20FEB Semi-Annual Report. to Unitholders

Transcription

1 20FEB Semi-Annual Report to Unitholders June 30, 2014

2 Notice: The unaudited interim financial statements of the Fund have been prepared by and are the responsibility of the Fund s management. The Fund s independent auditor has not reviewed these financial statements.

3 Moneda Latam Fixed Income Fund REPORT TO UNITHOLDERS The following presents the financial results of Moneda Latam Fixed Income Fund (the Fund ) for the six months ended June 30, Fund Structure The Fund is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of Class A Units and Class U Units (collectively the Units and each, a Unit ) with investment exposure to a diversified portfolio (the Portfolio ) of fixed income securities of companies located in, or with significant operations in, Latin America, primarily denominated in U.S. dollars. The Fund s investment objectives are to: (i) preserve and enhance the net asset value (the Net Asset Value or NAV ) of the Fund; and (ii) provide Unitholders with quarterly tax-advantaged distributions consisting primarily of returns of capital, in each case through exposure to the Porfolio by virtue of the Forward Agreement (as defined herein). The NAV for the Class A Units is calculated in Canadian dollars and for the Class U Units, in U.S. dollars. To pursue its investment objectives, the Fund entered into two forward purchase agreements (collectively, the Forward Agreement ) with The Bank of Nova Scotia (the Counterparty ) pursuant to which the Counterparty has agreed to pay the economic return provided by the Portfolio. The Portfolio is held by MLF Trust. Substantially all of the value of the Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U Units are designed for investors wishing to hold their investment in U.S. dollars. As a result of the forgoing, the Net Asset Value of the Units will vary depending on the performance of MLF Trust by virtue of the Forward Agreement and will also vary depending on the expenses allocated to, and distributions paid in respect of, the particular class of Units of the Fund. The Fund partially pre-settles the Forward Agreement in order to fund: (i) quarterly distributions on the Units; (ii) redemptions of Units from time to time; and (iii) operating expenses and other liabilities of the Fund. High Rock Capital Management Inc. (the Portfolio Manager ) provides portfolio management services required by the Fund and MLF Trust and appointed Moneda International Inc. as the sub-advisor (the Sub-Advisor ) for MLF Trust to perform some of its services. The Portfolio Manager is responsible for ensuring that the trading and investment activities of the Portfolio are in compliance with MLF Trust s investment objectives, strategy and restrictions. MLF Trust has leveraged exposure to the Portfolio through a revolving loan facility with Scotia Capital Inc. to borrow up to 25% of the total assets of MLF Trust at the time of borrowing. As at June 30, 2014, MLF Trust had borrowed $28.6 million or 20.4% (December 31, 2013 $25.3 million or 18.3%) of the total assets (net of short positions) of MLF Trust. The Class A Units of the Fund are listed for trading on the Toronto Stock Exchange under the symbol MLF.UN. The Class U Units are not listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes. 1

4 Moneda Latam Fixed Income Fund Tax Changes Affecting Forward Agreement Structures In the budget announced March 21, 2013, the government proposed and enacted to eliminate the tax benefits associated with forward agreements used by some investment funds to achieve capital gains treatment on income that would otherwise be treated as ordinary income. The government refers to these as character conversion transactions. Distributions from investment funds which enter into a forward agreement will now generally be taxed as income at the time of distribution as opposed to returns of capital which are not generally taxable at time of receipt and capital gains. This measure will apply to forward agreements entered into on or after March 21, The less favorable tax treatment will also apply to forward agreements entered into before March 21st if the terms of the agreement are extended or modified. This measure does not immediately affect the Fund as it entered into its forward agreement before March 21, 2013 and as such, the distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on June 19, Report from Portfolio Manager The Latin American high yield corporate debt market, as measured by the CEMBI Broad Latin High Yield Index (the Index ), rose 7.6% over the first half of The Fund lagged this performance posting a total return of 4.1% and 3.7% for the Class A and U Units, respectively. This performance can be explained by: (i) On the positive side, a good allocation at the country level, with long positions in Argentina and Peru significantly contributing to the positive performance; and (ii) Good selection at the security level in most countries offset by a single credit event in Mexico that explains a significant portion of the underperformance versus the Index. As of the end of June 2014, the largest country allocations were Brazil, Mexico, Argentina Dominican Republic and Peru, with the last three countries being the largest overweights versus the Index. Market Outlook As we ended June 2014, the economies of developed markets kept expanding with the support of their central banks. This has brought volatility levels to record lows and asset prices to new highs. In this context, global interest rates have unexpectedly dropped, with the yield on 10 year treasuries falling 50 basis points year-to-date. We are pleased to see how the market has adjusted to the news flow coming from the US Federal Reserve and its tapering program and we are confident that Latin-American debt markets will be able to cope effectively with the normalization of global rates. Latin-American debt funds which had experienced investment outflows since April 2013, started seeing a return of money flows into Latin-American debt securities in late March It is important to mention that dedicated institutional investors kept allocating money into the region even in the worst periods of outflows 2

5 Moneda Latam Fixed Income Fund which were dominated by retail fund outflow. This is a positive sign in our view as it shows the commitment of dedicated investors to the region and the asset class. We expect this support to continue for the time being. Latin-American currencies have shown uneven performances. The Brazilian real, Colombian and Mexico pesos have appreciated while all other currencies have depreciated albeit at a moderated pace. Countries in the region are entering a period of change. Chile has a newly elected government with an aggressive social agenda while the Colombian people have chosen to re-elect President Santos, therefore supporting the continuity of his economic agenda. Mexico is approving an aggressive set of economic reforms that should foster growth in the medium term, eliminating significant bottlenecks that have hampered the economy for many years, especially in the labor, energy and telecommunication sectors. Similarly, Brazil is entering an election period which will challenge the economic leadership of President Rousseff and hopefully bring the change and economic reforms that are needed. Argentina is finally dealing with issues that have been long overdue such as utility services pricing and YPF expropriation. Argentina s negotiation with holdouts on their debt restructuring is the last standing issue which we expect to be addressed and hopefully solved. In this context we continue to find value in corporates throughout the region supported by attractive spreads coupled with reasonable leverage ratios. Financial Performance The net assets attributable to Unitholders were $9.68 per Class A Unit and US$9.62 per Class U Unit at June 30, 2014 as compared to $9.67 per Class A Unit and US$9.65 per Class U Unit at December 31, The increase was due to appreciation and interest earned on Portfolio offset by the Fund s operating expenses including Forward Agreement fees and distributions paid on the Units. Distributions The Fund does not have a fixed distribution but intends to pay quarterly distributions through partial pre-settlements of the Forward Agreement based on, among other things, the interest earned on the Portfolio less actual and expected expenses of the Fund and MLF Trust. For the six month period ended June 30, 2014, the Fund declared distributions of $4.17 million (2013 $4.40 million) comprised of $3.88 million (2013 $4.07 million) to Class A Unitholders or $0.375 (2013 $0.375) per Class A Unit and US$0.29 million (2013 US$0.33 million) to Class U Unitholders or US$0.375 (2013 $0.375) per Class U Unit. Interest earned on the Portfolio funded the distributions and expenses of the Fund and MLF Trust. For the six month period ended June 30, 2014, $4.1 million was available for distribution comprised of interest earned on the Portfolio of $5.48 million offset by expenses of $1.38 million. This report, along with the accompanying financial statements of the Fund, is respectfully submitted to you on behalf of the Board of Directors of MLF Ltd., Trustee for the Moneda Latam Fixed Income Bond Fund. Toronto, Canada August 7, MAY Brian D. McChesney President and Chief Executive Officer 3

6 Moneda Latam Fixed Income Fund STATEMENTS OF FINANCIAL POSITION (unaudited) As at June 30 December 31 January Assets Current Assets Forward Agreement, at fair value (note 4) $ 107,569,094 $ 107,398,985 $ 48,485,935 Receivable from Counterparty (note 4) 2,299,319 2,318,060 1,076,943 Cash 7,041 7,227 13, ,875, ,724,272 49,576,241 Liabilities Current Liabilities Distributions payable 2,084,285 2,083, ,791 Accrued liabilities (note 7) 214, , ,092 Issue costs payable 5,945 2,298,983 2,304,827 1,132,828 Net Assets attributable to Unitholders $ 107,576,471 $ 107,419,445 $ 48,443,413 Net assets attributable to Unitholders per class: Class A $ 100,130,795 $ 99,977,739 $ 44,568,853 Class U (in equivalent CAD$) $ 7,445,676 $ 7,441,706 $ 3,874,560 Class U USD $ 6,946,661 $ 7,030,732 $ 3,887,064 Number of Units outstanding (note 5) Class A 10,345,504 10,338,753 4,661,917 Class U 722, , ,970 Net assets attributable to Unitholders per Unit Class A $ 9.68 $ 9.67 $ 9.56 Class U (in equivalent CAD$) $ $ $ 9.47 Class U USD $ 9.62 $ 9.65 $ 9.50 See accompanying notes to financial statements. 4

7 Moneda Latam Fixed Income Fund STATEMENTS OF COMPREHENSIVE INCOME For the six months ended June 30 (unaudited) Income Interest $ $ 156 Forward Agreement Net realized gain on partial pre-settlements of Forward Agreement 257, ,502 Unrealized appreciation on Forward Agreement 4,505,667 2,283,394 Forward Agreement fees (note 7) (210,428) (208,191) Net gain on Forward Agreement 4,552,575 2,395,705 Total Income, net 4,552,575 2,395,861 Expenses Management fee (note 7) 147, ,171 Unitholders information costs 25,588 15,949 Directors fees 11,343 8,136 Audit fees 8,331 9,890 Listing fees 8,033 5,788 Insurance premiums 6,546 6,398 Transfer agent fees 4,413 2,958 Legal fees 3,372 2,564 Independent Review Committee fees 1,860 1,850 Miscellaneous 5,843 4, , ,366 Increase in net assets attributable to Unitholders $ 4,329,771 $ 2,187,495 Increase in net assets attributable to Unitholders per Class Class A $ 3,971,064 $ 1,586,892 Class U 358, ,603 $ 4,329,771 $ 2,187,495 Increase in net assets attributable to Unitholders per Unit Class A $ 0.38 $ 0.17 Class U $ 0.49 $ 0.78 See accompanying notes to the financial statements. 5

8 Moneda Latam Fixed Income Fund STATEMENTS OF CASH FLOWS For the six months ended June 30 (unaudited) Operating activities Increase in net assets attributable to Unitholders $ 4,329,771 $ 2,187,495 Adjustments for: Net realized gain on partial pre-settlements of Forward Agreement (257,336) (320,502) Unrealized appreciation on Forward Agreement (4,505,667) (2,283,394) Proceeds on partial pre-settlements of Forward Agreement 4,592,894 4,826,414 Receivable from Counterparty 18,741 (1,360,012) Accrued liabilities (6,327) 80,443 Net cash flow provided by operating activities 4,172,076 3,130,444 Financing activities Distributions paid to Unitholders (4,172,262) (3,148,819) Purchases under Forward Agreement (66,954,514) Proceeds on issuance of Units 70,293,214 Issue costs paid (3,290,326) Net cash flow used in financing activities (4,172,262) (3,100,445) Net increase (decrease) in cash (186) 29,999 Cash, beginning of period 7,227 13,363 Cash, end of period $ 7,041 $ 43,362 See accompanying notes to the financial statements. 6

9 Moneda Latam Fixed Income Fund STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS For the six months ended June 30 (unaudited) Net assets attributable to Unitholders, beginning of period: Class A $ 99,977,739 $ 44,568,853 Class U 7,441,706 3,874, ,419,445 48,443,413 Increase in net assets attributable to Unitholders Class A 3,971,064 1,586,892 Class U 358, ,603 4,329,771 2,187,495 Unit Transactions (note 5): Conversion of Units Class A 60,340 1,044,158 Class U (60,340) (1,044,158) Proceeds from issue of units Class A 64,721,000 Class U 5,572,214 70,293,214 Issue costs Class A (3,067,391) Class U (267,163) (3,334,554) Financing unit transactions: Distributions to Unitholders (return of capital) Class A (3,878,348) (4,074,089) Class U (294,397) (326,057) (4,172,745) (4,400,146) Net assets attributable to Unitholders, end of period: Class A 100,130, ,779,423 Class U 7,445,676 8,409,999 $ 107,576,471 $ 113,189,422 See accompanying notes to the financial statements. 7

10 Moneda Latam Fixed Income Fund NOTES TO FINANCIAL STATEMENTS June 30, 2014 (unaudited) 1. GENERAL INFORMATION Moneda Latam Fixed Income Fund (the Fund ) is a closed-end investment fund established as a trust under the laws of the Province of Ontario and is governed by a declaration of trust dated May 30, 2012 (the Declaration of Trust ). The address of the Fund s registered office is 40 King Street West, Toronto, Ontario, M5W 2X6. Pursuant to this Declaration of Trust, MLF Ltd. acts as the trustee (the Trustee ) and is responsible for managing the affairs of the Fund. High Rock Capital Management Inc. (the Portfolio Manager ) provides any portfolio management services required by the Fund and MLF Trust (see below). The Portfolio Manager has appointed Moneda International Inc. ( Moneda or Sub-Advisor ) to perform some of its services and has responsibility for ensuring that the trading and investment activities of the Portfolio (as defined below) are in compliance with MLF Trust s investment objectives, strategy and restrictions. Scotia Managed Companies Administration Inc. ( SMCAI or the Manager ), a wholly-owned subsidiary of Scotia Capital Inc. which in turn is a wholly-owned subsidiary of The Bank of Nova Scotia, manages the administration of the Fund. The Fund provides holders (the Unitholders ) of Class A units and Class U units (collectively, the Units and each, a Unit ) of the Fund with investment exposure, on a tax-advantaged basis, to a diversified portfolio (the Portfolio ) of high yield fixed income securities of companies located in, or with significant operations in, Latin America, primarily denominated in U.S. dollars. The Fund s investment objectives are to: (i) preserve and enhance the net asset value (the Net Asset Value or NAV ) of the Fund; and (ii) provide Unitholders with quarterly tax-advantaged distributions consisting primarily of returns of capital, in each case through exposure to the Portfolio by virtue of the Forward Agreement (defined below). To pursue its investment objectives, the Fund entered into two forward purchase agreements (collectively, the Forward Agreement ) with The Bank of Nova Scotia (the Counterparty ) pursuant to which the Counterparty has agreed to pay the economic return provided by the Portfolio. The Forward Agreement is scheduled to terminate on June 19, The Portfolio is held by MLF Trust, an investment fund established for holding the Portfolio. Substantially all of the value of the Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U Units are designed for investors wishing to make their investment in U.S. dollars. As a result of the forgoing, the Net Asset Value of the Units will vary depending on the performance of the MLF Trust by virtue of the Forward Agreement and will also vary depending on the expenses allocated to, and distributions paid in respect of, the particular class of Units of the Fund. MLF Trust has a revolving loan facility (the Loan Facility ) with Scotia Capital Inc. to borrow up to 25% of the total assets of MLF Trust which is used to provide leverage in MLF Trust. These financial statements were authorized for issuance by the Board of Directors of the Trustee on August 7,

11 Moneda Latam Fixed Income Fund 2. BASIS OF PRESENTATION AND ADOPTION OF IFRS Statement of compliance These financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) applicable to the preparation of interim financial statements including, IAS 34, Interim Financial Reporting and IFRS 1, First-time Adoption of International Financial Reporting Standards. The Fund adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Fund prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in Part V of the CPA Canada Handbook ( Canadian GAAP ). The comparative information has been restated from Canadian GAAP to comply with IFRS. The Fund has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position at January 1, 2013 and throughout all periods presented, as if these policies had always been in effect. Note 11 discloses the impact of the transition to IFRS on the Fund s reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Fund s financial statements for the year ended December 31, 2013 under Canadian GAAP. The policies applied in these interim financial statements are based on IFRS issued and outstanding as of August 7, Any subsequent changes to IFRS that are given effect in the Fund s annual financial statements for the year ending December 31, 2014 could result in restatement of these interim financial statements including the transition adjustments recognized on transition to IFRS. Basis of measurement The financial statements have been prepared on the historical cost basis except for financial assets and liabilities held at fair value through profit or loss that have been accounted for based on fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. Functional currency and presentation currency These financial statements are presented in Canadian dollars, which is the functional currency of the Fund. Critical accounting estimates and judgments The preparation of the financial statements requires management to use judgment in applying its accounting policies and to make estimates and assumptions about the future. The following discusses the most significant accounting judgments and estimates that the Fund has made in preparing the financial statements: Classification and measurement of investments and application of the fair value option The Fund invests on a total return basis for the purpose of applying the fair value option for financial assets under IAS 39, Financial Instruments Recognition and Measurement (IAS 39). The most significant judgment made in preparing the financial statements is that certain investments are held-for-trading and that the fair value option could be applied to those which are not. The most significant estimate is the fair value of 9

12 Moneda Latam Fixed Income Fund the Forward Agreement which is based on the fair value of the underlying securities, other assets and liabilities and the credit risk associated with the Counterparty. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIIES Foreign Currency Translation Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing at the end of period. Purchases and sales of investments and income and expenses are translated into Canadian dollars at the exchange prevailing on the transaction date. Foreign exchange gains and losses relating financial assets and liabilities are recorded in the Statements of Comprehensive Income in net realized gain on partial pre-settlements of Forward Agreement and unrealized appreciation on Forward Agreement. Financial instruments The Fund recognizes financial assets and liabilities at fair value on the trade date when the Fund becomes a party to the contractual provisions of the instrument. The Fund has designated its investment in the Forward Agreement as held for trading as it is managed and its performance is evaluated on a fair value basis. This is consistent with the Fund s investment strategy. The Fund s obligation for net assets attributable to Unitholders is presented at the redemption amount. All other financial assets and liabilities are carried at amortized cost which approximates their fair values due to their short-term nature. The Fund s accounting policies for measuring the fair value of its investments and derivatives are identical to those used in measuring its net asset value for transactions with Unitholders. Cash Cash is comprised of demand deposits. Income Taxes The Fund qualifies as a mutual fund trust under the Income Tax Act (Canada). All of the Fund s net income for tax purposes and net capital gains realized in any period are required to be distributed to Unitholders such that no income tax is payable by the Fund. As a result, the Fund does not record income taxes. Since the Fund does not record income taxes, the tax benefit of capital and non-capital losses has not been reflected in the Statements of Financial Position as a deferred income tax asset. Revenue Recognition Interest represents the interest received on demand deposits accounted for on an accrual basis. Increase (decrease) in net assets to Unitholders The increase (decrease) in net assets attributable to Unitholders per unit amounts are calculated by dividing the increase (decrease) in net assets attributable to Unitholders by the weighted average number of units outstanding during the period. 10

13 Moneda Latam Fixed Income Fund Classification of units As the Fund has two classes of units with different features that are equally subordinate and contain multiple contractual obligations, its outstanding Units are classified as a financial liability in accordance with the requirements of International Accounting Standard 32 Financial Instruments: Presentation. Accounting standards issued but not yet adopted The final version of IFRS 9 Financial instruments, was issued by the IASB 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 recognised 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 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. FORWARD AGREEMENT Pursuant to the Forward Agreement, the Counterparty will deliver, on the scheduled settlement date of the Forward Agreement, a specified portfolio of securities of Canadian public issuers with an aggregate value equal to the redemption proceeds that would be received by Unitholders on the redemption of the relevant number of units issued by MLF Trust. The Fund partially pre-settles the Forward Agreement in order to fund: (i) quarterly distributions on the Units; (ii) redemptions of Units from time to time; and (iii) operating expenses and other liabilities of the Fund. Settlement of the Forward Agreement is unconditionally guaranteed by The Bank of Nova Scotia, a company with a current credit rating of AA as rated by DBRS. As at June 30, 2014, the Counterparty had received a confirmation notice to pre-settle the Forward Agreement and on July 15, 2014, the Counterparty delivered securities of a Canadian public issuer that were sold for proceeds of $2,299,318. As a result of the pre-settlement the Fund realized a gain of $53,873 equal to the proceeds less the allocable costs of the Forward Agreement and is included in total net realized gains on partial pre-settlements of $257,336. The Fund is fully exposed to the credit risk associated with the Counterparty. To secure obligations of the Counterparty under the Forward Agreement, the Counterparty pledges collateral in favour of the Fund with an aggregate value equal to the exposure under the Forward Agreement with the amount of collateral re-set on a weekly basis. As at June 30, 2014, collateral of $109.3 million (December 31, 2013 $109.7 million and January 1, 2013 $49.5million) consisting of liquid securities listed on the Toronto Stock Exchange with no more than 10% of the value in any one issuer was held in trust for the Fund. 11

14 Moneda Latam Fixed Income Fund The Portfolio whose fair value is based on average mid-prices supplied by investment dealers, loan payable and other net assets as reported by MLF Trust as at June 30, 2014, December 31, 2013 and January 1, 2013 are as follows: June 30 December 31 January Bonds and debentures $ 131,451,255 $ 134,387,124 $ 64,442,794 Bonds and debentures (short) (7,547,448) (3,464,444) (3,454,397) Loan payable (28,580,155) (25,309,611) (16,429,796) Other net assets 12,245,433 1,785,916 3,927,334 Net assets attributable to Unitholder $ 107,569,095 $ 107,398,985 $ 48,485,935 In addition to the income and expenses detailed in the Fund s Statement of Comprehensive Income, the following shows the combined operations of the Fund and MLF Trust including interest for distribution purposes and less administrative and operating expenses for the six month periods ended June 30, 2014 and 2013 representing amounts available for distribution to Unitholders. In addition, the financial statements of MLF Trust for the period ended June 30, 2014 are appended to these financial statements as an integral part hereof. Select information from the MLF Total Total Statements of Comprehensive Income Fund Trust Income Interest for distribution purposes $ $ 5,476,675 $ 5,476,675 $ 4,516,188 Expenses Management fee 147, , , ,968 Operating expenses 75, , , , , , , ,725 Interest expense 218, ,229 94,724 Total expenses 222, ,284 1,168,088 1,012,449 Income less expenses (222,804) 4,531,391 4,308,587 3,503,739 Less: Forward Agreement fees (210,428) (210,428) (208,191) Available for distribution to Unitholders $ (433,232) $ 4,531,391 $ 4,098,159 $ 3,295, NET ASSETS ATTRIBUTABLE TO UNITHOLDERS The Fund is authorized to issue an unlimited number of Units of each class. Each Class A Unit and Class U Unit represents an undivided ownership interest in the net assets of that class of Units of the Fund, with all Units of the same class having equal rights and privileges. The Class A Units of the Fund are listed for trading on the Toronto Stock Exchange ( TSX ) under the symbol MLF.UN. The Class U Units are not listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes. 12

15 Moneda Latam Fixed Income Fund The Class A Units and Class U Units both have the same investment objectives and restrictions and differ with respect to certain expenses allocable only to Class A Units including hedging costs and listing fees. Accordingly, the net assets per Unit of each class will not be the same as a result of the different fees and expenses allocable to each class of Units. The Fund does not have a fixed termination date but may be terminated at any time with the prior approval of the Unitholders that has been obtained by a two-thirds majority vote at a meeting of Unitholders called for that purpose. The Manager may also, in its discretion, terminate the Fund on not less than 21 days prior notice by way of press release to Unitholders without the approval of Unitholders if, in the opinion of the Manager, it is no longer economically feasible to continue the Fund or it would be in the best interest of the Unitholders to terminate the Fund. Retraction of Units Units may be surrendered for retraction, by delivery of a retraction notice to the Fund s registrar, 45 days prior to the 2 nd last business day of November each year (the Retraction Notice Date ). Units surrendered for retraction by a Unitholder no later than the Retraction Notice Date will be retracted, and the Unitholder will receive payment on the 15 th day after the Retraction Notice Date of each year. A holder who surrenders Units for retraction on or before the Retraction Notice Date will receive payment of the retraction price in cash in an amount per Unit equal to 100% of the Net Asset Value per Unit of the applicable class determined on the valuation date being the 2 nd last business day of November each year less any costs associated with the retraction, including any brokerage costs. Conversion of Class U Units to Class A Units A holder of Class U Units may convert such Class U Units into Class A Units on a weekly basis for liquidity purposes. Class U Units may be converted in any week on the first business day of such week (the Conversion Date ) by delivering a notice to the Manager and surrendering such Class U Units at least 5 business days prior to the applicable Conversion Date. For each Class U Unit so converted, a holder will receive that number of Class A Units equal to the Net Asset Value per Class U Unit as at the close of trading on the business day immediately preceding the Conversion Date divided by the Net Asset Value per Class A Unit as at the close of trading on the business day immediately preceding the Conversion Date. No fraction of a Class A Unit will be issued upon any conversion of Class U Units and any fractional amounts will be rounded down to the nearest whole number of Class A Units. 13

16 Moneda Latam Fixed Income Fund The number of Units issued and outstanding for the period/year ending June 30, 2014 and December 31, 2013 for each respective class is summarized as follows: Class A Balance, beginning of period/year 10,338,753 4,661,917 Units, issued for cash 6,100,000 Units, retracted for cash (577,191) Units, converted from Class U 6, ,027 Balance, end of period/year 10,345,504 10,338,753 Class U Balance, beginning of period/year 728, ,970 Units, issued for cash 529,055 Units, retracted for cash (59,000) Units, converted to Class A (6,200) (150,500) Balance, end of period/year 722, ,525 The market value of the Class A Units on June 30, 2014 was $9.69 per Unit (December 31, 2013 $9.66 and January 1, 2013 $10.74) 6. INCOME TAXES The Fund did not realize any income, gain or loss as a result of entering into the Forward Agreement and no amount is expected to be included in the Fund s income by virtue of the acquisition of the Canadian securities through partial pre-settlements or final settlement of the Forward Agreement subject to the Character Conversion Rules discussed below. The cost to the Fund of such Canadian securities will be that portion of the aggregate amount paid by the Fund under the Forward Agreement attributable to the Canadian securities. The resulting gain or loss realized by the Fund on the sale of Canadian securities acquired pursuant to the Forward Agreement is expected to be treated as capital gains or capital losses for tax purposes. Given the investment structure, the Fund s net income for tax purposes will be ordinarily comprised of realized gains on partial pre-settlements of the Forward Agreement, offset by expenses and issue costs of the Fund. To the extent the Fund has net income in any year, distributions paid or payable to Unitholders will be characterized for tax purposes as capital gains, with any excess characterized as return of capital. The Federal government has eliminated the tax benefits associated with forward agreements as used by the Fund to achieve capital gains treatment on income that would otherwise be treated as ordinary income (the Character Conversion Rules ). Distributions from investment funds which enter into a forward agreement will now generally be taxed as income at the time of distribution as opposed to returns of capital which are not generally taxable at time of receipt and capital gains. Based on the Fund s legal structure and the Forward Agreement in place, this measure does not immediately affect the Fund as the Character Conversion Rules include grandfathering rules such that the Fund s distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on June 19,

17 Moneda Latam Fixed Income Fund The Fund has capital losses of $32,377 and non-capital losses at $1,994,000 available to offset future income for tax purposes for which no benefit has been recognized in these financial statements. The capital losses do not have an expiry date and the non-capital loss amounts by year of expiry are as follows: 2032 $ 572, ,422,000 $ 1,944, RELATED PARTY INFORMATION In connection with the February 2013 offering, the Fund engaged Scotia Capital Inc. ( SCI ) to offer for sale to the public the Units. SCI acted as promoter and received compensation of $1,228,377 upon issue of the Units. For its services to the Fund which include the provision of key management personnel, SMCAI is entitled to receive a management fee equal to 0.25% per annum of the net asset value. The total management fee paid or payable to SMCAI for the period ended June 30, 2014 was $147,475 (2013 $150,171). The ongoing management fee is calculated and accrued weekly and is payable quarterly in arrears. Under the Forward Agreement, the Fund pays to the Counterparty an additional amount, calculated weekly and payable monthly in arrears, of up to 0.40% per annum of the notional amount of the Forward Agreement being the net asset value of MLF Trust. The total fees paid or payable to The Bank of Nova Scotia relating to the Forward Agreement for the period ended June 30, 2014 were $210,428 (2013 $208,191). At June 30, 2014, the Fund had accrued liabilities of $124,450 (December 31, 2013 $195,818 and January 1, 2013 $35,290) payable to SMCAI and the Counterparty, and had cash on deposit with The Bank of Nova Scotia of $6,307 (December 31, 2013 $6,494 and January 1, 2013 $12,798). 8. CAPITAL MANAGEMENT The Fund s capital is represented by net assets attributable to Unitholders. The Manager with oversight from the Trustee, is responsible for providing all administrative services required by the Fund, including the receipt of cash from partial pre-settlements of the Forward Agreement to fund operating expenses and the payment of distributions to the Unitholders. The Fund makes cash distributions funded from proceeds received from partial pre-settlements of the Forward Agreement after deduction of operating expenses of the Fund subject to maintaining a minimum level of cash on hand. MLF Trust may employ leverage up to 25% of its total assets. Accordingly, the maximum leverage level being total assets to net assets would be 33%. MLF Trust will sell a portion of the Portfolio, if at any time the loan payable under its loan facility exceeds 25% of the total assets of MLF Trust and reduce such percentage to no more than 25%. As at June 30, 2014, the loan payable represented 20.4% (December 31, % and January 1, %) of the total assets of MLF Trust. 15

18 Moneda Latam Fixed Income Fund 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table outlines the fair value hierarchy of the financial instruments as at June 30, 2014, December 31, 2013 and January 1, 2013: Level 1 Level 2 Level 3 Total As at June 30, 2014 Forward Agreement $ $ 107,569,095 $ $ 107,569,095 As at December 31, 2013 Forward Agreement 107,398, ,398,985 As at January 1, 2013 Forward Agreement 48,485,935 48,485,935 All fair value measurements are recurring. The carrying value of cash, receivable from Counterparty and all liabilities approximate their fair value because of the short-term nature of these items. Instruments are classified as Level 1 when the related security or derivative is actively traded and a quoted price is available. Instruments are classified as Level 2 when the related security or derivative has inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified into Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is classified as Level 3. There were no transfers between levels during the current period and the prior years. Forward Agreement The fair value is based on the net asset value of MLF Trust, the difference between the contract rate and current market rates, substantially based on U.S. dollar denominated high yield fixed income securities comprising the Portfolio. The inputs that are significant to the valuation are observable and therefore the Forward Agreement has been classified as Level RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS In the normal course of business, the Fund is exposed to a variety of financial risks: market risk (including price risk, interest rate risk and currency risk), credit risk and liquidity risk. The Manager seeks to reduce these risks by employing an experienced Portfolio Manager, who has the responsibility for investing within the limits as outlined in the Fund s investment objectives and strategies. The Fund s overall risk management program focuses on compliance and execution of the Fund s investment objectives and strategies. The Manager meets at least quarterly with the Portfolio Manager and/or Sub-Advisor to review operations and statistics, including performance and levels of risk. The risks associated with an investment in the Fund s Units are best defined in conjunction with financial risks associated with an investment in the units of MLF Trust comprising the Portfolio. 16

19 Moneda Latam Fixed Income Fund Price Risk Price risk is the risk that securities will fluctuate in value because of changes in market prices (other than those arising from interest rate risk or currency risk). All investments present a risk of loss of capital. By virtue of the Forward Agreement, the value of a Unit is dependent on the Net Asset Value of MLF Trust, which varies principally because of fluctuations in the value of high yield fixed income securities of companies held by it. The value of the fixed income securities can fluctuate on a daily basis as a result of factors outside of MLF Trust s control, including financial performance of the issuers of the fixed income securities, operational risks relating to the specific business activities of the respective issuers, quality of assets owned by respective issuers, commodity prices, exchange rates, interest rates, environmental risks, political risks, issues relating to government regulation and taxation, composition of the portfolio and other financial market conditions. The Portfolio Manager in co-ordination with the Sub-Advisor seeks to reduce this risk by following MLF Trust s investment strategy including active management and diversification of the Portfolio by country, industry sector, maturity and credit rating. In addition, the Portfolio may, from time to time, comprise other credit securities in the public and private market in the form of promissory notes, loans and other debt securities. If the prices for the fixed income securities held by MLF Trust had increased or decreased by 5% as at June 30, 2014, with all other variables held constant, the Fund s net assets would have increased or decreased, respectively, by approximately $5.9 million or 5.9% (December 31, 2013 $6.2 million or 6.0% and January 1, 2013 $2.80 million or 6.3%) of Class A net assets and $0.4 million or 5.9% (December 31, 2013 $0.5 million or 5.9% and January 1, 2013 $0.25 million or 6.4%) of Class U net assets of which $1.3 million or 1.3% (December 31, 2013 $1.2 million or 1.2% and January 1, 2013 $0.76 million or 1.7%) of Class A and $0.10 million or 1.4% (December 31, 2013 $0.08 million or 1.1% and January 1, 2013 $0.07 million or 1.7%) of Class U net assets is the result of leverage to which Unitholders are exposed though utilization of the MLF Trust s Loan Facility. In practice, the actual results may differ materially from this sensitivity analysis. Interest Rate Risk Interest rate risk arises from changes in the prevailing levels of market interest rates, which will affect the future cash flows and the fair values of interest bearing financial instruments. By virtue of the Forward Agreement, the Fund s indirect exposure to interest rate risk is concentrated in its investments in fixed income securities held by MLF Trust. Short-term investments, and other assets and liabilities are short-term in nature and/or non-interest bearing and not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. The table below summarizes the Fund s indirect exposure to interest rate risk as at June 30, 2014, December 31, 2013 and January 1, 2013 by duration of the bonds held by MLF Trust. The table also illustrates the potential impact to the Fund s net assets had the prevailing interest rates changed by 1% assuming a parallel shift in the yield curve, with all other variables held constant. MLF Trust s sensitivity to interest rate 17

20 Moneda Latam Fixed Income Fund changes was estimated using the weighted average duration of the Portfolio. In practice, the actual results may differ materially from this sensitivity analysis. Total Exposure June 30 December 31 January Term to maturity Bonds held by MLF Trust (1) Less than 1 year $ 6,813,010 $ 2,854,001 $ 3,198, years 34,539,789 49,301,922 24,602, years 58,595,018 60,622,934 24,460,916 > 10 years 23,486,671 18,143,823 8,726,790 Total $ 123,434,488 $ 130,922,680 $ 60,988,397 Impact on Net Assets $ 897,496 $ 917,035 $ 1,401,000 Impact on Net Assets (%) 0.8% 0.9% 2.9% (1) includes short positions By virtue of the Forward Agreement the Fund is exposed to changes in the value of MLF Trust s Loan Facility which bears interest at a floating rate. If interest rates increased or decreased by 1% at June 30, 2014 with all other variables remaining constant, net assets would have increased or decreased by approximately $286,000 or 0.3% (December 31, 2013 $253,000 or 0.2% and January 1, 2013 $165,000 or 0.3%) as a result of interest charged on the Loan Facility. Currency Risk Currency risk arises from financial instruments that are denominated in a currency other than the Canadian dollar, which is the Fund s functional and presentation currency. By virtue of the Forward Agreement, the Fund is exposed indirectly to fixed income securities denominated in U.S. dollars and other foreign currencies held by MLF Trust and is therefore indirectly exposed to currency risk due to changes in the foreign currency rates of those fixed income securities denominated in other currencies (indicated in note 3) in relation to the Canadian dollar. The Manager enters into foreign exchange contracts in MLF Trust for hedging purposes to reduce its foreign currency exposure. No U.S. dollar hedging is done on the portion of the Fund attributable to Class U Units as they are denominated in U.S. dollars. The tables below indicate the foreign currencies to which MLF Trust had exposure at as December 31, 2013 and 2012 in Canadian dollar terms. The tables also illustrate the potential impact to MLF Trust s net assets as at June 30, 2014, December 31, 2013 and January 1, 2013 if the Fund s functional currency, the Canadian 18

21 Moneda Latam Fixed Income Fund dollar, had strengthened or weakened by 5% in relation to all other currencies, with all other variables held constant. In practice, the actual results may differ materially from this sensitivity analysis. Total Exposure* Impact on Net Assets June 30 December 31 January 1 June 30 December 31 January Class A Units United States Dollar $ 1,748,914 $ 3,455,912 $ 2,527,200 $ 87,446 $ 172,796 $ 126,360 Brazilian Real 1,343,777 1,410, ,330 67,189 70,530 34,817 Mexican Peso 88,720 16,496 70,470 4, ,524 $ 3,181,411 $ 4,883,000 $ 3,294,000 $ 159,071 $ 244,150 $ 164,700 As a % of net assets 3.18% 4.88% 7.76% 0.16% 0.24% * exposure to U.S. dollar has been hedged with US$93.1 million (December 31, 2013 US98.7 million and January 1, 2013 US$41.6 million) notional foreign exchange contract Total Exposure Impact on Net Assets June 30 December 31 January 1 June 30 December 31 January Class U Units Brazilian Real $ 102,646 $ 101,747 $ 77,370 $ 5,132 $ 5,087 $ 3,869 Mexican Peso 6,777 1,190 7, $ 109,423 $ 102,937 $ 85,200 $ 5,471 $ 5,147 $ 4,260 As a % of net assets 1.47% 1.39% 2.05% 0.07% 0.07% 0.10% Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation or commitment that it has entered into with another party. Through the Forward Agreement, the Fund s main credit risk concentration is in fixed income securities held by MLF Trust with exposure to the risk that an issuer of fixed income securities will be unable to pay amounts in full when due. The Portfolio Manager reviews credit positions as part of its investment management process. 19

22 Moneda Latam Fixed Income Fund The table below summarizes the debt securities held by MLF Trust as at June 30, 2014, December 31, 2013 and January 1, 2013 by credit ratings: % of Total Bonds % of Net Assets of MLF Trust June 30 December 31 January 1 June 30 December 31 January 1 Credit Rating* BBB 6.4% 5.1% 5.3% 8.1% 6.3% 8.2% BB 21.5% 24.9% 29.9% 25.9% 31.2% 39.7% B 37.7% 36.3% 47.2% 44.6% 45.4% 59.4% CCC 13.6% 14.2% 6.1% 16.7% 17.7% 9.4% CC 0.1% 2.3% 0.0% 3.3% D 11.7% 8.9% 2.9% 14.0% 11.2% 4.2% No rating 9.0% 10.6% 6.3% 12.5% 13.3% 9.0% Total 100.0% 100.0% 100.0% 121.8% 125.1% 133.2% * based on lowest available rating from one of Standard & Poors, Moody s or Finch ratings. The Fund is fully exposed to the credit risk associated with the Counterparty. To secure obligations of the Counterparty under the Forward Agreement, the Counterparty pledges collateral in favour of the Fund with an aggregate value equal to 100% of the mark-to-market value of the exposure under the Forward Agreement with the amount of collateral re-set on a weekly basis. As at June 30, 2014, collateral of $109.3 million equal to 101.0% (December 31, 2013 $109.6 million and 102.1% and January 1, 2013 $49.5 million and 102.3%) of the Forward Agreement consisting of liquid TSX-listed securities with no more than 10% of the value in any one issuer was held in trust for the Fund. In the event of a default by the Counterparty, the Fund will have the ability to enforce its security interest and take possession of the collateral. The Fund maintains all of its cash and cash equivalents in bankers acceptances or term deposits with financial institutions having a minimum debt rating of A. All transactions in fixed income securities undertaken by MLF Trust are settled/paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is made only when MLF Trust has received payment. Payment is made on purchases once the securities have been received by MLF Trust. Should either party not meet its obligation, the trade will fail. Liquidity Risk Liquidity risk is defined as the risk that the Fund may not be able to settle or meet its obligations on time or at a reasonable price. By virtue of the Forward Agreement, the Fund invests its assets in fixed income securities that are traded in an active market and can be readily disposed of. There can be no assurance that an adequate market for the fixed income securities will exist at all times, or that the prices at which the fixed income securities trade, accurately reflect their net asset values. The Fund and MLF Trust generally maintain cash, cash equivalents and receivable from sale of investments to offset all of its liabilities with the exception of the Fund s obligation for net assets attributable to Unitholders. 20