NEI Northwest U.S. Dividend Corporate Class

Transcription

1 Interim Management Report of Fund Performance As at March 31, 2017 NEI Northwest U.S. Dividend This interim Management Report of Fund Performance contains financial highlights but does not contain either interim or annual financial statements of the investment fund. You can obtain a copy of the interim or annual financial statements at your request, and at no cost, by calling , by writing us at NEI Investments L.P., 151 Yonge Street Suite 1200, Toronto, ON M5C 2W7 or by visiting our website at or SEDAR at Security holders 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. Management Discussion of Performance Investment Objective and Strategies The objective of this Fund is to provide investors with long-term capital growth. The Fund invests primarily in common shares of large-capitalization American corporations. The fund achieves its objective by investing substantially all of its assets in units of NEI Northwest US Dividend Fund (the "Underlying Fund"). Risk The risks of investing in the Fund are unchanged from the prior year and remain as discussed in the prospectus. The Fund is suitable for investors with an average tolerance for risk. Any changes in the Fund have not affected the overall level of risk of the Fund. Results of Operations The NEI Northwest U.S. Dividend s Series A units returned 14.95% for the six months ended March 31, 2017 compared with a return of 23.70% for the benchmark explained below. Unlike the benchmark return, the Fund s returns are after the deduction of fees and expenses paid by the Fund. Performance differences between series of units are mainly attributable to management fees charged to each series. Refer to the Past Performance section for the details of returns by series. The benchmark index for this fund is the Russell 3000 Value Total Returns Index. I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 1

2 Yearly Comparison of Holdings Comparison Period March 31, 2016 to March 31, 2017 The following tables summarize material changes, new and exited positions of individual securities within the Fund during the period whereby materiality of changes is defined as 1% of the current year NAV. Name Material Changes Change in NAV Ownership (%) NEI Northwest U.S. Dividend Fund,Serie I Name New Positions % of Current Year NAV Canadian Dollar 0.85 Exited Positions None 2 I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

3 Factors That Have Affected Performance Donald Trump s 2016 presidential election victory largely caught investors off guard and, after recovering from an immediate, sharp decline in thinly-traded overnight markets, equities rallied aggressively over the remainder of Q President-elect Trump wasted no time, launching efforts supporting his pledge to focus on American jobs and cut wasteful spending in Washington. The American consumer seemed to take note of the change of tone as the University of Michigan Consumer Sentiment Index surged at the end of 2016, hitting its highest mark since The optimism that dominated markets in the wake of Inauguration Day continued to drive the market higher in Q1, but appeared to falter as the political process reached a fever pitch in the waning days of the first quarter. Sharp divisions between the two U.S. political parties were to be expected, but the seeming inability to bring the Republican Party together around healthcare reform has left many wondering if President Trump can effectively deliver on other parts of his platform, namely comprehensive tax and regulatory reform. Combined with the changes in many areas of foreign policy including Brexit, North Korea, trade, and NATO, it is little surprise that the market seemed a bit uneasy at the end of the period. Among the broad market, neither cyclical nor defensive sectors assumed leadership in Q1 in what was best classified as a reversal from the post-election period. The performance of various fundamental factors compiled by Bank of America/Merrill Lynch was mixed as well as quality and growth-related factors were among the best performing in Q1. Unsurprisingly, valuerelated factors including low EV/EBITDA and low price to book value were at the bottom of the list, but so too were dividend yield and dividend growth. As factors, quality and dividend are typically correlated, so the divergence is notable. Overall sector allocation was negative and was responsible for the underperformance of the Portfolio. The most significant negative impacts on relative results were from the underweight in Financials and stock selection in Materials. Overall stock selection was positive, and the most significant positive impact on relative performance was from stock selection in the Real Estate sector and the underweight in the Health Care sector. The three holdings with the highest contribution to Portfolio return during the period were GEO Group Inc. (GEO), a REIT offering correctional and detention facilities and services to federal, state, local, and foreign governments; PNC Financial Services Group Inc. (PNC), a super-regional commercial bank with operations in 19 states; and U.S. Bancorp (USB), the fifth-largest commercial bank in the United States. The three holdings with the lowest contribution to Portfolio return during the period were Target Corp. (TGT), the second-largest discount retailer in the United States; QUALCOMM Inc. (QCOM), a designer and manufacturer of integrated circuits; and Uniti Group Inc. (UNIT), a first-of-its-kind telecom infrastructure REIT. Recent Developments In the wake of the financial crisis, the absence of sustained fiscal policy support from Congress led to a stock market that was arguably over dependent on the Federal Reserve. With the Fed steadily reversing its extraordinary accommodations and moving back toward a more normal policy, the sub-advisor welcomed the opportunity for investors to shift focus toward the sustained boosts from tax and regulatory reform. However, should such support fail to materialize in a significant manner, the sub-advisor suspects that attention will shift back and the Fed will once again become a focal point for politicians and investors alike. The reality is that despite the recent increases, the Fed funds rate is still remarkably low for this point in the market cycle and thus monetary policy remains accommodative. Should such a shift in focus occur, the sub-advisor suspects that the pressure to keep rates low will be significant. I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 3

4 In Q4 the sub-advisor noted that stock prices now reflect an extreme level of optimism and markets are increasingly vulnerable to the disappointments that are bound to occur in the legislative process. At the end of the period, the weighted average discount to value for the top 20 holdings in DAV was 94%, at the high end of the historical range. The sub-advisor believes that vulnerability was exposed as concerns mounted in the final weeks of the quarter. While earnings growth has accelerated in recent quarters and looks to be on a positive trajectory, alone, it is unclear if approximately 10% growth is sufficient to support current market levels. From a wildcard perspective, geopolitics remains the likely flashpoint for 2017 as President Trump continues to challenge the status quo. The sub-advisor remains concerned about the intended and unintended consequences of the Administration s actions with regard to trade and foreign policy. Despite the obvious concern that the stalemate in Congress will continue this year, the sub-advisor does expect that fiscal policy support will ultimately prove forthcoming, it just might be later and less ambitious than the Trump Administration would like. To the extent that equity investors are disappointed and risk tolerance decreases, the sub-advisor would expect the historical downside protection pattern of the Strategy to hold. Additionally, the risk that the market will rally sharply and the Portfolio will be left behind appears to be diminishing. Lastly, the sub-advisor believes the Strategy s strong performance in 2016 supports their view that a broad portfolio of companies that both pay an attractive dividend and increase it, can outperform even as interest rates are rising. As of March 31, the Portfolio held 61 positions. In response to the outlook, the Portfolio sub-advisor established 6 positions, eliminated 9, and one, Adient plc, was spun off and eliminated. Pursuant to proposed changes to the Tax Act announced in the March 22, 2016 Federal Budget, after September 2016 the conversion of shares of one series of a Corporate Fund into shares of the same or different series of another Corporate Fund will be a disposition under the Tax Act, and the shareholder will realize a capital gain or loss on the conversion. The shareholder s cost of the shares acquired on the conversion will be equal to the fair market value of the shares that were converted immediately before the conversion. Financial Notes HST Following the introduction of a single harmonized tax HST levy and collection system on July 1st, 2010 Investment Funds had to change the way in which government taxes are charged to the Funds. The new rules require HST to be calculated and charged based on a blended tax rate derived from the residency of the unitholders and the current value of their units. This blended rate is required to be calculated and updated periodically and the table below indicates the current rate being charged until the Fund s next year end as well as the most recent completed period s rate for comparison. NEI Northwest U.S. Dividend For the Period Ending September 30, 2016 September 30, 2017 Series A 10.00% 9.54% Series F 10.55% 13.83% Effective April 1st, 2013, British Columbia replaced the 12% HST with separate PST and GST. A 5% GST rate is applicable going forward. Prince Edward Island introduced a new HST rate of 14%. 4 I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

5 On January 1st, 2013, Quebec increased the combined tax rate charged on the QST portion of taxable services from 14.95% to %. Accounting Standards The Fund's financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS"), applicable to the preparation of financial statements. The Funds adopted this basis of accounting in 2015, as required by the Canadian Securities Administrators and the Canadian Accounting Standards Board. Related Party Transactions Northwest and Ethical Investments L.P NEILP is the Manager, the Trustee, the Fund Manager and the Registrar of the Fund. NEILP is 50% indirectly owned by the Federation des Caisses Desjardins du Quebec (Federation) and 50% owned by five Provincial Credit Union Centrals. NEILP charges the Funds a fixed administration fee in place of certain variable expenses. NEILP in turn, pays all operating expenses of the Fund, other than specified fund costs (e.g. the fees and expense of the Independent Review Committee, taxes, and brokerage commissions) which include payments to related parties of which the Federation is a significant owner. These services are in the normal course of operations and are measured at an exchange amount that is consistent with other independent parties. At the end of the period, the accrued expenses payable to related third parties are listed below. Where applicable the amounts received from underlying funds during the period are also presented. September 2016 March 2017 Accrued Expenses Payable to Related Parties 11,911 14,214 Received from Related Parties Dividends 210, ,195 Underlying Funds 113,129 The Fund s sub advisors may place a portion of their fund transactions with brokerage firms which are affiliates of NEILP; provided that the affiliates trade execution abilities and costs are comparable to those of non-affiliated qualified brokerage firms. The Fund is distributed through Credential Asset Management Inc., Credential Securities Inc., Desjardins Securities Inc., Desjardins Financial Services Firm Inc., Desjardins Financial Securities Investments Inc., and Gestions SFL Inc., and other nonrelated parties by way of shared ownership. NEILP pays to these parties distribution and servicing fees based on a percentage of the daily values of the units of each held by the dealer s clients and additionally, in some cases, on the amount of initial purchase. This document contains forward-looking statements. Such statements are generally identifiable by the terminology used, such as plan, anticipate, intend, expect, estimate, or other similar wording. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market and business conditions; fluctuations in securities prices, fluctuation in interest rates and foreign currency exchange rates; and actions by governmental authorities. Future events and their effects on the fund may not be those anticipated by us. Actual results may differ materially from the results anticipated in these forwardlooking statements. We do not undertake, and specifically disclaim, any obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise. I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 5

6 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 each of the past five years, as applicable. Net Assets per Unit (1) Series Period Net Assets, Beginning of Period Total Revenue Increase (Decrease) from Operations: Total Expenses Realized Gains (Losses) Unrealized Gains (Losses) Commissions and Other Portfolio Transaction Costs (2) Total Increase (Decrease) from Operations (3) From Income (Excluding Dividends) Distributions: From From Underlying Dividends Funds (6) A Mar N/A From Capital Gains Return of Capital Total Distributions (4,5) Sept N.A N/A Sept N/A N/A Sept N/A Sept N/A Sept N/A F Mar N/A Sept N.A N/A Sept N/A N/A Sept N/A Sept N/A Sept N/A (1) All per unit figures presented in 2017, are referenced to net assets determined in accordance with IFRS and are derived from the Fund's unaudited annual financial report for the period ended March 31, The beginning of period net assets per unit of 2015 and net assets per unit for prior periods were derived from the Fund's audited annual financial statements that were prepared in accordance with Canadian GAAP as defined in Part V of the CPA Handbook for prior periods. (2) From March 31, 2015, Commissions and other portfolio transaction costs are included in Expenses. (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. (4) Distributions were paid in cash or reinvested in additional units of the Fund. (5) Distributions (if any) that may have been made that included return of capital in excess of short term earnings were made to minimize disruption and provide stability to investors who have elected to take their distributions in the form of cash, and as disclosed in the Simplified Prospectus. These amounts are reviewed at each calendar yearend and management engages in discussions with the sub-advisor to determine the most applicable strategy on a go forward basis and will take any action(s) as needed for the long term stability of the Fund. (6) On March 31, 2017, distributions from underlying funds are presented separately. Previously, those amounts were split between the different type of revenues. Net Assets, End of Period 6 I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

7 Ratios and Supplemental Data Series Period Total Net Asset Value (000 s of $) Number of Units Outstanding (000 s) Management Expense Ratio (%) (1) Management Expense Ratio before Waivers and Absorptions (%) Trading Expense Ratio (%) (2) Portfolio Turnover Rate (%) (3) Net Asset Value per Unit ($) A Mar , Sept , Sept , Sept , Sept , Sept , F Mar , Sept , Sept , Sept Sept Sept (1) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs, as well as withholding taxes) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (2) The trading expense ratio represents total commissions and other Fund transaction costs expressed as an annualized percentage of daily average net asset value during the period. (3) The portfolio turnover rate indicates how actively the Fund's subadvisor manages its investment holdings. 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 period. The higher a fund s portfolio turnover rate in a period, the greater the trading costs payable by the Fund in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between a high turnover rate and the performance of a fund. Certain turnover rates for September 2011 were restated due to a formula inconsistency. I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 7

8 Management Fees The Manager is responsible for the management, supervision and administration of the Fund. The Manager receives from the Fund management fees, before HST, calculated daily on the net asset value of the Fund at an annual rate shown below. The management fee covers the cost of investment advisory fees, sales, marketing, and distribution expenses of the Fund. In addition, the Manager may pay a trailer fee to dealers out of this management fee. The trailer fee is a percentage of the average daily value of the units of the Fund held by the dealer s clients. The following table shows the major services paid for out of management fees as a percentage of the management fee for all series of the Fund: Management Fee Investment Advisory and Other Fees Trailer Fee Series A 1.90% 79.6% 20.4% Series F 0.90% 100.0% N/A (1) (1) No trailer fees are paid in respect of any Series F units of the Fund Past Performance The following charts and tables show the past performance for each series of units of the Fund and will not necessarily indicate how the Fund will perform in the future. The information shown assumes that distributions made by the Fund in the periods shown were reinvested in additional units of the relevant series of the Fund. In addition, the information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. Year-by-Year Returns The following charts show the annual performance for each series of units of the Fund for each period shown and illustrate how the Fund s performance has varied from period to period. The charts indicate how much an investment made on the first day of each financial period would have grown or decreased by the last day of each financial period. Series A Series F Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Mar-17 0 N/A N/A N/A N/A N/A Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Mar-17 8 I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

9 Annualized Compound Returns The following table shows the annual compound returns for all series of the Fund. All returns are in Canadian dollars, on a total return basis, net of all fees. For comparison, the returns for the benchmark are included. The benchmark index for this fund is the Russell 3000 Value Total Returns Index. The Russell 3000 Value is an index that measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. While the Fund uses this benchmark for long-term performance comparisons, it is not managed relative to the composition of the Index. As a result, the Fund may experience periods when its performance is not aligned with the Index, either positively or negatively. Please see the "Results of Operations" section of this report for a discussion of recent performance results. Group/Investment 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception Russell 3000 Value TR CAD NEI Northwest US Dividend CC A NEI Northwest US Dividend CC F I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 9

10 Summary of Investment Fund as at March 31, 2017 NEI Northwest U.S. Dividend Total Net Asset Value: $7,623,286 Top 25 Positions (Long Positions) % 1 NEI Northwest U.S. Dividend Fund,Serie I Cash and Equivalents 0.8 There is no short position in this Fund or underlying funds. "Others" geographic category includes all countries representing less than 5% of the Fund s net asset value The Summary of Investment Fund may change due to ongoing Fund transactions of the investment fund. Total Net Asset Value Mix % Investment Funds 99.2 Cash and Equivalents 0.8 Sector Allocation % Investment Funds 99.2 Cash and Equivalents 0.8 Geographic Distribution % Canada 99.2 Cash and Equivalents I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e

11 Fund-of-Fund Underlying Holdings NEI Northwest U.S. Dividend This fund is a fund of fund structure which holds a position in one or more underlying Mutual Funds. Actual consolidated security holdings are only identifiable by including the holdings of the underlying Mutual Fund(s). The following tables represent an aggregated look-through of the top positions and category summaries that are held in the top and underlying fund(s). Top 25 Positions (Long Positions) % 1 Cash and Equivalents 0.8 Total 0.8 Drill Down Total Net Asset Value Mix % Equities-U.S Equities-Foreign 9.4 Equities-Canadian 1.6 Cash and Equivalents 3.5 Mortgage-Backed Securities 12.8 Drill Down Sector Allocation % Financials 14.1 Information Technology 12.6 Industrials 11.7 Consumer Discretionary 10.4 Energy 11.6 Consumer Staples 7.0 Materials 4.7 Utilities 4.4 Health Care 5.0 Telecommunication Services 2.3 Cash and Equivalents 3.5 Mortgage-Backed Securities 12.8 Drill Down Geographic Distribution % United States 85.5 Other 9.4 Canada 1.6 Cash and Equivalents 3.5 I n t e r i m M a n a g e m e n t R e p o r t o f F u n d P e r f o r m a n c e 1 1