Brookfield Investment Management

Transcription

1 Brookfield Investment Management 2015 Brookfield Select Opportunities Income Fund BSO.UN Interim Financial Statements For the period from January 1, 2015 to June 30, 2015

2 Notice to Reader These interim financial statements and related notes of Brookfield Select Opportunities Income Fund (the Fund ) for the six months ended June 30, 2015 have been prepared by management of the Fund. The external auditors of the Fund have not audited or reviewed these interim financial statements. CONTENTS Interim Financial Statements 2 Notes to Interim Financial Statements 9 Fund Information Interim Financial Statements 1

3 STATEMENTS OF FINANCIAL POSITION As at June 30, 2015 and As at December 31, 2014 (Unaudited, Expressed in Canadian Dollars) As at As at June 30, 2015 December 31, 2014 Assets: Current assets Financial assets at fair value through profit or loss 160,579, ,320,750 Cash and cash equivalents 1,288,490 4,559,709 Collateral cash 18,938,987 18,126,612 Due from broker 342,130 - Accrued investment income 2,632,739 2,421,273 Total assets 183,781, ,428,344 Liabilities Current liabilities Unrealized depreciation on forward currency contracts 6,056,878 5,884,814 Swap contracts 8,657,145 4,820,225 Margin payable (Note 7) 23,441,609 28,319,173 Distributions payable 2,880,000 2,880,000 Accounts payable and accrued liabilities 692, ,731 Total liabilities (excluding net assets attributable to holders of redeemable units) 41,728,169 42,808,943 Net assets attributable to holders of redeemable units 142,053, ,619,401 Number of redeemable units outstanding (Note 11) 19,200,000 19,200,000 Net assets attributable to holders of redeemable units per unit See accompanying notes to financial statements. Approved on behalf of the Manager, Brookfield Investment Management (Canada) Inc. Gail Cecil Director Jonathan Tyras Director 2015 Interim Financial Statements 2

4 STATEMENTS OF COMPREHENSIVE INCOME For the six months ended June 30, 2015 and the period from May 23, 2014 to June 30, 2014 (Unaudited, Expressed in Canadian Dollars) * Investment income Interest income for distribution purposes 6,441, ,811 Dividend income 1,183,274 55,633 Net realized foreign exchange gain (loss) 498,706 (18,946) Net realized gain (loss) on sale of investments (2,697,344) 527,598 Net realized loss on forward currency contracts (7,366,321) - Net realized gain on swaps - 1,009,836 Net change in unrealized appreciation (depreciation) on foreign exchange (541,735) 72,079 Net change in unrealized appreciation (depreciation) on swaps (3,836,920) 551,837 Net change in unrealized appreciation (depreciation) on forward currency contracts (172,064) 46,800 Net change in unrealized appreciation (depreciation) of investments 9,037,680 (532,762) Total income 2,546,884 2,015,886 Expenses (Note 9) Management fees 1,049, ,596 Interest expense 88, Audit fees 11,992 4,308 Legal fees 10,087 3,953 Brokerage commissions and other charges 42, ,960 Operating expenses 83,617 26,291 Total expenses 1,286, ,877 Operating profit 1,260,672 1,490,009 Withholding taxes (66,745) (6,419) Increase in net assets attributable to holders of redeemable units 1,193,927 1,483,590 Increase in net assets attributable to holders of redeemable units per unit *The Fund began operations on May 23, See accompanying notes to financial statements Interim Financial Statements 3

5 STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS For the six months ended June 30, 2015 and the period from May 23, 2014 to June 30, 2014 (Unaudited, Expressed in Canadian Dollars) * Net assets attributable to holders of redeemable units, beginning of period 146,619,401 - Increase in net assets attributable to holders of redeemable units 1,193,927 1,483,590 Redeemable unit transactions Proceeds from issuance of units - 192,000,000 Amounts paid for issuance costs of units - 10,880,000 Net increase from redeemable unit transactions - 181,120,000 Distributions to holders of redeemable units Return of net investment income (5,760,000) - Total distributions to holders of redeemable units (5,760,000) - Net increase (decrease) in net assets attributable to holders of redeemable units (4,566,073) 182,603,590 Net assets attributable to holders of redeemable units, end of period 142,053, ,603,590 *The Fund began operations on May 23, See accompanying notes to financial statements Interim Financial Statements 4

6 STATEMENTS OF CASH FLOWS For the six months ended June 30 and the period from May 23, 2014 to June 30, 2014 (Unaudited, Expressed in Canadian Dollars) * Cash flows provided by (used for): Cash flows from operating activities Increase in net assets attributable to holders of redeemable units 1,193,927 1,483,590 Adjustments for: Interest income for distribution purposes (6,441,608) (303,811) Dividend income, net of withholding (1,116,529) (55,633) Net realized gain (loss) on investments 2,697,344 (527,598) Net realized gain on swaps - (1,009,836) Net realized loss on foreign currency contracts 7,366,321 - Change in unrealized appreciation (depreciation) on forward currency contracts 172,064 (46,800) Change in unrealized (appreciation) depreciation on investments (9,037,680) 532,762 Change in unrealized appreciation (depreciation) of swaps 3,836,920 (551,837) (Increase) decrease in collateral cash (812,375) - (Increase) decrease in prepaid expenses - (8,372,079) Increase (decrease) in accounts payable and accrued liabilities (212,194) 1,010,889 Payments made on foreign currency contracts (7,366,321) - Payments made on swap contracts - 1,009,836 Interest received 6,207,480 (1,273,294) Dividend received, net of witholding 1,139,191 21,644 Proceeds from sale of investments 39,550,102 1,165,337 Amounts paid for purchase of investments (29,810,297) (171,662,030) Net cash from (used for) operating activities 7,366,345 (178,578,860) Cash flows from financing activities Margin payable, net (repayments) borrowings and foreign exchange (4,877,564) - Distributions to holders of redeemable units (5,760,000) - Amounts paid for agency fees for issuance - (10,880,000) Proceeds from issuance of units - 192,000,000 Net cash (used for) from financing activities (10,637,564) 181,120,000 Net increase (decrease) in cash and cash equivalents (3,271,219) 2,541,140 Cash and cash equivalents, beginning of period 4,559,709 - Cash and cash equivalents, end of period 1,288,490 2,541,140 *The Fund began operations on May 23, See accompanying notes to financial statements Interim Financial Statements 5

7 SCHEDULE OF INVESTMENTS As at June 30, 2015 (Unaudited, Expressed in Canadian Dollars) Quantity Bonds Security Average Cost Fair Value %ofnet Assets United States Dollar Denominated 5,050,000 Arch Coal Inc % 10/01/20 4,022,882 1,765, ,980,000 Banco do Brasil SA 9.000% 12/29/49 6,415,596 6,735, ,749,000 Banco do Brasil SA 9.000% 12/29/49 1,872,668 1,969, ,720,000 Basic Energy Services Inc % 02/15/19 3,819,826 3,866, ,251,000 Bill Barrett Corp % 10/01/19 3,495,017 3,876, ,000 Bill Barrett Corp % 10/15/22 580, , ,505,000 Empresas ICA S.A.B. de C.V % 05/29/24 8,033,706 7,003, ,528,000 EV Energy Partners L.P % 04/15/19 6,745,431 7,579, ,722,000 Forbes Energy Services Ltd % 06/15/19 8,721,006 7,712, ,923,000 Hexion US Finance Corp % 11/15/20 11,794,200 9,818, ,108,000 Hexion US Finance Corp % 02/01/18 2,057,208 2,375, ,200,000 Just Energy Group Inc % 07/29/19 2,181,869 2,581, ,709,000 Lightstream Resources Ltd % 02/01/20 13,557,883 10,194, ,963,000 MEG Energy Corp % 01/30/23 3,995,694 4,576, ,236,000 MEG Energy Corp % 03/15/21 2,463,747 2,686, ,000 MEG Energy Corp % 03/31/24 1,045,411 1,190, ,405,000 New Albertson's Inc % 08/01/29 2,476,662 2,882, ,857,000 New Albertson's Inc % 06/15/26 1,974,667 2,260, ,000,000 New Albertson's Inc % 06/01/28 1,861,653 2,122, ,207,000 New Albertson's Inc % 05/01/30 1,299,828 1,529, ,000 New Albertson's Inc % 05/01/31 577, , ,993,154 83,968, Canadian Dollar Denominated 7,300,000 Imperial Metals Corp % 09/04/20 7,300,000 8,122, ,200,000 Just Energy Group Inc % 06/30/17 6,515,795 6,879, ,540,000 Perpetual Energy Inc % 07/23/19 6,506,600 5,853, ,322,395 20,855, Brazil Real Denominated 3,708,000 Companhia de Eletricidade do Estado da Bahia Coelba 1.750% 04/27/16 1,725,823 1,466, ,725,823 1,466, Equities United States Dollar Denominated 131,400 General Motors Co. 5,363,448 5,467, ,950 HSBC Holdings PLC 4,842,462 4,920, ,600 JPMorgan Chase & Co. 4,539,515 6,057, ,000 Royal Dutch Shell PLC 5,658,534 4,653, ,125 Vector Group Ltd. 1,287,474 1,526, ,691,433 22,625, Interim Financial Statements 6

8 Quantity Security Average Cost Fair Value %ofnet Assets Great British Pound Denominated 578,070 Aberdeen Asset Management PLC 4,732,015 4,585, ,000 British American Tobacco PLC 6,588,404 6,772, ,320,419 11,357, Canadian Dollar Denominated 400,400 AGF Management Ltd. 5,195,714 2,346, ,800 TORC Oil & Gas Ltd. 2,743,693 2,286, ,600 Vermilion Energy Inc. 2,693,178 2,621, ,540 Whitecap Resources Inc. 1,276,455 1,496, ,909,040 8,751, Euro Denominated 114,350 GDF Suez 2,757,878 2,646, ,757,878 2,646, Hong Kong Dollar Denominated 645,400 COSCO Pacific Ltd. 954,837 1,093, ,837 1,093, Term Loans United States Dollar Denominated 10,563,352 SuperMedia Inc % 12/31/16 9,584,639 7,813, ,584,639 7,813, Transaction costs (120,697) Total Investments 169,138, ,579, Due to broker 342, Accrued investment income 2,632, Cash and cash equivalents 1,288, Derivative instruments (14,714,023) (10.36) Liabilities, net of other assets (8,075,159) (5.68) Total net assets attributable to holders of redeemable Units 142,053, Interim Financial Statements 7

9 SCHEDULE OF DERIVATIVE INSTRUMENTS As at June 30, 2015 (Unaudited, Expressed in Canadian Dollars) Underlying Asset Counterparty Number of Shares Settlement Date Notional Value Unrealized Gains / (Losses) Banco Do Brasil S.A. J.P. Morgan 184,000 July 27, ,629,714 (836,393) CCR S.A. J.P. Morgan 76,600 July 27, ,082 (334,696) EV Energy Partners LP J.P. Morgan 186,151 November 30, ,773,183 (6,119,878) Energy Transfer Partners LP J.P. Morgan 43,600 July 12, ,009,361 (169,277) Markwest Energy Partners LP J.P. Morgan 82,350 July 27, ,992,098 (1,196,901) Total swap contracts (8,657,145) Forward Currency Contracts Amount Bought Amount Sold Maturity Date Unrealized Gains /(Losses) CAD 82,264,000 USD 70,000,000 July 6, 2015 (5,131,280) CAD 10,658,940 GBP 5,900,000 July 6, 2015 (925,598) (6,056,878) See accompanying notes to financial statements Interim Financial Statements 8

10 NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS 1. THE FUND Brookfield Select Opportunities Income Fund (the Fund ) is an investment fund established under the laws of the Province of Ontario pursuant to a Declaration of Trust dated April 24, The Fund effectively began operations on May 23, 2014 when it completed an initial public offering of 19,200,000 units of the Fund (the Units ) at 0.00 per Unit (the Offering ), for gross proceeds of million and net proceeds of million after deducting issuance costs of approximately 10.9 million. The Fund was created with objectives to (i) provide holders of units ( Unitholders ) with quarterly cash distributions; (ii) maximize total return for Unitholders through distributions and capital appreciation; and (iii) preserve capital. The Fund was created to invest in a portfolio comprised primarily of fixed income and equity securities on a global basis (the Portfolio ). Brookfield Investment Management (Canada) Inc. ( BIM Canada ) is the manager (the Manager ), the investment manager (the Investment Manager ), and the trustee of the Fund. The Investment Manager makes all of the investment and trading decisions on behalf of the Fund. The Fund s registered office is Brookfield Place, 181 Bay Street, Suite 300 Toronto, Ontario Canada M5J 2T3. These financial statements were authorized for issue by the Manager on August 26, BASIS OF PRESENTATION These financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS"). The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for assets. In applying IFRS, management makes estimates and assumptions that may affect the amounts of assets, liabilities, income and expenses reported in these financial statements. The most significant estimates relate to the valuation of investments. Actual results may differ from the estimates. 3. SIGNIFICANT ACCOUNTING POLICIES Financial Instruments The Fund's investments in equity and fixed income securities are designated at fair value through profit or loss ( FVTPL ) at inception. The Fund's derivatives are categorized as held for trading. As a result of such designation and categorization, the Fund's investments and derivatives are measured at FVTPL. The Fund's accounting policies for measuring the fair value of its investments and derivatives are identical to those used in measuring its published Net Asset Value (NAV). Offsetting Financial assets and liabilities are offset and the net amount presented in the Statements of Financial Position only when the Fund has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In the normal course of business, the Fund enters into various master netting agreements or similar agreements that do not meet the criteria for offsetting in the Statements of Financial Position but still allow for the related amounts to be offset in certain circumstances, such as bankruptcy or termination of contracts Interim Financial Statements 9

11 Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded marketable securities) are based on quoted market prices at the close of trading on the reporting date. However, if (i) a fair value or price is not readily available, (ii) the available quotations are not believed to be reflective of fair value by the Investment Manager, or (iii) a significant event has occurred that would materially affect the value of the security, the security is fair valued, as determined in good faith, by the Fund s Valuation Committee. The Fund s Valuation Committee is comprised of senior members of Brookfield Investment Management, Inc. s management team. The price determined by the Valuation Committee is an estimate and may differ from the actual price used in a purchase or sale transaction. The Fund s policy is to recognize transfers into and out of the fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer. The fair value of financial assets and liabilities that are not traded in an active market including over-the-counter derivatives is determined using established valuation procedures. The Fund uses a variety of methods and makes assumptions that are based on market conditions existing at each measurement date. Valuation techniques include the use of comparable recent arm s length transactions, reference to other instruments that are substantially the same and others commonly used by market participants and which make the maximum use of observable inputs. Refer to Note 7 for further information about the Fund s fair value measurements. All investment transactions are accounted for on the trade date. Realized gains and losses from investment transactions and unrealized appreciation or depreciation in the value of investments are calculated on an average cost basis, excluding transaction costs and the effect of foreign exchange fluctuations, which are disclosed separately. Other assets and liabilities For the purpose of categorization, accrued investment income is recorded at cost or amortized cost. Similarly, margin payable, payables for securities purchased, distributions payable and accounts payable and accrued liabilities are deemed to be other financial liabilities and reported at amortized cost. All other financial assets and liabilities are measured for at amortized cost. Under this method, financial assets and liabilities reflect the amounts required to be received or paid, discounted when appropriate, at the financial instrument s effective interest rate. The fair values of the Fund's financial assets and liabilities that are not carried at FVTPL approximate their carrying amounts due to their short-term nature. Revenue recognition Dividend income is recognized on the ex-dividend date and the interest for distribution purposes shown on the Statements of Comprehensive Income represents the coupon interest received by the Fund accounted for on an accrual basis. The Fund does not amortize premiums paid or discounts received on the purchase of fixed income securities except for zero coupon bonds which are amortized on a straight line basis. Transaction costs Transaction costs, such as brokerage commissions incurred in the purchase and sale of securities by the Fund, are expensed and are included in operating expenses in the Statements of Comprehensive Income. Transaction costs are incremental costs that are directly attributable to an acquisition, issue or disposal of an investment, which include fees and commissions paid to agents, advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties Interim Financial Statements 10

12 Functional and presentation currency The performance of the Fund is measured and reported to the investors in Canadian dollar. The Manager considers the Canadian dollar as the currency that most faithfully represents the economic effects of the underlying transactions, event and conditions. These financial statements are presented in Canadian dollars, which is the Fund s functional currency. Foreign currency translation Investments and other assets denominated in foreign currencies are translated into Canadian dollars using the rate of exchange prevailing on the trade date. Investment transactions and income and expenses are translated at the rate of exchange on the date of such transactions. The fair values of investments and other assets and liabilities in foreign currencies are translated at the period-end exchange rates. Forward currency contracts Forward currency contracts, if applicable, are valued at current market value on each valuation date. The value is determined as the gain or loss that would be realized, if on the valuation date, the position of the forward currency contracts were closed out. Redeemable Units The Fund's redeemable Units are classified as financial liabilities and are measured at redemption amounts. Distributions to holders of redeemable Units are recognized in Statements of Changes in Net Assets Attributable to Holders of Redeemable Units when they are authorized. The characteristics of the units are not identical and therefore do not meet the criteria in IAS 32 for classification as equity. New standards and interpretations not yet adopted: The final version of IFRS 9, Financial Instruments, was issued by the International Accounting Standards Board in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however is available for early adoption. In addition, the own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The Fund is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements in conformity with IFRS requires the Manager to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized in the period in which the estimates are revised and in any future period affected Interim Financial Statements 11

13 Fair Value Measurement of Derivatives and Securities Not Quoted in an Active Market The Fund may hold financial instruments that are not quoted in active markets. Fair values of such instruments are determined using valuation techniques and may be determined using reputable pricing sources (such as pricing agencies) or indicative prices from market makers. Broker quotes as obtained from the pricing sources may be indicative and not executable or binding. 5. MANAGEMENT OF FINANCIAL RISKS The Fund is exposed to various financial risks, including market risk (consisting of currency risk, interest rate risk, and other price risk), and liquidity risk. The Fund's overall risk management programme seeks to minimize potentially adverse effects of those risks on the Fund's financial performance by employing experienced portfolio managers and by continuous monitoring of the Fund's securities positions and markets. The Manager maintains a corporate governance structure that oversees the Fund's investment activities. The Fund may use derivative financial instruments to mitigate certain risk exposures and is currently engaged in a series of foreign exchange contracts as described below. Currency Risk Currency risk is the risk that the value of an investment will change due to fluctuations in foreign exchange rates. The Fund's net assets attributable to holders of redeemable Units are measured in Canadian dollars and payments to Unitholders are made in Canadian dollars. The Fund is exposed to currency risks as it may hold assets or have liabilities denominated in currencies other than in Canadian dollars. As at June 30, 2015, the Fund was exposed to currency risk as the value of any assets or liabilities denominated in currencies other than the Canadian dollar will vary due to changes in foreign exchange rates. The following tables summarize the Fund's exposure to foreign currency as at June 30, 2015: June 30, 2015 Investments Cash Other Net Assets/ (Liabilities)* Derivative Instruments** Total Net Asset % U.S. Dollar 114,408, ,700 (2,176,090) (96,047,907) 16,806, Brazilian Real 1,466, ,251,707 3,718, British Pound 11,357,607 85,125 - (11,591,356) (148,624) (0.10) Hong Kong Dollar 1,093,380-16,006-1,109, Euro 2,646, (1,022) - 2,645, Total 130,972, ,917 (2,161,106) (105,387,556) 24,131, * Other Net Assets includes borrowings of 23,441,609. ** Includes notional exposure from derivatives positions Interim Financial Statements 12

14 The following tables summarize the Fund s exposure to foreign currency as at December 31, 2014: December 31, 2014 Investments Cash Other Net Assets/ (Liabilities)* Derivative Instruments** Total Net Asset % U.S. Dollar 116,273, ,869 (8,263,760) (85,142,529) 23,451, Brazilian Real 1,576, ,420,304 3,996, British Pound 16,781,615 50, ,449 (10,655,408) 6,294, Hong Kong Dollar 2,809,103 39, ,848, Total 137,440, ,443 (8,146,311) (93,377,633) 36,591, * Other Net Assets includes borrowings of 28,319,173. ** Includes notional exposure from derivatives positions. As at June 30, 2015, had the Canadian dollar strengthened or weakened by 1% against each of the other currencies with all other variables remaining constant, the net assets of the Fund would have increased or decreased by 241,316 (December 31, ,915). As at June 30, 2015, the Fund had entered into forward currency contracts with a net unrealized loss of 6,056,878 (December 31, 2014 net unrealized loss of 5,884,814) to deliver currencies at specified future dates. For further information regarding forward currency contracts, see the Schedule of Derivative Instruments. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The Fund is exposed to interest rate risk from its holdings of fixed-rate debt instruments, the values of which fluctuate due to changes in prevailing levels of market interest rates. As at June 30, 2015 the Fund's debt instruments remaining terms were as follows: Debt Instruments %of Net Assets Less than 1 year 1,466, to 3 years 17,068, to 5 years 41,663, Greater than 5 years 53,906, Total 114,104, Interim Financial Statements 13

15 As at December 31, 2014 the Fund's debt instruments remaining terms to maturity were as follows: Debt Instruments %of Net Assets Less than 1 year to 3 years 18,053, to 5 years 28,937, Greater than 5 years 1, Total 117,906, Interest rate risk of the Fund is currently mitigated by the relatively short duration and high credit spread of the high yield bonds in the Portfolio. These characteristics make the Portfolio s sensitivity to interest rate risk relatively less than what would be experienced by a portfolio with longer duration investments that trade at tighter spreads to government-backed fixed income securities. It would also be possible to hedge interest rate risk by shorting government-backed fixed income securities or engaging in various interest rate derivatives. As at June 30, 2015 and December 31, 2014, the Fund had no such hedges in place. At June 30, 2015, if the prevailing interest rates had risen or declined by 0.25%, assuming a parallel shift in the yield curve, with all other variables held constant, the Fund's net assets would have decreased or increased, respectively, by approximately 775,913 (December 31, ,031,683). The Fund's sensitivity to interest rate changes was estimated using the weighted average duration of the bonds. In practice, the actual results may differ from this sensitivity analysis and the differences could be material. Other price risk Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk). Such changes may be the result of factors affecting multiple instruments traded in a market, market segment or asset class. The Fund is exposed to other price risk of securities held in the Portfolio. The Fund may take outright long or short positions in any of its investments, which may include derivative instruments for purposes consistent with its investment objectives and investment strategy and subject to its investment restrictions. As at June 30, 2015, the Fund had direct exposure to derivatives through its holdings in equity total return swaps and forward currency contracts. Please refer to Schedule of Derivative Investments which shows the underlying notional equity exposure. The Manager seeks to mitigate this risk through careful selection of securities and other financial instruments. As at June 30, 2015, had the market increased or decreased by 5% with all other variables remaining constant, the net assets of the Fund would have increased or decreased by 8,028,958 (December 31, ,216,038). Credit risk Credit risk is the risk of non-payment of scheduled interest and/or principal payments Interim Financial Statements 14

16 The Fund is exposed to several types of credit risks including the risk that one or more investments in the Portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the security experiences a decline in its financial status. As at June 30, 2015, the maximum exposure to any one debt issuer in the Portfolio was 12,193,649 (December 31, ,218,885) representing 8.59% (December 31, %) of net assets attributable to redeemable unites. The performance of the Fund is also subject to general economic and specific industry conditions that could impact the fair value of one or more debt securities in the Portfolio. Securities with lower ratings tend to be more sensitive to these kinds of risks. As at June 30, 2015 and December 31, 2014 the Fund was invested in debt securities with the following credit ratings. June 30, 2015 December 31, 2014 Debt Instruments by S&P Rating* % of Net Assets Total % of Net Assets Total A 0.00% % 6,657,042 BBB 1.03% 1,466, % 1,576,092 BB 12.08% 17,159, % 11,960,307 B 25.66% 36,452, % 36,832,714 CCC or below 29.17% 41,441, % 44,489,977 Not Rated ** 12.38% 17,584, % 16,390,547 Total 80.32% 114,104, % 117,906,679 * Or if not rated by Standard & Poor's, the most closely comparable rating from Moody's Investor Service ** Not rated by Standard & Poor's or Moody's Investors Service The Manager seeks to mitigate the above credit risk through the careful selection of investments, through the employment of experienced portfolio managers and through continuous monitoring of the Fund's investments. Another type of credit risk is exposure to the creditworthiness of the Fund's trading counterparties. All securities transactions executed by the Fund are settled upon delivery using approved brokers. The risk of payment default is considered negligible, as delivery of securities sold is only made once the broker has received payment on behalf of the Fund. Payment is not made on a purchase until the securities have been received by the broker on behalf of the Fund. The trade will fail if either party fails to meet its obligation. The Fund may enter into derivative contracts for a variety of purposes, including but not limited to, (i) for the purposes of hedging as defined in NI and (ii) as a substitute for purchasing or selling securities. Derivative contracts involve risks arising from the possible inability of counterparties to meet the terms of their contracts due to movement in currency, security values and interest rates. The Fund seeks to mitigate this risk through the careful selection of its derivative counterparties. Liquidity risk Liquidity risk is the risk that the Fund may not be able to settle or meet its obligation on time or at a reasonable price Interim Financial Statements 15

17 The Fund has current financial liabilities outstanding, including but not limited to, margin loans and interest payable on its margin loans, accounts payable and accrued liabilities. The Manager seeks to mitigate this liquidity risk by ensuring that a reasonable portion of the Fund's investments trade in active markets and can be sold readily. There can be no assurance that an adequate market for the investments will exist at all times, or that the prices at which the investments trade, accurately reflect their fair value. Low trading volumes of the investments could also make it difficult to liquidate holdings quickly. As required by IFRS 7 Financial Instruments, the Fund s financial liabilities should be categorized into relevant maturity groupings based on the remaining year as at June 30, 2015 and December 31, 2014, to the contractual maturity date. However, as all liabilities, including liabilities for redeemable units tendered for redemption as of the applicable balance sheet date (of which there were none as at June 30, 2015 and December 31, 2014), are due in less than one year, this analysis is not required in this instance. In accordance with the Fund s policy, the Investment Manager monitors the Fund s overall liquidity risk on a continuous basis. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Fund uses a three-tier hierarchy as a framework for disclosing fair value which reflects the significance of the inputs used in making the measurements. The hierarchy has the following levels: Level 1 - quoted prices in an active market (Level 1 unadjusted inputs); Level 2 - inputs other than quoted prices (Level 2 directly or indirectly derived from observational market data); Level 3 - and inputs not based on observable market data (Level 3 unobservable inputs). In addition to the above disclosure requirements, IFRS 7 Financial Instruments: Disclosures, requires disclosure of significant transfers between Levels 1 and 2 since the prior reporting period, as well as reconciliation of Level 3 assets, disclosing separately changes during the reporting period attributable to: (i) total gains or losses recognized in net income, and a description of where they are presented in the income statement, (II) purchases, sales, issues and settlements, and (III) transfers into or out of Level 3 and the reasons for those transfers. Any significant transfers between Level 1 and Level 2 are disclosed. Further, for fair value measurements in Level 3, if changing one or more type of the inputs to reasonably possible alternative assumptions would change fair value significantly, the entity shall state this fact and disclose both the effect of those changes and how the effect was calculated Interim Financial Statements 16

18 The following table provides a summary of the inputs used as at June 30, 2015and December 31, 2014, respectively, in valuing the Fund's investments carried at fair value: As at June 30, 2015 Level 1 Level 2 Level 3 Investments, at fair value: Bonds - 106,291, ,291,002 Equities 46,474, ,474,368 Term Loans - 7,813,781-7,813,781 Total Investments, at fair value 46,474, ,104, ,579,151 Derivative liabilities - (14,714,023) - (14,714,023) Total 46,474,368 99,390, ,865,128 Total As at December 31, 2014 Level 1 Level 2 Level 3 Investments, at fair value: Bonds - 107,769, ,769,330 Equities 46,414, ,414,071 Term Loans - 10,137,349-10,137,349 Total Investments, at fair value 46,414, ,906, ,320,750 Derivative liabilities - (10,705,039) - (10,705,039) Total 46,414, ,201, ,615,711 Total The carrying values of cash, subscriptions receivable, interest receivable, payable for investments purchased, redemptions payable, distributions payable, accrued expenses and the Fund s obligations for Net Assets attributable to holders of redeemable units approximates their fair values due to their short-term nature. During the Period, there were no Level 3 assets held by the Fund, nor were there significant transfers between levels. The following provides details of the categorization in the fair value hierarchy by asset classes: a) Equities The Fund's equity positions are classified as Level 1 when the security is actively traded and a reliable price is observable. b) Fixed income Fixed income includes primarily corporate bonds, and also term loans which are valued at the bid price provided by recognized investment dealers. These prices are observable and therefore the Fund's corporate bonds and term loans have been classified as Level 2. c) Derivative assets and liabilities Derivative assets and liabilities consist of forward currency contracts which are valued based primarily on the contract notional amount, the difference between the contract rate and the forward market rate for the same currency, interest rates and credit spreads. Contracts for which counterparty credit spreads are observable and reliable, or for which credit-related inputs are determined not to be significant to fair value are classified as Level Interim Financial Statements 17

19 7. BORROWINGS The Fund may use leverage to finance the purchase of certain investments. Leverage is restricted to 25% of the total assets for the Fund. Accordingly, at the time of borrowing, the maximum amount of leverage that the Fund could employ is 1.33:1 (total long positions (including leveraged positions) divided by net assets of the Fund). As at June 30, 2015, the Fund had employed leverage equal to 17.9% (16.0% - December 31, 2014) of net assets, equating to 25.4 million (23.4 million -December 31, 2014) which includes both margin payable and leverage obtained through derivatives. This minimum and maximum amount of borrowings outstanding during the six months end June 30, 2015 was 15.8 and 33.1 million, respectively. The minimum and maximum amount of borrowings outstanding during the period from May 23, 2014 to June 30, 2015 was 0 and 41.3 million, respectively. At June 30, 2015, the Fund held 18.9 million of cash (December 31, million) in collateral with a counterparty in connection with the derivative positions. The borrowings may be used to grow the Fund's investments and for working capital needs. Adding a controlled amount of leverage to the Fund is consistent with the Fund's objectives. 8. INCOME TAXES The Fund qualifies as a mutual fund trust under the Income Tax Act (Canada) and, accordingly, is not subject to tax on that portion of its income, including net realized capital gains for its taxation year that is paid or payable to Unitholders. Income tax on net realized capital gains not paid or payable will be generally recoverable by virtue of refunding provisions contained in the Income Tax Act (Canada) and provincial income tax legislation, as redemptions occur. It is the intention of the Fund to pay all net taxable income and sufficient net taxable gains so that the Fund will not be subject to income taxes. The Fund may distribute more than it earns, in which case the excess distribution is a return of capital and is not taxable to Unitholders. No provision for income taxes has been recorded in the accompanying financial statements as all income and net realized capital gains are to be distributed to the Unitholders. Capital losses realized in excess of those utilized to offset realized capital gains in the current taxation year can be carried forward indefinitely and may be applied against future years capital gains. Non-capital losses may be carried forward for a period of 20 years and applied against future years taxable income. As at June 30, 2015, the Fund had no capital losses and had no non-capital losses. 9. EXPENSES OF THE FUND An annual management fee equal to 1.25% per annum of the net asset value of the Fund, calculated daily and payable monthly in arrears plus applicable taxes, is paid to the Manager. The management fee totalled 1,049,348 and 265,596 for the six months ended June 30, 2015 and the period May 23, 2014 to June 30, 2014, respectively. The Fund pays for all ordinary expenses incurred in connection with its operation and administration, including, but not limited to, all costs of Portfolio transactions, fees payable to the Manager, administrator and other third party service providers, custodial fees, legal, accounting, audit and valuation fees, other administrative expenses and extraordinary expenses that the Fund may incur. The Manager is also eligible in each fiscal year to receive from the Fund a performance fee (the "Performance Fee") that shall be calculated and accrued monthly and be paid annually, if applicable. The Performance Fee for a given year will, subject to some exceptions regarding redemptions and issuances of Units, be equal to 20% of the amount by which the sum of the net asset value per Unit (calculated without taking into account any Performance Fee) plus distributions paid on such Units during the year exceeds 106.0% of the Threshold Amount plus applicable taxes. The Threshold Amount 2015 Interim Financial Statements 18

20 will be the greater of: (i) 10.00; and (ii) the net asset value per Unit at the end of the last fiscal year in which a Performance Fee was paid (after payment of such Performance Fee). Please refer to the Fund's Prospectus for additional information on the Performance Fee. The Performance Fee accrual totalled 0 and 0 for the six months ended June 30, 2015 and the period May 23, 2014 to June 30, 2014, respectively. 10. RELATED PARTY DISCLOSURE The Manager and Investment Manager is a wholly-owned subsidiary of Brookfield Asset Management Inc. ( Brookfield ) and manages the investment and trading activities of the Fund pursuant to a portfolio management agreement. Due to Brookfield s ability to control the Fund, Brookfield, and its affiliates over which it has the ability to exercise control or significant influence, are related parties of the Fund by virtue of common control or common significant influence. Transactions with related parties, including investment transactions, are conducted in the normal course of operations and are recorded at exchange amounts, which are equivalent to normal market terms. Please refer to Note 9, which outlines the fees paid to the Manager by the Fund. During the period May 23, 2014 to December 31, 2014, the Fund entered into inter-fund trades with New Horizons Master Fund (the Master Fund ) which is a related party of the Fund due to common control. The Investment Manager determined that these inter-fund trades complied with the Fund's and the Master Fund s investment restrictions and that owning the securities was consistent with the Fund's and Master Fund s investment objectives. The Manager sought the approval of the Fund's and Master Fund s Independent Review Committee (the IRC ) of the proposed inter-fund trades. The IRC provided its approval on the proposed inter-fund trades on the Manager s recommendation. During the six months ended June 30, 2015, Brookfield purchased 13,550 units of the Fund in the open market. As at June 30, 2015, Brookfield and its affiliates owned a 4.1% (December 31, %) interest in the Fund. 11. REDEEMABLE UNITS AND NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS The Fund is authorized to issue an unlimited number of redeemable and transferable Units of a single class, each of which represents an equal, undivided interest in the net assets of the Fund. The Declaration of Trust provides that the Fund may not issue additional Units except: (i) for net proceeds not less than 100% of the net asset value per Unit calculated as of the close of business on the business day immediately prior to the pricing of such offering; (ii) by way of Unit distributions; or (iii) with the approval of Unitholders. Commencing in July 2016 to and including July 2018, Units may be surrendered annually prior to 5:00 p.m (Toronto time) on the 15th business days prior to the annual redemption date, if and only if the annual redemption condition (the Annual Redemption Condition ), described below, has been met in such year. Units properly surrendered for redemption during the Notice Period will be redeemed on the last business day in July of each year and the Unitholder will receive a redemption price per Unit equal to 100% of the net asset value per Unit as determined on the Annual Redemption Date less any costs associated with the redemption Interim Financial Statements 19

21 The Annual Redemption Condition states that Units may only be redeemed on an Annual Redemption Date if the simple average of the Net Asset Values of the Units on each business day occurring in the month of August preceding the Annual Redemption Date is less than Notwithstanding the Annual Redemption Condition, Units may be redeemed at the option of Unitholders on the last business day of July 2019 and on the last business day of July each year thereafter. Changes in the number of issued redeemable Units outstanding for the Fund for the six months ended June 30, 2015 and the period ended May 23, 2014 to December 31, 2014 consisted of the following: For the period ended June 30, 2015 For the period from May 23, 2014 to December 31, 2014 Beginning balance 19,200,000 - Subscription of Units - 19,200,000 Redemption of Units - - Number of Units outstanding, end of period 19,200,000 19,200,000 Capital management Units issued and outstanding represent the capital for the Fund. The Fund has no restrictions or specific capital requirements and is authorized to issue an unlimited number of transferable Units. Restrictions and specific requirements on the redemption of Units are described above. The Statements of Changes in Net Assets and the above table outline the relevant changes of the Units for the Period. The Fund manages its capital in accordance with its investment objectives and strategies and the risk management practices outlined in Note 5 while maintaining sufficient liquidity to meet Unitholder redemptions. 12. DISTRIBUTIONS In accordance with the Fund's investment objective to provide Unitholders with quarterly cash distributions, the Fund intends to make quarterly distributions to Unitholders of record on the last business day of March, June, September and December (each, a Distribution Record Date ). Distributions will be paid on a business day designated by the Manager that will be no later than the 15th business day of the month following the Distribution Record Date. The Fund has adopted a distribution reinvestment plan which shall provide that all quarterly cash distributions made by the Fund shall, at the election of each Unitholder, be automatically reinvested in additional Units on each Unitholder s behalf in accordance with the terms of the plan. The initial quarterly distributions are targeted to be 0.15 per Unit (0.60 per annum representing an annual cash distribution of 6.0% based on the per Unit issue price). During the period ended June 30, 2015, the Fund declared two quarterly cash distributions of 0.15 per Unit each. Distributions payable as at June 30, 2015 totalled 2,880,000. The distribution was subsequently paid to Unitholders in early July The Fund does not have a fixed quarterly distribution. In any year after such distributions, there would otherwise remain in the Fund additional operating profit or net realized capital gains, the Fund intends to make, on or before December 31 of that year, a special distribution of such portion of the remaining net income and net realized capital gains as is necessary to ensure the Fund will not be liable for income tax under the Income Tax Act (Canada) Interim Financial Statements 20

22 13. FINANCIAL INSTRUMENTS BY CATEGORY The following table presents the carrying amounts of the Fund's financial assets by category as at June 30, 2015 and December 31, 2014, respectively. All of the Fund's financial liabilities, other than its net assets attributable to holders of redeemable units: Financial Assets as at June 30, 2015 Held for Trading At FVTPL Designated at Inception Total At Amortized Cost Financial assets at fair value through profit or loss - 160,579, ,579,151 - Cash and cash equivalents ,288,490 Collateral cash ,938,987 Due from broker ,130 Accrued investment income ,632,739 Total - 160,579, ,522,273 22,860,216 Financial Liabilities as at June 30, 2015 Held for Trading Designated at Inception Unrealized depreciation on forward currency contracts 6,056,878-6,056,878 - Swap contracts 8,657,145-8,657,145 - Financial liabilities at fair value through profit or loss ,441,609 Due to broker ,880,000 Accounts payable and accrued liabilities ,537 Total 14,714,023-14,714,023 27,014,146 Total Total Total Financial Assets as at December 31, 2014 Held for Trading At FVTPL Designated at Inception Total At Amortized Cost Financial assets at fair value through profit or loss - 164,320, ,320,750 - Cash and cash equivalents ,559,709 Collateral cash ,126,612 Accrued investment income ,421,273 Total - 164,320, ,320,750 22,860,216 Financial Liabilities as at December 31, 2014 Held for Trading Designated at Inception Unrealized depreciation on forward currency contracts 5,884,814-5,884,814 - Swap contracts 4,820,225-4,820,225 - Financial liabilities at fair value through profit or loss ,319,173 Due to broker ,880,000 Accounts payable and accrued liabilities ,731 Total 10,705,039-10,705,039 32,103,904 Total Total Total 2015 Interim Financial Statements 21

23 The following table presents the net gains (losses) on financial instruments at FVTPL by category for the period ended June 30, 2015 and June 30, 2014: Category Net gains (losses) Net gains (losses) Financial assets and liabilities at FVTPL: Held for Trading (11,375,305) 1,608,473 Designated at Inception 6,340,336 (5,164) Total Financial assets and liabilities at FVTPL (5,034,969) 1,603,309 The Fund entered into various master netting arrangements in connection with its forward currency and swap derivative contracts. These agreements, such as the International Swaps and Derivatives Association agreements, do meet the criteria for offsetting in the Statements of Financial Position and allow for the related amounts to be settled on a net basis. Other financial assets and financial liabilities do not meet the criteria for offsetting but may be set off under certain circumstances, such as bankruptcy or termination of the contracts. As at June 30, 2015, the Fund had no financial instruments that were offset on the Fund s Statement of Financial Position. The following table presents the recognized financial instruments that are offset, or subject to enforceable master netting agreements or other similar agreements, as at December 31, The "Net amount presented" column represents the amount after offsetting, as stated in the Fund's Statements of Financial Position. The "Net" column represents what the impact on the Fund's Statements of Financial Position would be if all set-off rights were exercised. Financial assets and liabilities Amounts offset Amounts not offset Gross assets/liabilities Gross assets/liabilities offset Net Amounts presented Financial Instruments Cash collateral received Net December 31, 2014 Net unrealized depreciation on forward currency contracts (5,967807) 82,993 (5,884,814) - - (5,884,814) Swap Contracts (4,820,225) - (4,820,225) - - (4,820,225) (10,788,032) 82,993 (10,705,039) - - (10,705,039) 14. EVENTS AFTER STATEMENT OF FINANCIAL POSITION DATE Management has evaluated subsequent events in the preparation of the Fund's financial statements and has determined that other than the items listed herein, there are no events that require recognition or disclosure in the condensed interim financial statements Interim Financial Statements 22

24 FUND INFORMATION MANAGER AND INVESTMENT MANAGER Brookfield Investment Management (Canada) Inc. Gail Cecil Director, President & Chief Executive Officer Jonathan Tyras Director, Chief Financial Officer, Treasurer, and Secretary Craig Noble Director INDEPENDENT REVIEW COMMITTEE John P. Barratt (Chair) Corporate Director James L. R. Kelly President Earth Power Inc. Frank Lochan Corporate Director CONTACT INFORMATION Brookfield Select Opportunities Income Fund welcomes inquiries from Unitholders, analysts, media representatives or other interested parties. Manager, Investment Manager, and Trustee Brookfield Investment Management (Canada) Inc. Brookfield Place 181 Bay Street, Suite 300 Toronto, Ontario M5J 2T3 t w. Transfer Agent and Registrar Unitholder inquiries relating to distributions, address changes and Unitholder account information should be directed to the Fund s Transfer Agent: Valiant Trust Company 710, 130 King Street West Toronto, Ontario M5X 1A9 t (toll-free North America) f (toll-free North America) International e. inquiries@valianttrust.com w Interim Financial Statements 23

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