BMO Growth & Income Fund (the Fund )

Transcription

1 (the Fund ) For the period ended June 30, 2014 Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio Manager: Guardian Capital LP (the portfolio manager ) 2014 Semi-Annual Management Report of Fund Performance This semi-annual management report of fund performance contains financial highlights but does not contain either semi-annual or annual financial statements of the Fund. If the semi-annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling , by writing to us at BMO Investments Inc., 1 First Canadian Place, 43rd Floor, 100 King Street West, Toronto, Ontario, M5X 1A1 or by visiting our website at or SEDAR at You may also contact us using one of these methods to request a copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Results of Operations Over the six-month period ended June 30, 2014 (the period ), Advisor Series units of the Fund returned 10.72%. Please see Past Performance for information on the performance returns of the Fund s other series. During the period, Canadian equity investors enjoyed the strongest rally in five years. The S&P/TSX Composite Total Return Index (the Index ) closed near a record high, advancing 6.4% which brought the six month total return to 12.9%. Bond returns were also strong, benefitting from a decline in 10-year Canada yields to 2.3% from 2.6%. Both markets took in stride the U.S. Federal Reserve Board s (the Fed ) tapering (i.e., a reduction in the Fed s quantitative easing or bond-buying program) and the central bank s pledge to maintain short-term interest rates at very low levels for an extended time frame. The Fund s holdings in the Financials sector, and being heavily overweight in the Energy sector while holding no precious metal securities, held the key to Fund performance in REITs and bank holdings each had approximately a 15-16% weighting in the Fund, while the Energy sector was approximately a 35% weight. The Fund maintained a substantial overweight in the Energy sector (mid-3 versus the Index of mid-2 range) and this was the strongest contributor to positive returns. The Energy sector produced a 19.2% return during the first six months of Only a few important tactical changes were undertaken in the portfolio during the period, primarily to enhance the diversification and growth potential of the Fund. Additions to the portfolio of Calfrac Well Services Ltd. and Encana Corporation increased natural gas exposure to a heavily oil biased portfolio. The addition of Bank of Nova Scotia reduced the concentration of having two very large bank positions, Royal Bank of Canada and Toronto-Dominion Bank. The addition of Bank of Nova Scotia was funded by a reduction of the REITs weighting from just over 2 to about 14-15%, which reduced portfolio concentration. The sale of CapReit reduced the number of REITs positions to five which the portfolio manager believes is an appropriate diversification for a 15% sector weighting. The Fund distributes a fixed amount per unit each month, consistent with the Fund s stated objective of providing a stable cash flow to its unitholders. A portion of a distribution may consist of a return of capital, this portion may be significant, and will occur when the income earned by the Fund per unit is less than the fixed amount of the distribution. Distributions are expected to continue to include return of capital until there is a general improvement in the economy, an increase in interest rates, or there is a change in the fixed amount to be distributed. Management Fee Change Effective April 3, 2014, the management fee on Series F units was reduced to 0.5 from 0.75%. Recent Developments While the portfolio manager would not be surprised if equity prices move slightly higher from current levels, they still firmly believe stocks will struggle as the Fed stops its bond-buying program. The unwinding of the 3rd round of

2 quantitative easing by the Fed makes refinancing debt at continuously lower interest rates less likely, however, higher stock prices makes share repurchase programs and acquisitions less attractive. Significant Accounting Changes Resulting from our Adoption of IFRS Effective January 1, 2014, the Fund adopted International Financial Reporting Standards ( IFRS ) as its basis of accounting. The semi-annual financial statements for the period ended June 30, 2014, are the first set of financial statements prepared on an IFRS basis. The adjustments made to reflect the impact of the change from Canadian generally accepted accounting principles ( Canadian GAAP ) to IFRS are presented in note 8 to the financial statements. Key changes to the financial statements as a result of the implementation of IFRS are: Statement of Financial Position replaced the Statement of Net Assets: - The Fund s unitholders investments in the units of the Fund did not qualify for equity classification under IFRS and have been classified as a financial liability for financial reporting purposes. - Classification of financial instruments: derivatives and short positions have been classified as held for trading while all other financial instruments have been designated as fair valued through profit and loss. Following adoption of IFRS by the Fund for financial reporting purposes, the Fund now fair values its investment securities traded on an exchange at close price, which is determined as the price within the bid ask range that represents the best estimate of fair value. Statement of Comprehensive Income replaced Statement of Operations: - The Fund accounts for interest income using the effective interest rate method, rather than the coupon method previously used under Canadian GAAP. Statement of Changes in Net Assets Attributable to Holders of Redeemable Units replaced the Statement of Changes in Net Assets and the Fund now presents a Statement of Cash Flows. Other notable changes to the financial statement notes include additional or enhanced information in the notes to the financial statements, including a more detailed note and reconciliation on the Fund s transition from Canadian GAAP to IFRS. RELATED PARTY TRANSACTIONS BMOII, an indirect, wholly-owned subsidiary of Bank of Montreal, is the Manager of the Fund. From time to time, the Manager may, on behalf of the Fund, enter into transactions or arrangements with, or involving, other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Manager (each a Related Party ). The purpose of this section is to provide a brief description of any transaction involving the Fund and a Related Party. Buying and Selling Securities Investing in Common Shares or Preferred Shares of the Bank of Montreal During the period, the Manager relied on an approval and standing instruction provided by the Fund s Independent Review Committee ( IRC ) to enable the Fund to make investments in common shares or preferred shares of Bank of Montreal ( BMO ), an affiliate of the Manager (each investment, a Related Party Transaction ). In accordance with the IRC s approval and standing instruction, in making a decision to cause the Fund to make a Related Party Transaction, the Manager and portfolio manager of the Fund are required to comply with the Manager s written policies and procedures governing the Related Party Transaction and report periodically to the IRC, describing each instance that the Manager and/or portfolio manager relied on the approval and standing instruction and their compliance or non-compliance with the governing policies and procedures. The governing policies and procedures are designed to ensure the Related Party Transaction (i) is made free from any influence of BMO or an associate or affiliate of BMO and without taking into account any considerations relevant to BMO or an associate or affiliate of BMO, (ii) represents the business judgment of the portfolio manager, uninfluenced by considerations other than the best interests of the Fund, and (iii) achieves a fair and reasonable result for the Fund. Brokerage Commissions The Fund pays standard brokerage commissions at market rates to BMO Nesbitt Burns Inc., an affiliate of the Manager, for executing a portion of its trades. The brokerage commissions charged to the Fund (excluding exchange and other fees) during the periods were as follows: June 30, 2014 June 30, 2013 ($) ($) Total brokerage commissions $ 493, ,850 Brokerage commissions paid to BMO Nesbitt Burns Inc. $ 58,375 54,046

3 Administration Services The Manager and other members of BMO Financial Group provide the Fund with certain administration services, such as those relating to fund accounting, record keeping, order processing, issuing and distributing account statements and general administrative support. Further details about the Fund s administration fees can be found in the Fund s most recent simplified prospectus. The expenses charged to the Fund in respect of such services during the period amounted to $350,510 (2013 $634,303). Dealer Compensation The Manager markets and distributes the Fund through Bank of Montreal branches and/or (depending on the series) through registered dealers and brokers including BMO InvestorLine Inc. and BMO Nesbitt Burns Inc., both affiliates of the Manager. The Manager pays to these affiliates a service fee called a trailing commission based on the average daily value of the units and/or shares that are held in investor accounts. This service fee is paid monthly or quarterly and varies by purchase option and by series. Management Fees The Manager is responsible for the day-to-day management of the business and operations of the Fund. The Manager monitors and evaluates the Fund s performance, pays for the investment advice provided by the Fund s portfolio manager and provides certain administrative services required by the Fund. As compensation for its services the Manager is entitled to receive a management fee payable monthly, calculated based on the daily net asset value of each series of the Fund at the maximum annual rate set out in the table below. As a Percentage of Management Fees General Maximum Annual Administration, Management Dealer Investment Fee Rate Compensation Advice and Profit % % % Advisor Series Units Series T5 Units Series T8 Units Series F Units Classic Series Units FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the periods indicated. The Fund s Net Assets per Unit (1) Advisor Series Units Net assets, beginning of period (5) $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ 0.30 Return of capital $ Total annual distributions (4) $ Net assets, end of period (5) $ Series T5 Units (6) Net assets, beginning of period (5) $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ 0.08 From dividends $ From capital gains $ 0.39 Return of capital $ Total annual distributions (4) $ Net assets, end of period (5) $

4 Series T8 Units Net assets, beginning of period (5) $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ 0.27 Return of capital $ Total annual distributions (4) $ Net assets, end of period (5) $ Series F Units Net assets, beginning of period (5) $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ 0.31 Return of capital $ Total annual distributions (4) $ Net assets, end of period (5) $ Classic Series Units Net assets, beginning of period (5) $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ 0.36 Return of capital $ Total annual distributions (4) $ Net assets, end of period (5) $ * Initial net assets. (1) The information is derived from the Fund s audited annual financial statements and unaudited June 30, 2014 semi-annual financial statements. Prior to 2014, the net assets per unit presented in the financial statements differed from the net asset value calculated for fund pricing purposes. An explanation of these differences can be found in the notes to the Fund s financial statements. (2) Includes commissions and portfolio transaction costs. Prior to 2014, withholding taxes were not included in expenses as they were included in revenue. (3) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (4) Distributions were paid in cash or reinvested in additional units of the Fund, or both, where applicable. (5) Net assets prior to 2014 were calculated under Canadian GAAP. Net assets in 2014 were calculated under IFRS. (6) The information shown in this column is for the period beginning January 4, 2010 (the series inception date) and ending December 31, 2010.

5 Ratios and Supplemental Data Advisor Series Units Total net asset value (000s) (1) $ 380, , , , , ,257 outstanding (000s) (1) 38,345 40,390 43,898 46,482 48,195 56,891 (2) % before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series T5 Units (5) Total net asset value (000s) (1) $ 1,552 1,664 1, outstanding (000s) (1) (2) % before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series T8 Units Total net asset value (000s) (1) $ 12,216 11,942 11,378 8,053 7,821 3,228 outstanding (000s) (1) 1,377 1,433 1,420 1, (2) % before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series F Units Total net asset value (000s) (1) $ 40,740 36,175 31,020 30,294 32,230 28,797 outstanding (000s) (1) 3,889 3,769 3,498 3,554 3,648 3,810 (2) % before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Classic Series Units Total net asset value (000s) (1) $ 50,027 47,702 47,540 49,146 58,104 59,001 outstanding (000s) (1) 4,160 4,315 4,616 4,963 5,668 6,735 (2) % before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ (1) This information is provided as at June 30 or December 31 of the period shown. (2) The management expense ratio of a particular series is calculated based on all expenses allocated to the series, as applicable, including all taxes and interest expenses but excluding brokerage commissions and other portfolio transaction costs, divided by the average daily net asset value of that series, annualized. BMOII may reduce the effective management fees payable by some unitholders by reducing the management fees it charges to the Fund and directing the Fund to make management fees distributions to these unitholders in amounts equal to the amounts of the management fees reduction. The management expense ratio does not take into account the reduction in management fees due to management fees distributions to unitholders. (3) BMOII absorbed certain expenses or waived certain fees otherwise payable by a series. In doing so, BMOII attempts to maintain the overall MER of the Fund at a relatively consistent level. BMOII may discontinue the absorption or waiver at any time. (3) The trading expense ratio represents the total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 10 is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher a fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. (5) The information shown in this column is for the period beginning January 4, 2010 (the series inception date) and ending December 31, 2010.

6 PAST PERFORMANCE The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional units or shares of the Fund and is based on the net asset value of the Fund. The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember, how the Fund has performed in the past does not indicate how it will perform in the future. The returns of each series may differ from one another for a number of reasons, including if the series was not issued and outstanding for the entire reporting period and because of the different levels of fees and expenses allocated and payable by each series. Year-by-Year Returns The following bar charts show the performance for each series of the Fund for each of the financial years shown and for the six-month period ended June 30, The charts show in percentage terms how an investment made on the first day of each financial year would have increased or decreased by the last day of the financial year. Advisor Series Units Series T8 Units (1) Series F Units Classic Series Units Series T5 Units 5 (1) Return from January 8, 2008 to December 31, (2) Return from January 4, 2010 to December 31, (3) For the six-month period ended June 30, (2)

7 SUMMARY OF INVESTMENT PORTFOLIO As at June 30, 2014 % of Net Portfolio Allocation Asset Value Financials 37.9 Energy 35.0 Industrials 7.3 Money Market Investments 5.8 Materials 4.7 Consumer Discretionary 4.1 Telecommunication Services 2.3 Information Technology 2.2 Cash/Receivables/Payables 0.7 Total Portfolio Allocation % of Net Top 25 Holdings Asset Value Issuer Toronto-Dominion Bank, The, 5.9 Government of Canada, Treasury Bills, 0.918% Jul 31, Bank of Nova Scotia 4.8 Royal Bank of Canada 4.7 Canadian National Railway Company 4.3 Magna International Inc. 4.1 Crescent Point Energy Corp. 3.7 ARC Resources Ltd. 3.3 Inter Pipeline Ltd. 3.2 RioCan REIT 3.2 H&R REIT 3.2 Manulife Financial Corporation 3.2 Power Financial Corporation 3.1 Canadian Natural Resources Limited 3.0 Westshore Terminals Investment Corporation 3.0 CI Financial Corporation 2.9 Canadian REIT 2.8 Chartwell Retirement Residences 2.8 AltaGas Ltd. 2.8 EnCana Corporation 2.6 Suncor Energy Inc. 2.6 Keyera Corp. 2.4 Pembina Pipeline Corporation 2.4 Calfrac Well Services Ltd. 2.4 Cenovous Energy Inc. 2.3 Top Holdings as a Percentage of Total Net Asset Value 83.5 Total Net Asset Value $485,249,148 The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

8 BMO Investments Inc. First Canadian Place, 43rd Floor, 100 King Street West Toronto, ON M5X 1A1 For more information please call This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, the effects of competition in the geographic and business areas in which the Fund may invest in and the risks detailed from time to time in BMO Mutual Funds simplified prospectus. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, BMO Investments Inc. does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Registered trade-mark of Bank of Montreal, used under licence. Trade-mark of Bank of Montreal, used under licence. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal.