s Odebrecht Oil & Gas ( OOG ) and Gol Linhas Aereas Inteligentes ( GOL ). OOG reached an agreement with creditors to restructure its debt and managed to keep its contracts with Petrobras while GOL showed significant improvements in passenger load factors and yields which, coupled with a more favourable foreign exchange, allowed the company to deleverage. As of the end of 2017, the largest country allocations were Brazil, Argentina, Mexico, Chile and the Dominican Republic, with those five countries representing just over 86% of the portfolio. The largest overweight positions versus the Index were Argentina and the Dominican Republic whereas Brazil represented the largest underweight. Market Outlook Developing and emerging economies ended 2017 in a positive tone. Both the US and Eurozone economies surprised to the upside on growth. The US economy kept expanding and passed a fiscal reform that should stimulate the economy further. The US Federal Reserve has shown some intention to raise rates based on this reform and other short-term indicators including oil prices and a weak dollar. With the latest news on inflation, the tone has turned more hawkish. Europe is still behind in the cycle and still, no inflationary pressure is foreseen. They did begin tapering down by the end of 2017, which explains the appreciation of the Euro dollar later in the year. The 10-year US Treasury rate closed the year at 2.41%, 3 bps below its 2016 close. Latam currencies performed unevenly during 2017 with the Argentinean peso, the worst performer, falling 14.5% and the Chilean peso, the best, appreciating 8.3% during the year. The Brazilian economy improved after years of contraction and some mild growth should be confirmed for Whereas this sounds promising, a full revival of the economy will depend on the results of general elections in October and the implementation of reforms. Argentina also resumed growth but inflation has kept the peso under pressure. By the end of the year, growth had stagnated, mainly on lower estimates for soybean crop yields. Moreover, the government announced changes in the inflation targets late in December and indicated that reference interest rates could be lower, which led to the strong depreciation in the currency. Mexico s economy remained very resilient during the year, helped in part by the 13% increase in oil prices but with NAFTA risk limiting the country s growth. It was generally a positive year for commodities. Copper, gold and silver were up (31%, 14% and 6%, respectively) during the year helping the Chilean Peso and Peruvian Sol to appreciate. Other price changes in commodities impacting the region included: pulp +24%, iron ore (11%) and refined sugar (25%). The political risk went dissimilar ways within countries and we expect this to remain for In Peru, the current president Mr. Kuczynski has struggled to remain in power as bribery accusations against him have arisen. On the other hand, Chile elected the right-wing candidate Mr. Piñera, which brought confidence to the market. Three elections will follow during 2018 including Brazil, Mexico and Colombia. Mexico s market-unfriendly presidential hopeful Mr. Lopez Obrado is still leading the voting polls while in Brazil, the risk of Mr. Lula da Silva s return to power was brought to minimum after his recent conviction. Overall, Latam fixed income markets have benefited from the fall in political risks and continued worldwide economic growth. Sovereign Latam spreads showed some compression during the year falling 11 bps while aggregate Latam corporations showed a much steeper fall, contracting 87 bps. Despite historically low levels of spread, the region remains attractive on a relative basis offering an attractive high yield pick versus other emerging regions. Management Report of Fund Performance 2 Moneda Latam Corporate Bond Fund

3 Distributions For the year, the Fund declared and paid cash distributions of $0.60 per Class A Unit and US$0.60 per Class U Unit (2016 $ per Class A Unit and US$ per Class U Unit). The Fund s cash distributions for 2017 were characterized as 68.9% capital gains and 31.1% other income ( % capital gains). The Fund also declared a Special Distribution (as defined below) in Units of $0.052 per Class A Unit and US$0.052 per Class U Unit. The Fund s Declaration of Trust provides that a special distribution (the Special Distribution ) will automatically be payable on December 31 in each year where the Fund realizes net income for tax purposes, including net realized capital gains, which is in excess of any distributions paid to Unitholders during the year. The result for Unitholders of record on December 31, 2017 was the realization of a capital gain equal to the Special Distribution per Unit, received in Units. The Units received were then automatically consolidated with a corresponding increase in the Unitholders adjusted cost base per Unit equal to the Special Distribution per Unit. Related Party Transactions For its services to the Fund which include the provision of key management personnel, Scotia Managed Companies Administration Inc. ( SMCAI ), a wholly-owned subsidiary of Scotia Capital Inc. ( SCI ) which in turn is a wholly-owned subsidiary of The Bank of Nova Scotia, is entitled to receive a management fee equal to 0.40% per annum of the Net Asset Value. The total management fee paid or payable to SMCAI for the year ended December 31, 2017 was $150,182 (2016 $150,455). The ongoing management fee is calculated and accrued weekly and is payable quarterly in arrears. The Fund had entered into a forward purchase agreement (the Forward Agreement ) with The Bank of Nova Scotia (the Counterparty ). As a result of changes to the Income Tax Act (Canada), the Forward Agreement was settled on its scheduled termination date of November 3, 2016 (the Forward Date ). Up to the Forward Date, the Fund paid to the Counterparty an additional purchase amount, calculated weekly and payable monthly in arrears, of up to 0.40% per annum of the notional amount of the Forward Agreement including the cost of providing collateral. The total fee paid or payable to The Bank of Nova Scotia relating to the Forward Agreement for the year ended December 31, 2016 was $131,534. As the administrator, SMCAI is responsible for managing the purchases and sales of the Moneda Fund units as required to meet the investment objectives and operating policies of the Fund. Such transactions are carried out using the services of SCI on an agency basis for a variable cost per trade. For the year ended December 31, 2017, SCI received transaction fees of $2,023 (2016 $5,373). The Fund has a Loan Facility with The Bank of Nova Scotia. Total interest expense on the Loan Facility for the year ended December 31, 2017 was $93,841 (2016 $9,698). Prior to the Forward Date, the Forward Agreement provided leveraged exposure to an additional number of units of the Moneda Fund though a funded amount (the Funded Amount ). Fees charged on the Funded Amount totaled $51,124 for the year ended December 31, At December 31, 2017, the Fund had interest payable of $1,231 (December 31, 2016 $4,196) payable to The Bank of Nova Scotia, and had cash on deposit with The Bank of Nova Scotia of $5,787 (December 31, 2016 $29,296). Recent Development The Bank of Nova Scotia previously announced that Marquest Asset Management Inc. agreed to acquire SMCAI, the administrator to the Fund. That transaction will no longer occur, and SMCAI remains part of the Scotiabank group of companies. Moneda Latam Corporate Bond Fund 3 Management Report of Fund Performance

4 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 past five years. The information is derived from the Fund s audited financial statements. For the Year Ended For the Year Ended For the Year Ended For the Year Ended For the Year Ended December 31, December 31, December 31, December 31, December 31, Class A Class U Class A Class U Class A Class U Class A Class U Class A Class U CAD USD CAD USD CAD USD CAD USD CAD USD Net assets per Unit, beginning of year. $ $ $ 8.87 $ 8.81 $ $ $ $ $ 9.74 $ 9.72 Increase (decrease) from operations: Total revenue Total expenses... (0.13) (0.10) (0.11) (0.09) (0.08) (0.07) (0.08) (0.08) (0.07) (0.07) Realized gains (losses) for the year (1) (0.57) (0.12) 0.47 Unrealized gains (losses) for the year (3.33) (1.75) 0.06 (0.69) Total increase (decrease) from operations (0.59) (0.58) Distributions: From ordinary income... (0.19) (0.19) From capital gains... (0.41) (0.41) (0.71) (0.71) From return of capital... (0.75) (0.75) (0.75) (0.75) (0.75) (0.75) Total distributions (2)... (0.60) (0.60) (0.71) (0.71) (0.75) (0.75) (0.75) (0.75) (0.75) (0.75) Net assets per Unit, end of year... $ $ $ $ $ 8.87 $ 8.81 $ $ $ $ Based on the weighted average number of Units during the year except for the net asset values and distributions wherein the actual number of Units outstanding at the relevant time are used. (1) Includes adjustments to reconcile the basis of calculation of per unit amounts between weighted average and the end of year number of units. (2) All distributions were paid in cash. In addition, Special Distributions of $0.052 per Class A and US$0.052 per Class U were made in 2017 and of $1.10 per Class A Unit and US$1.10 per Class U Unit in Unitholders of record realized a non-cash distribution of capital gains with a matching increase in their aggregate adjusted cost base per Unit. Ratios and Supplemental Data December 31, 2017 December 31, 2016 December 31, 2015 December 31, 2014 December 31, 2013 Class A Class U Class A Class U Class A Class U Class A Class U Class A Class U CAD USD CAD USD CAD USD CAD USD CAD USD Net asset value (000 s) (1)... $ 29,222 $ 3,804 $ 28,549 $ 3,486 $ 29,661 $ 3,330 $ 36,210 $ 3,866 $ 43,659 $ 4,084 Number of Units outstanding... 2,639, ,190 2,839, ,465 3,343, ,165 3,547, ,165 4,207, ,165 Management expense ratio (2) % 2.35% 3.04% 3.05% 3.19% 3.12% 2.65% 2.68% 2.69% 2.75% Management expense ratio excluding interest (2) % 2.06% 2.87% 2.88% 3.04% 2.97% 2.51% 2.54% 2.53% 2.58% Trading expense ratio (3) % 0.01% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Portfolio turnover rate (4) % 16.9% 15.4% 15.4% 24.0% 24.0% 60.5% 60.5% 33.4% 33.4% Net asset value per Unit... $ $ $ $ $ 8.87 $ 8.81 $ $ $ $ Market value per Unit... $ n/a $ 9.38 n/a $ 8.30 n/a $ n/a $ 9.95 n/a (1) Net asset value is equal to net asset value per Unit multiplied by the number of Units outstanding. (2) Management expense ratio ( MER ) is based on total expenses of the Fund for the stated year including expenses of the Moneda Fund. Up to the maturity of the Forward Agreement on November 3, 2016, total expenses included Forward Agreement fees and fees on the Funded Amount. The MER is expressed as an annualized percentage of the weekly average Unit Net Asset Value during the year. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of weekly average net asset value during the year. (4) The Fund s portfolio turnover rate indicates how actively the Portfolio Manager manages its bond portfolio. A portfolio turnover rate of 100% is equivalent to the Moneda Fund buying and selling all of the fixed income securities in its portfolio once in the course of a year. Management Report of Fund Performance 4 Moneda Latam Corporate Bond Fund

5 Past Performance Year by Year Returns The following chart shows the performance of the Fund s Units based on Net Asset Value since the Fund s inception indicating, in percentage terms, how much an investment made on the first day of each financial year/period would have increased or decreased by the last day of each financial year/period assuming reinvestment of all distributions at Net Asset Value. Past performance is not an indication of how the Units will perform in the future. The calculation of the returns based on net asset value follows the requirements of NI As an investor cannot purchase or sell the Units at Net Asset Value, the following is an indication of the performance of the assets of the Fund rather than returns available to Unitholders. Returns based on market value are also presented in narrative form below as an indication of returns actually available to Unitholders. Class A Class U 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 12.8% 14.7% 5.7% -6.7% -6.1% 22.0% 16.4% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 12.7% 14.5% 5.5% -6.8% -6.1% 23.6% 17.0% MAR MAR The Class A Units are listed for trading on the TSX while the Class U Units are not but may be converted into Class A Units on a weekly basis. Accordingly, the market value return for the Class A Units was (1.4)%, 7.7%, 8.7%, 8.9%, (10.7)%, 22.4% and 21.8% for the years 2011 through This performance from inception reflects the payment of upfront costs related to the establishment of the Fund and assumes that distributions are reinvested in additional Units at the then market price on the TSX, which price may reflect a premium or discount to net asset value. Annual Compound Returns The calculation of the annual compound returns based on Net Asset Value follows the requirements of NI As an investor cannot purchase or sell the Units at Net Asset Value, the following is an indication of the performance of the assets of the Fund rather than returns available to Unitholders. Returns based on market value are also presented in narrative form below as an indication of returns actually available to Unitholders. 1 yr 3 yr 5 yr From inception (1) Class A Unit % 10.1% 10.1% 9.0% Class U Unit % 10.8% 10.4% 9.2% CEMBI Broad Latam HY Index (2) % 7.9% 3.7% 5.5% (1) The return of the Fund is for the period from November 3, 2011, the date of inception, to December 31, 2017, based on an opening price of $10.00 or US$10.00 in the case of Class U Units. (2) The CEMBI Broad Latam HY Index tracks USD denominated debt issued by Latin-American emerging market corporations. The annual compound returns based on market value for the Class A Units for one year, three year, five year and from inception to December 31, 2017 are 21.8%, 10.0%, 9.6% and 8.7%. Moneda Latam Corporate Bond Fund 5 Management Report of Fund Performance

6 The following chart shows performance data for the Moneda Fund based on net asset value for the past ten years indicating, in percentage terms, how much an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year or period assuming reinvestment of any dividends. There are differences between holding the Fund and the Moneda Fund including additional fees and expenses, the use of leverage and currency hedging. Year by Year Returns 100.0% 80.0% 80.2% 60.0% 40.0% 20.0% 0.0% -20.0% 22.1% 2.5% 13.3% 13.4% 5.9% -4.1% 23.1% 16.6% -40.0% -34.9% MAR Annual Compound Returns One Year Three Year Five Year Ten Year Moneda Fund units % 11.3% 10.6% 10.7% CEMBI Broad Latam HY Index % 7.9% 3.7% 6.7% Management Report of Fund Performance 6 Moneda Latam Corporate Bond Fund

7 Summary of Investment Portfolio Below is a summary of the investment portfolio of the Moneda Fund as at December 31, 2017, upon which the Unitholders return is based. This summary of the investment portfolio may change due to ongoing portfolio transactions. Net Asset Value of the Moneda Fund... US$1,908,637,524 Top 25 investments Issuer % of Net Assets of the Moneda Fund Long Positions 1. Enjoy SA 10.5% % 2. Autopistas Del Nordeste 9.39% % 3. QGOG Constellation S.A. 6.25% % 4. Mastellone Hermanos S.A % % 5. Odebrecht Offshore Drilling Finance Ltd. 7.72% % 6. Petrobas Global Finance BV 5.299% % 7. Bantrab Senior Trust 9% % 8. Argent 7.82% % 9. Eldorado Brasil 8.625% % 10. Argent 8.28% % 11. Petrobas Global Finance BV 8.75% % 12. Metrogas S.A % % 13. Banco Hipotecario SA 9.75% % 14. Bantrab Senior Trust 9% % 15. Andino Investment Holding S.A. 11% % 16. AES Andres BV 7.95% % 17. ACI Airport Sudamerica SA 6.875% % 18. CEMEX Float Perpetual 4.46% 1.1% 19. IRSA Propiedades Com 8.75% % 20. Corpgroup Banking S.A. 6.75% % 21. Latian Offshore Holding Ltd 8.875% % 22. Gol Linhas Aereas Inteligentes 8.875% % 38.2% Short Positions 1. U.S. Treasury 2.5% % 2. Brazil 4.25% % 3. Uruguay 4.5% % 6.1% Moneda Latam Corporate Bond Fund 7 Management Report of Fund Performance