Annual Report Scotiabank Trinidad & Tobago Fixed Income Fund Inc. Scotiabank Trinidad & Tobago Growth Fund Inc.

Transcription

1 Annual Report 2015 Scotiabank Trinidad & Tobago Fixed Income Fund Inc. Scotiabank Trinidad & Tobago Growth Fund Inc. Registered trademark of the Bank of Nova Scotia, used under license.

2 TABLE OF CONTENTS BOARD OF DIRECTORS REPORT... 2 MANAGEMENT REPORT... 3 i) ECONOMIC REVIEW... 3 ii) FINANCIAL MARKET REVIEW... 3 iii) INVESTMENT PERFORMANCE REVIEW... 4 iv) FINANCIAL RESULTS REVIEW... 5 v) RELATED PARTY TRANSACTIONS... 7 AUDITED FINANCIAL STATEMENTS

3 BOARD OF DIRECTORS REPORT The Board of Directors (the Directors ) of Scotiabank Trinidad & Tobago Fixed Income Fund and Scotiabank Trinidad & Tobago Growth Fund are pleased to present the annual report on the activities and financial results for both Funds for the fiscal year ended December 31, Results Scotiabank Trinidad & Tobago Fixed Income Fund The Scotiabank Trinidad & Tobago Fixed Income Fund s (the Fund ) net asset value decreased by 8.7% to TT$215.3 million at December 31, 2015 from TT$235.9 million at December 31, The decrease is attributed to investment performance of -TT$1.6 million and net sales of -TT$17.5 million, offset by cash distributions of TT$1.5 million. The net asset value per share for the Fund s Class AT shares decreased from TT$9.88 at December 31, 2014 to TT$9.73 at December 31, The Fund s Class AT shares had a dividend yield of 0.63% in The return of -0.83% for the Fund s Class AT shares was primarily due to the negative effect that an increase in interest rates had on bond prices. Scotiabank Trinidad & Tobago Growth Fund The Scotiabank Trinidad & Tobago Growth Fund s (the Fund ) net asset value increased by 0.6% to TT$58.6 million at December 31, 2015 from TT$58.3 million at December 31, This increase is attributed to investment performance of -TT$1.0 million and net sales of TT$1.3 million. The net asset value per Class AT share for the Fund decreased from TT$9.97 at December 31, 2014 to TT$9.82 at December 31, The return of -1.52% in 2015 for the Fund s Class AT shares was primarily attributed to lower equity prices resulting from a deteriorating local macroeconomic environment and increased global volatility. Board During the period, the Board of Directors continued to discharge its duties of providing guidance to management and oversight of the Fund s business affairs. There were no changes in the composition of the Board of Directors in Appreciation I would like to thank our valued shareholders for their continued support and confidence. I would also like to thank the members of the Board of Directors, our stakeholders and the entire team at Scotia Asset Management (St Lucia) Inc. and Scotiabank & Trust (Cayman) Ltd. for their contributions over the past year. Sloane Muldoon Director 2

4 MANAGEMENT REPORT i) ECONOMIC REVIEW The ongoing recovery of the global economy followed an uneven path during 2015, with many emerging markets including China, Brazil and Russia experiencing slower than anticipated growth or an outright recession. Much of this weakness was triggered by waning demand from China and a strengthening US dollar that led to weakness in commodity prices, in particular crude oil and base metals such as copper. On the positive side, the US economy continued to expand with unemployment falling to multi-year lows while job creation increased by more than 200,000 per month. The economic performance of the twin island republic reflected the waning fortunes of crude oil during the fiscal year ended December A plunge in the price of WTI crude oil by 30.5% to $37.04 per barrel resulted in the economy contracting by an estimated 1.5% for the year. The energy sector was responsible for most of the economic contraction, with official figures showing a steep 7.3% contraction during the third quarter of 2015, while the non-energy sector remained flat through most of the year. The decline in the energy sector pushed the country s balance of payments into deficit through the first ten months of the calendar year. To contain potential currency outflows, the central bank gradually increased its repo rate from 3.50% at the start of the year to 4.75% in December. Higher interest rates amid a weak growth environment had a negative effect on the overall health of the economy. On the fiscal front, the 2014/15 budget registered a larger than expected deficit of 4.2% of GDP for the fiscal year ending October The gross debt ratio rose from 52% in 2014 to 58% at the end of The newly elected government which assumed power following elections in September 2015, is projecting that revenues for the 2015/16 fiscal year from the energy sector will decline by 44%, with oil revenues based on an average of US$45 a barrel in the budget. To close the larger than expected budget gap amid a weak outlook for crude oil, the government announced some revenue enhancing measures including broadening of the value added tax (VAT) base, a 15% increase in the price of gasoline and diesel fuels, sale of assets and dividend receipts from associated companies. Looking ahead, the prospects for Trinidad and Tobago remain weak. The Moody s credit rating agency downgraded Trinidad and Tobago sovereign debt from Baa1/Negative to Baa2/Negative in April 2015, citing weak energy prices, a deteriorating fiscal position and low forecasted growth. Meanwhile Standard & Poor s has revised the outlook on its A rating to negative due to the country s vulnerability to global energy prices. Growth for 2016 is likely to remain negative amid weak crude oil prices, while the country s tightly managed fixed exchange rate may need to trade in a wider band than has occurred historically as foreign exchange reserves continue to be impacted by weak energy prices. ii) FINANCIAL MARKET REVIEW During 2015, there were a number of financial market developments that affected the Trinidadian funds. From a global perspective, the uncertain path of US interest rates, especially heading into the September US Federal Reserve (Fed) meeting, resulted in significant market volatility for developed and emerging market assets. The expectation of the rate hike, along with a strengthening US dollar, impacted bonds issued by the Government of Trinidad and Tobago and State entities. In addition, the Chinese devaluation of the Yuan leading up to August Fed meeting in 2015 put downward pressure on commodity related asset prices including base metals and crude oil. Until the start of the fourth quarter, there was no clear path to the Fed s rate hike timing, resulting in additional market volatility amid mixed economic data. In December, the US Central bank finally hiked rates for the first time in a decade by 0.25%. 3

5 On the local front, a lack of USD liquidity due to a deteriorating net international reserves position impacted availability of US dollars, which affected the market s ability to acquire USD assets. This had a significant impact given the generally low availability of TT denominated assets in the market for funds to invest in. In addition, the State oil company, Petrotrin, was downgraded one notch to BB+ from BBB- by Standard & Poor s. This fall from the investment grade threshold to speculative grade, along with weak crude prices, affected the price of Petrotrin s bonds, which is widely held in the market. On the positive front, in August Phoenix Gas Park Processor s Limited issued an Initial Public Offering of Trinidad & Tobago Natural Gas Limited at a share price of TT$20 per share. The issue provided an opportunity for investors to gain ownership in the local energy sector. The issue was oversubscribed by 1.8X with a reported TT$2.68 billion in subscriptions received in total. The shares started trading in October The Caribbean debt markets also received another welcome boost in August as Sagicor Financial Corporation issued a US$320 million, 7 year bond, callable after 4 years, with a coupon of 8.875%, yielding 9.125%. This bond provided a boost to the market as it was priced fairly cheaply to the local USD Trinidad yield curve. Overall, the Trinidad equity market had a 0.99% return in 2015, with most of this return driven by cross listed Jamaican equities, as local Trinidadian equities declined by 3.9%. The trailing P/E of the Trinidad composite market fell from 19.2X at the start of the year to 16.6X at the end of iii) INVESTMENT PERFORMANCE REVIEW The Scotiabank Trinidad & Tobago Fixed Income Fund The Fund ended 2015 with a Net Asset Value (NAV) of TT$215.3 million, representing an 8.7% decline compared to the prior year. At December 31, 2015, the Fund s Class AT NAV per share was TT$9.73, its annual return was -0.83% and its dividend yield was 0.63%. During the year, the Fund Manager executed on its investment strategy to increase exposure to US dollar (USD) denominated assets and to reduce the Fund s duration based on the expected depreciation of the local currency against the USD and rising interest rates, respectively. As such, the Fund s exposure to USD increased from 33% to 38% and its duration decreased from 3.52 years to 2.83 years. With the expectation of higher interest rates, the Fund also increased its overweight position to short-term securities from 10% to 17% and reduced its exposure to corporate bonds from 74% to 59%. The Fund s exposure to Mortgages and Foreign denominated assets contributed positively to the Fund s performance. However, those positive contributors were outweighed by volatility in global capital markets, lower commodity prices and a rise in local interest rates, which impacted the Fund s Trinidad and Tobago dollar denominated assets. Local interest rates, as measured by the Central Bank s benchmark rate, increased 125 basis points in 2015, which resulted in lower prices for the Fund s local bonds holdings. The Fund s average credit quality continues to be Investment Grade with an average S&P credit rating of BBB-. The Fund manager forecasts that interest rates may continue to increase, albeit at a more moderate pace. The Fund Manager will continue to manage the duration of the Fund to mitigate the potential loss from a rise in interest rates. In addition, the Fund will continue to be rebalanced to gradually increase its exposure to US denominated assets. 4

6 The Scotiabank Trinidad & Tobago Growth Fund The Fund ended the year with a NAV of TT$58.6 million, representing an approximate 0.6% increase over the previous year. The increase in the Fund s NAV was primarily due to net sales of TT$1.3 million. At December 31, 2015, the Class AT shares of the Fund had a NAV per share of TT$9.82 and an annual return of -1.52%. During the year, the Fund reduced its exposure to Canadian dollar denominated equities based on the expectation that both the Canadian dollar and Canadian equities would continue to weaken. The Fund increased its exposure to the US from 9% to 28% based on the positive view of the US stock market and the US dollar relative to the TT dollar. The Fund subsequently reduced its exposure to TTD denominated assets from 81% to 72%. The Fund adopted more defensive positioning and increased its fixed income exposure given the volatility in the equities market. The strategy to increase USD exposure benefitted the Fund; however, this was offset by weakness in Trinidad and Tobago equities resulting from the deterioration in the local macroeconomic environment. The Fund Manager is optimistic that US equities may have a positive return in 2016, but with continued volatility. Increased volatility may provide the Fund Manager with an opportunity to purchase undervalued securities at lower prices. However, lower energy prices may continue to adversely impact the local economy and local equities in The Fund Manager will therefore seek to maintain its holdings in strong dividend paying stock and companies with diversified revenue streams. iv) FINANCIAL RESULTS REVIEW Scotiabank Trinidad & Tobago Fixed Income Fund Summary of Results The Fund s net asset value decreased by 8.7% to TT$215.3 million at December 31, 2015 from TT$235.9 million at December 31, The decrease is attributed to investment performance of -TT$1.6 million and net sales of -TT$17.5 million, offset by cash distributions of TT$1.5 million. The investment performance of the Fund includes earned income and expenses which vary year over year due to portfolio activity. The Fund s expenses increased as compared to the previous period, mainly as a result of changes in average net assets and portfolio activity. Income increased as compared to the previous period due to changes in the Fund s income earning investments. The Fund had TT$35.4 million in cash at December 31, 2015, which the manager believed was sufficient to manage liquidity. Financial Highlights TT$ (000 s) TT$ (000 s) Total Assets 215, ,456 Total Liabilities ,509 Net Assets attributable to holders of investment shares 215, ,947 Net Income (before distributions / dividends) (1,732) (758) Net Income (after distributions / dividends) (3,206) (1,664) 5

7 As at December 31, 2015 Class AT Class NT Class IT NAV 202,659,973 6,440 12,624,058 Shares 20,820, ,275,218 NAV per Share As at December 31, 2014 Class AT Class NT Class IT NAV 223,965,376 6,541 11,974,960 Shares 22,676, ,204,073 NAV per Share Scotiabank Trinidad & Tobago Growth Fund Summary of Results The Fund s net asset value increased by 0.6% to TT$58.6 million at December 31, 2015 from TT$58.3 million at December 31, This increase is attributed to investment performance of -TT$1.0 million and net sales of TT$1.3 million. The investment performance of the Fund includes earned income and expenses which vary year over year due to portfolio activity. The Fund s expenses increased as compared to the previous period mainly as a result of changes in average net assets and portfolio activity. Income decreased as compared to the previous period due to changes in the Fund s income earning investments. The Fund had TT$3.8 million in cash at December 31, 2015 which the manager believed was sufficient to manage liquidity. Financial Highlights TT$ (000 s) TT$ (000 s) Total Assets 59,425 59,393 Total Liabilities 810 1,123 Net Assets attributable to holders of investment shares 58,614 58,270 Net Income (before distributions / dividends) (981) 555 Net Income (after distributions / dividends) (981) 555 As at December 31, 2015 Class AT Class NT Class IT NAV 54,695,824 6,033 3,912,471 Shares 5,570, ,625 NAV per Share

8 As at December 31, 2014 Class AT Class NT Class IT NAV 54,359,233 6,169 3,904,340 Shares 5,451, ,625 NAV per Share v) RELATED PARTY TRANSACTIONS All related party transactions are documented in Other Related Party Transactions in Note 5 of the Notes to Financial Statements 7

9 Audited Financial Statements

10 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. FINANCIAL STATEMENTS

11 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. INDEX TO FINANCIAL STATEMENTS CONTENTS Page 1) INDEPENDENT AUDITORS' REPORT 1-2 2) STATEMENT OF FINANCIAL POSITION 3 3) STATEMENT OF COMPREHENSIVE LOSS 4 4) STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS 5 OF REDEEMABLE INVESTMENT SHARES 5) STATEMENT OF CASH FLOWS 6 6) NOTES TO FINANCIAL STATEMENTS 7-19

12 Independent auditor s report To the Board of Directors of Scotiabank Trinidad & Tobago Fixed Income Fund Inc. We have audited the accompanying financial statements of Scotiabank Trinidad & Tobago Fixed Income Fund Inc., which comprise the statement of financial position as at December 31, 2015 and the statements of comprehensive loss, changes in net assets attributable to holders of redeemable investment shares and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Scotiabank Trinidad & Tobago Fixed Income Fund Inc. as at December 31, 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. March 30, 2016 PricewaterhouseCoopers, 18 Forum Lane, P.O. Box 258, Grand Cayman, KY1-1104, Cayman Islands T: +1 (345) , F: +1 (345) ,

13 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. STATEMENT OF FINANCIAL POSITION AT (Expressed in Trinidad and Tobago dollars) ASSETS Cash and cash equivalents 35,399,136 25,156,610 Financial assets at fair value through profit or loss (Cost: TT$178,822,249: 2014:TT$229,336,572) (Notes 3, 7 and 8) 176,517, ,109,123 Interest receivable 2,795,214 2,113,638 Receivable from Manager (Note 5) 643,233 - Subscriptions receivable 218,200 77,000 Total assets 215,573, ,456,371 LIABILITIES Accrued expenses 283, ,911 Redemptions payable - 16,308,921 Payable for investments purchased - 2,815,289 Management fees (Note 4) - 206,373 Liabilities (excluding net assets attributable to holders of redeemable investment shares) 283,218 19,509,494 Governance shares - - Net assets attributable to holders of redeemable investment shares (Notes 6, 7 and 8) 215,290, ,946,877 Net asset value per redeemable investment shares (Note 6) Class AT (TT$202,659,973/20,820,071; 2014: TT$223,965,376/22,676,501 shares) Class NT (TT$6,440/659; 2014: TT$6,541/656 shares) Class IT (TT$12,624,058/1,275,218; 2014: TT$11,974,960/1,204,073 shares) Approved for issuance on behalf of Scotiabank Trinidad & Tobago Fixed Income Fund Inc. s Board of Directors by: Sarah Hobbs Sarah Hobbs Director Rhory McNamara Rhory McNamara Date : March 29, 2016 Director The accompanying notes are an integral part of these financial statements

14 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. STATEMENT OF COMPREHENSIVE LOSS YEAR ENDED (Expressed in Trinidad and Tobago dollars) Income Interest income 8,772,998 4,746,422 Net realized loss on financial assets at fair value through profit or loss and foreign currencies (5,111,763) (1,687,450) Net change in unrealized depreciation on financial assets at fair value through profit or loss and foreign currencies (1,055,013) (1,166,776) Total net gain 2,606,222 1,892,196 Expenses Management fees (Note 4) 3,265,692 1,936,241 Custodian and administration fees 1,148, ,784 Other expenses 252, ,147 Professional fees 206, ,354 Total operating expenses 4,872,821 2,751,526 Less: expenses reimbursed (Note 4) (534,396) (101,640) Operating loss (1,732,203) (757,690) Finance costs Distributions to holders of redeemable investment shares (1,474,137) (906,498) Loss after distributions (3,206,340) (1,664,188) Decrease in net assets from operations attributable to holders of redeemable investment shares (3,206,340) (1,664,188) The accompanying notes are an integral part of these financial statements

15 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE INVESTMENT SHARES YEAR ENDED (Expressed in Trinidad and Tobago dollars) Total Decrease in net assets net assets from attributable to operations redeemable attributable to investment redeemable shareholders Share investment (at redemption Capital shareholders value) Balance as at December 31, ,536,286 (134,873) 64,401,413 Issue of redeemable investment shares 226,479, ,479,526 Redemption of redeemable investment shares (53,269,874) - (53,269,874) Decrease in net assets from operations attributable to holders of redeemable investment shares - (1,664,188) (1,664,188) Balance as at December 31, ,745,938 (1,799,061) 235,946,877 Issue of redeemable investment shares 71,425,798-71,425,798 Redemption of redeemable investment shares (88,875,864) - (88,875,864) Decrease in net assets from operations attributable to holders of redeemable investment shares - (3,206,340) (3,206,340) Balance as at December 31, ,295,872 (5,005,401) 215,290,471 The accompanying notes are an integral part of these financial statements

16 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. STATEMENT OF CASH FLOWS YEAR ENDED (Expressed in Trinidad and Tobago dollars) Cash flows from operating activities Interest received 8,091,422 3,270,493 Interest paid - (1,268,633) Operating expenses paid (4,974,887) (2,492,943) Operating expenses paid on behalf of manager (2,043,262) (986,557) Reimbursements received from manager 1,934,425 1,126,174 Purchase of financial assets at fair value through profit or loss (42,489,494) (236,215,609) Proceeds from sale and maturity of financial assets at fair value through profit or loss 85,098,648 43,485,627 Net cash used in operating activities 45,616,852 (193,081,448) Cash flows from financing activities Proceeds from subscriptions of redeemable investment shares 70,037, ,268,990 Payments for redemption of redeemable investment shares (105,184,785) (36,960,953) Distribution paid to holders of redeemable investments (226,549) (62,962) Net cash provided by financing activities (35,374,326) 189,245,075 Net change in cash and cash equivalents 10,242,526 (3,836,373) Cash and cash equivalents at beginning of the year 25,156,610 28,992,983 Cash and cash equivalents at end of the year 35,399,136 25,156,610 Non-cash transaction reinvested distributions (1,247,589) (843,536) The accompanying notes are an integral part of these financial statements

17 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. 1. Incorporation and Principal Activities NOTES TO FINANCIAL STATEMENTS Scotiabank Trinidad & Tobago Fixed Income Fund Inc. (the Fund ) was incorporated under the laws of Saint Lucia on September 20, 2012 and is licensed in Saint Lucia by the Financial Sector Supervision Unit, Ministry of Finance of Saint Lucia, as a public international mutual fund. On January 22, 2013, the Fund also registered under The Mutual Funds Law (revised) of the Cayman Islands. The Fund commenced operations on October 17, The Fund is a Trinidad and Tobago Dollar-denominated open-ended investment Fund. The registered office of the Fund is located at 20 Micoud Street, Castries, Saint Lucia. No application has been made for the Fund to be listed on any stock exchange. The Fund s investment objective is to provide income and modest capital gains. The Fund is designed to invest primarily in fixed income securities, issued or guaranteed by the Trinidadian or foreign governments, or issued by Trinidadian or foreign corporations. Scotia Asset Management (St. Lucia) Inc. is the Manager (the Manager ), Scotiabank and Trust (Cayman) Ltd. is the Sub-Manager (the Sub-Manager ), Scotia Investments Trinidad & Tobago Limited is the Portfolio Manager (the Portfolio Manager ). ADCO Fund Administrators Inc. is the Fund Administrator (the Fund Administrator ). State Street Cayman Trust Company, Ltd. is the sub-administrator, (the Sub-Administrator ) and State Street Bank and Trust Company is the custodian (the Custodian ). 2. Summary of Significant Accounting Policies The principal accounting policies applied in the preparation of these financial statements are set out below. Basis of preparation: The financial statements of the Fund have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative financial instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgment in the process of applying the Fund s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 8. All references to net assets throughout this document refer to net assets attributable to holders of Redeemable Investment Shares unless otherwise stated. Net assets per share information as disclosed in the Statement of Financial Position for each class of investment shares as disclosed in Note 6 has been determined as total assets less total liabilities (excluding net assets attributable to holders of Redeemable Investment Shares) divided by the number of outstanding shares of each class of Redeemable Investment Shares. (a) Standards and amendments to existing standards effective January 1, 2015 that are adopted by the Fund. There are no standards, interpretations or amendments to existing standards that are effective for the first time for the financial year beginning January 1, 2015 that would be expected to have a material impact on the Fund. (b) New standards, amendments and interpretations effective after January 1, 2015 and have not been early adopted. A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2015, and have not been applied in preparing these financial statements. None of these are expected to have a material effect on the financial statements of the Fund

18 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. 2. Summary of Significant Accounting Policies (continued) Valuation of financial assets at fair value through profit or loss: The Fund s investments are considered trading securities and consequently categorized as financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recognized at fair value, which is considered the cost basis of the financial assets. The Fund records security transactions on a trade date basis, recognizing the cost or sales proceeds of financial assets sold or purchased on an average cost basis. Financial assets are valued on the valuation date at fair value, using data provided by one or more reputable third party pricing vendors which are in turn based upon (1) last traded price on the exchange upon which such financial assets are traded, (2) valuation models using observable market inputs, or (3) prices quoted by the principal market makers for non-exchange traded financial assets. Management evaluates the reliability of the pricing data received at each report date. All related realized gains and losses are recognized in the Statement of Comprehensive Loss as income as they occur. Fair value estimation: The fair value of financial assets and liabilities that are not traded in an active market (for example, structured notes and mortgages) is determined using valuation techniques. The Fund uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques used include the use of comparable recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models, and other valuation techniques commonly used by market participants making the maximum use of market inputs and replying as little as possible on entity-specific inputs. Functional and presentation currency: Items included in the Fund s financial statements are measured using the currency of the primary economic environment in which it operates (the functional currency ). This is the Trinidad and Tobago Dollar ( TT$ ), which reflects the Fund s primary activity of investing in TT$ denominated investment grade securities issued or guaranteed by the Trinidadian or foreign government, or issued by Trinidadian or foreign corporations. The Fund has adopted the TT$ as its presentation currency. Accounting for investments and investment income: Security transactions are accounted for on a trade date basis. Realized gains and losses on sales of financial assets are calculated on an average cost basis. Redeemable investment shares and governance shares: Redeemable investment shares (the Redeemable Investment Shares ) are redeemable at the shareholder s option and are classified as financial liabilities. Any distribution on such Redeemable Investment Shares is recognized in the Statement of Comprehensive Loss as finance costs. The Redeemable Investment Shares can be put back to the Fund by the holder at any dealing day for cash equal to a proportionate share of the respective Fund s net assets. The Redeemable Investment Shares are carried at the redemption amount that would be payable at the dealing day if the shareholder exercised its right to put the share back to the Fund. Governance shares (the Governance Shares ) are not redeemable, and do not participate in the net income or dividends of the Fund as per the Fund s articles of association. Interest income: Interest income on financial assets is accrued on a daily basis. Interest income on financial assets includes interest and discount earned (net of premium), which is the difference between the face value and the original cost, including original issue discount, amortized using the effective yield method over the term of the financial assets. Interest is recognized in the Statement of Comprehensive Loss using the effective yield method and includes discount accreted and premium amortized over the remaining period to maturity of individual assets. Expenses: Expenses directly attributable to the Fund are recorded on an accrual basis. Translation of foreign currency amounts: Assets and liabilities denominated in currencies other than the TT$ ( foreign currencies ) are translated at the rates prevailing on the date of valuation and exchange differences are reflected in the Statement of Comprehensive Loss in the period in which they arise. Transactions in foreign currencies are translated at prevailing exchange rates at the date of the transaction. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on financial assets from the fluctuations arising from changes in market prices of financial assets held. Such fluctuations are included with the net realized gain or loss on financial assets at fair value through profit or loss and/or the net change in unrealized appreciation or depreciation on financial assets at fair value through profit or loss

19 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. 2. Summary of Significant Accounting Policies (continued) Distribution policy: The Fund will only distribute income and/or capital gains when determined by the Board of Directors of the Fund. Distributions will be automatically reinvested in additional Redeemable Investment Shares of the Fund, unless a written election to receive cash payments is received by the Manager or its agent. Distributions are recognized as a finance cost in the Statement of Comprehensive Loss. Cash and cash equivalents: Cash and cash equivalents comprise cash, fixed term deposits and short term bonds with original maturity of less than 90 days. Capital risk management: The capital of the Fund is represented by the net assets attributable to holders of Redeemable Investment Shares. The amount of net asset attributable to holders of Redeemable Investment Shares can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund s objective when managing capital is to safeguard the Fund s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Fund. In order to maintain or adjust the capital structure, the Fund s policy is to perform the following: Monitor the level of daily subscriptions and redemptions relative to the liquid assets and adjusts the amount of distributions the Fund pays to redeemable shareholders. Redeem and issue new shares in accordance with the constitutional documents of the Fund, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions. The Board of Directors and the Portfolio Manager monitor capital on the basis of the value of net assets attributable to Redeemable Investment Shares. 3. Financial Assets at Fair Value through Profit or Loss At December 31, 2015 and 2014 the financial assets comprised the following debt securities: Cost Fair Value Cost Fair Value Structured Notes TT$ - TT$ - TT$ 8,563,208 TT$ 8,605,710 Government and Agency Bonds and Notes 31,600,301 31,876,531 11,235,925 11,402,939 Corporate Bonds and Notes 128,289, ,709, ,650, ,213,055 Mortgages 18,932,130 18,932,130 21,887,419 21,887,419 TT$ 178,822,249 TT$ 176,517,906 TT$ 229,336,572 TT$ 228,109,

20 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. 3. Financial Assets at Fair Value through Profit or Loss (continued) The following summarizes the investment portfolio segregated by country of issuer: Financial Assets at fair value Fair Value % of total portfolio Fair Value % of total portfolio Aruba TT$ 6,086, % TT$ % Bermuda 7,443, % % Brazil 2,607, % 1,357, % Canada % 8,516, % Cayman Islands 6,314, % 1,338, % Chile % 6,149, % Colombia % 4,235, % Dominican Republic 4,794, % 1,223, % Jamaica 1,730, % % Luxembourg % 1,346, % Mexico 4,877, % 4,814, % Netherlands % 2,868, % Poland 4,655, % 4,661, % Trinidad & Tobago 129,219, % 161,226, % United Arab Emirates % 734, % United States 8,788, % 29,635, % Total financial assets at fair value through profit or loss TT$ 176,517, % TT$ 228,109, % As at December 31, 2015 the portfolio consists of 50 (2014: 67) positions, primarily located in Trinidad and Tobago. The three largest concentrations in corporate bonds and notes are in Guardian Holdings Limited (13%), Trinidad and Tobago Water & Sewerage Authority (13%) and FirstCaribbean International Bank (Trinidad and Tobago) Limited (12%) (2014: Guardian Holdings Limited (11%), Trinidad and Tobago Water & Sewerage Authority (10%) and FirstCaribbean International Bank (Trinidad and Tobago) Limited (10%)). The contractual interest rates range from 2.25% to 9.75% (2014: from 0.70% to 10.50%) and maturity dates of the securities range from 2016 to 2039 (2014: 2015 to 2039). The current year yields range from 0.64% to 7.00% (2014: 0.55% to 6.75%). Mortgages comprise 11% (2014: 10%) of the portfolio. The fair value of the 28 (2014: 31) mortgage positions held by the Fund are fully secured by mortgage liens. No individual mortgage exceeds 1% of the Fund s portfolio. The amount to be lent in respect of any individual property is based on the appraised value and the type of property involved. All of the Fund s mortgage investments are either advanced to customers in Trinidad and Tobago or are secured by property in Trinidad and Tobago. Fair value of investment in mortgages was determined by management using a portfolio approach. As such, all mortgages are fair valued which approximates amortized cost. There is no quoted price in an active market for the mortgage investments. The Manager makes its determination of fair value based on its assessment of the current lending market for mortgage investments of same or similar terms. Typically, the fair value of these mortgages investments approximate their carrying values given all mortgages have variable rates that re-price with market rate changes, and the maximum period between re-pricing dates is twelve months. The interest rates on mortgages range from 5.50% to 7.00% (2014: 5.50% to 6.75%) and maturity dates range from 2023 to 2039 (2014: 2022 to 2039). 4. Management Agreement The Manager has responsibility for the general administration of the Fund, but has delegated the performance of most tasks to third parties

21 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. 4. Management Agreement (continued) The Manager is entitled to a fee (the management fee ) at rates disclosed in the table below. The management fee is paid out of the assets of the Fund and is accrued daily and paid quarterly in arrears. Out of this fee, the Manager is required to pay the fees of the Sub-Manager and Portfolio Manager and any other person to whom functions are delegated by the Manager, along with all investment related direct expenses. The Manager may also pay trailing commissions to Distributors out of the management fee (Note 5). The Manager and/or Sub-Manager may choose from time to time to absorb any portion of the annual management fee on any class of shares of the Fund. The Manager is entitled to a management fee from the classes of Redeemable Investment Shares as listed below: Class Management fee per annum AT Up to 1.90% NT Up to 2.35% No management fees are charged on Class IT shares. Instead, Class IT investors negotiate a separate fee that is paid directly to the Manager. For the year ended December 31, 2015, the management fee was set at 1.50% (2014:1.50%) for Class AT shares and 1.95% (2014: 1.95%) for Class NT shares, which amounted to TT$3,265,692 (2014: TT$1,936,241), of which TT$NIL (2014: TT$206,393) was payable as at December 31, The Fund also incurs certain operating expenses. Such expenses may include, but are not limited to, administration costs, interest on borrowed funds, auditing expenses, legal expenses, insurance, licensing, accounting, fees and disbursement of transfer agents, registrars, custodians, sub-custodians and escrow agents and the annual registration fee payable in St Lucia, the Cayman Islands and any other jurisdictions where the Fund may be registered from time to time. The Manager has subcontracted third party service providers to perform these services. The Manager and/or Sub-Manager may choose to absorb any of these operating expenses at any time. For the year ended December 31, 2015, the Manager voluntarily applied a management expense ratio cap on management fees and operating expenses of 2.00% (2014: 2.00%) for Class AT shares, 2.45% (2014: 2.45%) for Class NT shares, and 0.50% (2014: 0.50%) for Class IT shares. As a result of the management expense ratio cap, total management fee and operating expenses reimbursable by the Manager and/or Sub-Manager for the year ending December 31, 2015 was TT$534,396 (2014: TT$101,640), of which TT$534,396 (2014: TT$NIL) was receivable as at December 31, 2015 and was subsequently paid to the Fund. 5. Other Related Party Transactions At December 31, 2015 and 2014, the Sub-Manager held 100 Governance Shares. All fees payable to the Sub- Manager are being borne by the Manager. During the year ended December 31, 2015, on behalf of the Manager the Fund paid TT$946,897 to the Portfolio Manager and TT$1,096,366 to sub-distributors (2014: TT$424,304, TT$562,252, respectively), of which TT$108,836 is recorded as a receivable from Manager in the Statement of Financial Position. At December 31, 2015, a related party fund, Scotiabank Trinidad & Tobago Growth Fund Inc. held 238,071 (2014: 178,733) units of class IT shares valued at 2,356,780 (2014: TT$1,777,551). The Manager of the Fund is also the manager of Scotiabank Trinidad & Tobago Growth Fund Inc. The mortgage investments held by the Fund are purchased from and administrated by Scotiabank Trinidad & Tobago Limited

22 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. 5. Other Related Party Transactions (continued) Under the terms of the sub-distributorship agreement dated December 18, 2012, Scotiabank & Trust (Cayman) Ltd. (the Distributor ) is responsible for the distribution of Redeemable Investment Shares of the Fund in accordance with the terms of the prospectus. The Distributor may appoint sub-distributors. The sub-distributors are entitled to all initial subscription charges levied against subscribers. The subscription charge is levied solely at the discretion of the Sub-Manager at up to 5% of the total amount paid by the subscriber for shares. 6. Share Capital Authorized: 100 Governance Shares of no par value 300,000,000 Redeemable Investment Shares of no par value Issued: Total shares issued or redeemed during the year and the corresponding share capital can be summarized as follows: Governance Shares Shares TT$ Shares TT$ Shares issued during the year Shares redeemed during the year Redeemable Investment Shares Class AT Shares issued during the year 6,776,835 66,478,209 22,678, ,635,990 Shares redeemed during the year (8,748,513) (85,775,864) (3,574,829) (35,552,243) Reinvestment 115,246 1,130,361 51, ,026 Class NT Shares issued during the year Shares redeemed during the year Reinvestment Class IT Shares issued during the year 371,712 3,700, Shares redeemed during the year (312,374) (3,100,000) (1,781,907) (17,717,631) Reinvestment 11, ,193 33, ,205 The Governance Shares are held exclusively by the Sub-Manager, who has full voting rights. Shares that are redeemed within 90 days of purchase may be subject to a redemption fee up to 2% of the redemption amount. TT$NIL redemption fees were levied during the years ended December 31, 2015 and Each of the classes of Redeemable Investment Shares are issued and redeemable daily at a price equal to the net asset value per share on the valuation day on which the notification is received, as long as it is received before the Fund s close of business. The net asset value per share for any valuation date is determined by dividing the value of the assets of the respective share class less its liabilities at the close of business on such valuation day by the number of Redeemable Investment Shares outstanding in the share class on that date. The Redeemable Investment Shares confer no voting rights and no entitlement to receive notice of, or attend at, general meetings of the Fund. The Redeemable Investment Shares carry the right to participate in dividends and all other distributions of the Fund. The Fund s capital is primarily represented by these Redeemable Investment Shares. In accordance with the objectives outlined in Note 1 and the risk management policies in Note 7, the Fund endeavors to invest the subscriptions received from redeemable investment shareholders into appropriate investments while maintaining sufficient liquidity to meet redemptions, being augmented by disposal of fixed income securities where necessary

23 7. Financial Risk Management SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. The Fund s investment activities expose it to various types of risk which are associated with the financial assets and markets in which it invests. Price risk: All financial assets present a risk of loss of capital. The Portfolio Manager moderates this risk through a careful selection of the financial assets. Maximum risk resulting from financial assets is determined by the fair value of the financial assets. The Fund s overall positions are monitored on a daily basis by the Portfolio Manager. As the Fund s objective is to invest in fixed income securities none of its holdings are susceptible to any significant market fluctuations other than those described in interest rate risk and credit risk below. There were no structured notes held at December 31, Within the structured notes held at December 31, 2014 TT$8,605,710 of these notes are not principal protected and the Fund may not necessarily obtain its full investment at maturity. Currency risk: When the Fund buys or holds an investment that is denominated in a currency other than Trinidad & Tobago dollars, changes in the exchange rate between that foreign currency and the Trinidad & Tobago dollar will affect the value of the Fund. Changes in exchange rates between currencies or the conversion from one currency to another may cause the value of the financial assets to diminish or increase. Currency exchange rates may fluctuate over short periods of time and are generally determined by supply and demand in the currency exchange markets and the relative merits of investments in different countries, actual or perceived changes in interest rates and other complex factors. Currency exchange rates can be affected unpredictably by intervention (or the failure to intervene) by government or central banks, or by currency controls or political developments. In accordance with the Fund s policy, the Portfolio Manager monitors the financial assets and liabilities exposure to currency risk. Interest rate risk: Funds that invest in fixed income securities, such as bonds, money market instruments, mortgages and loans, are affected by changes in the general level of interest rates. In general, when interest rates rise, the value of these investments tends to fall. When rates fall, fixed income securities tend to increase in value. Fixed income securities with longer terms to maturity are generally more sensitive to changes in interest rates. Substantially all of the Fund s mortgage investments are subject to cash flow interest rate risk due to fluctuations in the prevailing levels of market interest rates. Substantially all mortgages issued bear variable interest rates linked to the Trinidad and Tobago prime rate and re-price as and when these rates (market rates) change. Accordingly the Fund is not exposed to significant market interest rate risk on mortgage investments. The Fund s interest-bearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows

24 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. 7. Financial Risk Management (continued) Interest rate risk (continued): The table below summarizes the Fund s exposure to interest rate risks. It includes the Fund s financial assets and liabilities, categorized by the earlier of contractual re-pricing or maturity dates: At December 31, 2015 Non-interest Up to 1 year 1-5 years Over 5 years bearing Total Assets Cash and cash equivalents ,399,136 35,399,136 Financial assets at fair value through profit or loss 42,723,136 88,110,580 45,684, ,517,906 Other assets ,656,647 3,656,647 Total assets 42,723,136 88,110,580 45,684,190 39,055, ,573,689 Non-interest Up to 1 year 1-5 years Over 5 years bearing Total Liabilities Other liabilities , ,218 Redeemable investment shares ,290, ,290,471 Total liabilities (including ,573, ,573,689 redeemable investment shares) Interest sensitivity gap 42,723,136 88,110,580 45,684,190 At December 31, 2014 Non-interest Up to 1 year 1-5 years Over 5 years bearing Total Assets Cash and cash equivalents ,156,610 25,156,610 Financial assets at fair value through profit or loss 36,911, ,383,131 84,814, ,109,123 Other assets ,190,638 2,190,638 Total assets 36,911, ,383,131 84,814,020 27,347, ,456,371 Non-interest Up to 1 year 1-5 years Over 5 years bearing Total Liabilities Other liabilities ,509,494 19,509,494 Redeemable investment shares ,946, ,946,877 Total liabilities (including ,456, ,456,371 redeemable investment shares) Interest sensitivity gap 36,911, ,383,131 84,814,

25 SCOTIABANK TRINIDAD & TOBAGO FIXED INCOME FUND INC. 7. Financial Risk Management (continued) Interest rate risk (continued): At December 31, 2015, should interest rates have lowered by 25 basis points with all other variables remaining constant and ignoring the effects of any management fees, the change in the increase in net assets attributable to holders of Redeemable Investment Shares for the period would amount to approximately TT$1,106,233 (2014: TT$671,711) higher arising substantially from the increase in market values of debt securities. If interest rates had risen by 25 basis points with all other variables remaining constant and ignoring the effects of any management fees, the change in the decrease in net assets attributable to holders of Redeemable Investment Shares would amount to approximately TT$1,120,422 (2014: TT$691,194) higher arising substantially from the decrease in market values of debt securities. Credit risk: Financial assets which potentially expose the Fund to credit risk consist primarily of cash and cash equivalents, interest receivable, and investments. The Fund takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Investments in debt securities, structured notes, and mortgages expose the Fund to the risk that an issuer will default on the payment of interest, principal or both. The extent of the Fund s exposure to credit risk in respect of these financial assets approximates their carrying value as recorded in the Fund s Statement of Financial Position. Scotiabank Trinidad & Tobago Limited services the mortgage investments on behalf of the Fund and performs ongoing monitoring of the performance and servicing of the mortgage investments, maintenance of the collateral and updating credit risk assessment based on the loan history and any changes in the mortgages circumstances. At December 31, 2015 and 2014 there are no mortgage investments in past due status (over 90 days overdue). The majority of transactions of financial assets undertaken by the fund are cleared through and held in custody by a reputable custodian. The Fund s cash is held by the same custodian. The clearing and depository operations for the Fund s security transactions are mainly concentrated with one custodian. The Custodian is a member of a major securities exchange and had a credit rating from S&P of AA- as at December 31, 2015 and The Fund is subject to credit risk and possible losses should the Custodian be unable to fulfil its obligations to the Fund. At December 31, 2015 and 2014, substantially all cash and cash equivalents balances are either held with or placed in custody with the Custodian