2017 ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE

Transcription

1 MD Family of Funds 2017 ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE DISCLOSURE This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the investment fund. You can obtain a copy of the annual financial statements at your request, and at no cost, by calling , by writing to us at MD Financial Management Inc., 1870 Alta Vista Drive, Ottawa, Ontario, K1G 6R7, or by visiting our website at md.cma.ca or SEDAR at sedar.com. Security holders may also contact us using one of these methods to request a copy of the investment fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.

2 A Message to MD Family of Funds Investors Dear MD Family of Funds Investor: As part of our commitment to keeping you informed about your MD Fund investments, please find attached the 2017 Annual Management Report of Fund Performance (MRFP). If you also opted to receive the fund s financial statements, they are included in this package. The annual MRFP is a regulatory document that supplements the annual financial statements. The document includes a brief discussion and analysis of the fund s investment activities, performance and financial highlights, as well as an explanation of how the markets and overall asset mix have affected the fund. The report is produced on a fund-by-fund basis, and your report only includes information on the funds you owned as of December 31, If you have any questions regarding these documents, please contact your MD Advisor or the MD Trade Centre at We thank you for your continued investment in the MD Family of Funds. MD Financial Management Inc. wholly owns or has a majority interest in its seven subsidiaries (the MD Group of Companies). It provides financial products and services, is the fund manager for the MD Family of Funds and offers investment counselling services. For a detailed list of the MD Group of Companies, visit md.cma.ca. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund. Standard performance data assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges payable by any securityholder which would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing. You may obtain a copy of the prospectus before investing by calling your MD Advisor or the MD Trade Centre at

3 Management Report of Fund Performance (December 31, 2017) Series A units of this Fund are offered for sale to existing unitholders only. Private Trust Series units (PT series) of this Fund are offered for sale to discretionary, managed-account clients only. Investment Objectives and Strategies The (the Fund ) seeks to achieve long-term capital growth. The Fund invests in Canadian equity securities issued primarily large capitalization companies. The Fund uses a multi-advisor structure utilizing the investment strategies of five separate Advisors, namely: Franklin Bissett Investment Management (Franklin Bissett), PCJ Investment Counsel (PCJ), Hillsdale Investment Management (Hillsdale), QV Investors (QV), Mackenzie Financial Corporation (Mackenzie). Franklin Bissett s investment style is growth at a reasonable price or GARP. Franklin Bissett s investment philosophy is focused on making long-term investments in high quality businesses, and uses bottom-up, fundamental research to construct a portfolio using, primarily, the common shares of companies with clearly visible, fullcycle profitability that are trading at a low valuation compared to estimated fair value. PCJ has a growth oriented investment philosophy with the investment belief that earnings growth drives common share price appreciation. PCJ uses fundamental bottom-up analysis to identify growth catalysts with high visibility and consistency. PCJ s portfolio construction process ensures that a portion of the Fund it manages is focused purely on alpha generating ideas, another portion represents the best large cap opportunities for strong organic growth, and the remainder is focused on prudent, non-dilutive diversification. Hillsdale s philosophy is style-neutral, but focused on maximizing information ratio. Hillsdale believes that by applying the best of fundamental and capital market insights through quantitative disciplines, it will be able to deliver alpha. Using an adaptive approach, Hillsdale s investment process seeks to identify and capitalize on the actions of other market participants. QV stands for quality and value, and is directly aligned with its value oriented philosophy of buying primarily the common shares of businesses run by capable, committed, and candid people. QV s team-based investment process is highly focused on risk management and protecting capital against loss. Mackenzie All Cap Value Team s selection is based on the principles of value investing identifying companies whose stock price, it believes, is below fair market value. Mackenzie s research process is disciplined, both quantitatively and qualitatively. Its style of value investing produces what it believes to be a welldiversified portfolio with low volatility without sacrificing long-term returns. The Fund may not invest in companies that manufacture tobacco or tobacco-related products or marijuana or marijuana related products. Risk At times, a portfolio can be subject to any number of investment risks. The risk level of the Fund did not change significantly during the year. Investment risks continue to be managed by the Advisor and the Fund remains well diversified by both industry and company. Descriptions of the investment risks associated with this Fund are detailed in the Simplified Prospectus. On May 29, 2017 MD Financial Management Inc. announced the adoption of the new Canadian Securities Administrators mutual fund risk classification methodology. The new classification methodology is consistent with the scheduled amendment to National Instrument Investment Funds, effective September 1, The amendment standardizes terminology, categories and risk descriptions. MD client's individual investment risk assessments and the underlying risks of the MD Funds and MDPIM Pools are unchanged. Results of Operations As part of our investment management discipline, we carefully select, combine and monitor the Investment Advisors to ensure the investment decisions and fund investments remain consistent with the objectives of the Fund. We manage the Fund by allocating assets among the following Investment Advisors. The approximate allocation of assets at the end of the year was as follows: Advisor Allocation Investment Advisor 34% Franklin Bissett Investment Management 39% PCJ Investment Counsel 10% Hillsdale Investment Management 10% QV Investors 7% Mackenzie Financial Corporation For the period ended December 31, 2017, the Fund had a total return of 6.41%(series A), and 7.81% (series PT). With a return of 9.1% for the S&P/TSX Capped Composite, Canadian equities delivered strong returns again in Commodities were the one area of the Canadian equity universe that held back returns with the Energy sector posting negative returns and the gold industry also posting negative returns over the full year. Canadian equities were led by Consumer Discretionary, Health Care and Industrials, while the big six banks posted another strong year with returns of 14.75%. The Canadian economy continues to grow with expectations for real GDP growth of 3.0% in 2017 and 2.2% in As of December 31, 2017, investors are forecasting earnings growth for Canadian equities of 9.3% in 2018, which implies a P/E of 16.2x 2018 forecasted earnings. Out of the eleven GICS sectors represented in the Fund, the Energy and Financials sectors retained, on average, the highest portfolio weightings, while Healthcare and Real Estate received the lowest allocation. Industrials and Financials were the two sectors that contributed the most to portfolio performance in 2017, while Energy and Health Care were the two sectors to detract from performance in Energy was the biggest detractor to the portfolio s performance. More specifically, the Energy sector declined by 7.5% in 2017 as the price of oil was down over 14% in the first half of the year. As at December 31, 2017, the total net asset value of the fund was $3 billion, consistent with the beginning of the year. Investment gains within the fund were offset by net redemptions and distributions from the fund resulting in a net asset value consistent with the prior year. 1 MD Family of Funds Annual MRFP 2017

4 Management Report of Fund Performance (December 31, 2017) Recent Developments STRATEGIC CHANGES There were no strategic changes to the Fund throughout the year. The Fund continues to be managed in a manner consistent with its investment mandate. The Investment Advisors have adhered to their investment disciplines and portfolio strategies, and they are in line to achieve the long-term objectives of the Fund. On June 23, 2017, MD Financial Management Inc. resolved to terminate Series T units of the Fund. This decision was announced publicly on June 23, 2017 and the effective date of termination was August 25, All clients holding Series T units on August 25, 2017 were automatically switched into Series A units of the same fund. Related Party Transactions MD Financial Management Inc. is the Manager, Registrar and Trustee of the Fund. As Manager, MD Financial Management Inc. manages the overall business of the MDPIM Pools and is responsible for: setting investment objectives, providing and/ or retaining the services of third party service providers for fund accounting services, administration services, and promoting the sales of the Fund s units. As Registrar, MD Financial Management Inc. keeps track of the owners of units of the MDPIM Pools, processes purchase, transfer and redemption orders, issues investor account statements, and issues annual tax reporting information. As the Fund is organized as a Trust, investing in the Fund means purchasing units of the Trust. As Trustee to the Fund, MD Financial Management Inc. holds actual title to the property in the Fund the cash and securities the Fund invests in on behalf of the unitholders. The principal distributor is MD Management Limited. As principal distributor, units of the MDPIM Pools are only available through MD Management Limited to clients of MD Private Trust Company or discretionary account clients of MD Financial Management Inc. MD Management Limited and MD Private Trust Company are owned by the Fund s Manager, MD Financial Management Inc., which is owned by MD Financial Holdings Inc. Management Fees MD Financial Management Inc. provides the series A units of the Fund with investment management and administrative services, including fund accounting and unitholder record-keeping. In return, MD Financial Management Inc. receives an annual management fee and an annual administration fee, both based on a fixed percentage of the daily net asset value of the Fund. Management fees are paid weekly and administration fees are paid monthly. (As a percentage of management fees) Financial Planning Services - Investment management, administration and other 100.0% No management fee is charged in respect of the PT series of the the Fund. Investors in the PT Series units have agreed to pay a managed account fee directly to MD Financial Management Inc. Past Performance The following bar chart shows the Fund s annual performance for each of the years shown, and illustrates how the Fund s performance changed from year to year. The chart shows, in percentage terms, how much an investment made on the first day of each calendar year would have grown or decreased by the last day of each calendar year. The performance information assumes that all distributions made by the Fund were reinvested in additional units of the Fund and does not take into account sales, redemption, distribution or other optional charges that would reduce returns. How the Fund has performed in the past does not necessarily indicate how the Fund will perform in the future. YEAR BY YEAR RETURNS Series A % Return % -29.9% 34.1% 35.9% Private Trust Series 17.6% 19.1% -15.4% -14.1% 8.6% 10.1% 18.7% 20.4% 7.6% 9.0% -7.8% -6.5% 19.3% 21.0% ANNUAL COMPOUND RETURNS The following table shows the Fund s historical annual compound return for the past one, three, five and ten year periods ended on December 31, as compared to the return of the S&P TSX Capped Composite Index. The MDPIM Canadian Equity Pool PT Series The MDPIM Canadian Equity Pool Series A S&P/TSX Capped Composite Index 6.4% 7.8% 1 year 3 years 5 years 10 years 7.81% 6.83% 9.86% 5.55% 6.41% 5.39% 8.36% 4.12% 9.10% 6.59% 8.63% 4.65% Management uses the S&P/TSX Capped Composite Index as the benchmark for this Fund because it represents the aggregate common share returns of Canada s largest companies. Although index returns are hypothetical as they do not reflect the true cost of owning or managing the underlying stocks they are one of several useful indicators. By comparing the Fund s performance to the movements of the benchmark, we are able to assess how the Fund is doing. For example, some shortterm deviations can signal the need for change while others confirm the expectations of a longer-term strategy. If Management were to ascertain that the Fund s over or under performance was the result of excessive risk-taking or deviation from the investment mandate, we would, on behalf of all our unitholders, address these issues with the Investment Advisor, and make changes if necessary. MD Family of Funds Annual MRFP

5 Management Report of Fund Performance (December 31, 2017) The most recent one-year period of underperformance against the benchmark, noted in the table above, was predominantly the result of stock selection in the Energy sector. While the Fund was on average underweight the energy sector in 2017, investments in Crew Energy, Birchcliff Energy and Peyto Exploration and Development detracted the most relative to the benchmark from the Energy sector. Also stock selection in the Financials Sector detracted from benchmark relative performance in 2017 and this was primarily due to an allocation to Home Capital Group. Sector allocation was slightly positive over the year due to an overweight to Industrials. The Canadian small cap allocation within the fund was a positive contributor to benchmark relative performance. Regarding Forward-Looking Statements This document contains forward-looking statements. Such statements are generally identifiable by the terminology used, such as plan, anticipate, intend, expect, estimate, or other similar wording. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market and business conditions; fluctuations in securities prices; fluctuation in interest rates and foreign currency exchange rates; and actions by governmental authorities. Future events and their effects on the Fund may not be those anticipated. Actual results may differ materially from the results anticipated in these forward-looking statements. 3 MD Family of Funds Annual MRFP 2017

6 Management Report of Fund Performance (December 31, 2017) 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 past five years, if applicable. This information is derived from the Fund s audited annual financial statements. THE FUND'S NET ASSETS PER UNIT 1 Year ended December 31 SERIES A Net assets beginning of the year $ $ $ $ $ Increase (decrease) from operations: Total revenue $ 0.59 $ 0.55 $ 0.57 $ 0.54 $ 0.53 Total expenses $ (0.31) $ (0.28) $ (0.28) $ (0.30) $ (0.26) Net realized gains (losses) for the year $ 0.87 $ 0.15 $ 0.29 $ 1.75 $ 1.10 Net unrealized gains (losses) for the year $ 0.25 $ 3.16 $ (2.18) $ (0.31) $ 1.87 Total increase (decrease) from operations 2 $ 1.40 $ 3.58 $ (1.60) $ 1.68 $ 3.24 Distributions: From income (excluding dividends) $ - $ - $ - $ - $ - From dividends $ (0.20) $ (0.20) $ (0.17) $ (0.15) $ (0.19) From capital gains $ (0.16) $ - $ (0.60) $ (0.87) $ - Return of capital $ - $ - $ - $ - $ - Total annual distributions 3 $ (0.36) $ (0.20) $ (0.77) $ (1.02) $ (0.19) Net assets end of the year $ $ $ $ $ Year ended December 31 PRIVATE TRUST SERIES Net assets beginning of the year $ $ $ $ $ Increase (decrease) from operations: Total revenue $ 0.52 $ 0.52 $ 0.54 $ 0.51 $ 0.50 Total expenses $ - $ - $ - $ - $ - Net realized gains (losses) for the year $ 0.79 $ 0.16 $ 0.36 $ 1.73 $ 1.07 Net unrealized gains (losses) for the year $ 0.31 $ 3.00 $ (2.01) $ (0.21) $ 1.87 Total increase (decrease) from operations 2 $ 1.62 $ 3.68 $ (1.11) $ 2.03 $ 3.44 Distributions: From income (excluding dividends) $ (0.02) $ (0.02) $ (0.01) $ (0.01) $ (0.01) From dividends $ (0.51) $ (0.50) $ (0.53) $ (0.49) $ (0.50) From capital gains $ (0.01) $ - $ (0.51) $ (0.80) $ - Return of capital $ - $ - $ - $ - $ - Total annual distributions 3 $ (0.54) $ (0.52) $ (1.05) $ (1.30) $ (0.51) Net assets end of the year $ $ $ $ $ This information is derived from the Fund s audited annual financial statements. 2 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 year. This table is not intended to be a reconciliation of beginning to ending net assets per unit. 3 Distributions were paid in cash or reinvested in additional units of the Fund, or both. MD Family of Funds Annual MRFP

7 Management Report of Fund Performance (December 31, 2017) Financial Highlights (continued) RATIOS AND SUPPLEMENTAL DATA Year ended December 31 SERIES A Total net assets, end of the year 1 $ 11,021,143 $ 11,426,294 $ 10,637,366 $ 12,098,843 $ 13,624,443 Number of units outstanding 472, , , , ,765 Management expense ratio % 1.36% 1.36% 1.36% 1.37% Management expense ratio before tax 1.25% 1.25% 1.25% 1.25% 1.26% Management expense ratio before waivers 1.39% 1.38% 1.39% 1.40% 1.44% or absorptions Trading expense ratio % 0.19% 0.17% 0.18% 0.20% Portfolio turnover rate % 81.53% 81.97% 81.16% 75.70% Net assets per unit $ $ $ $ $ Year ended December 31 PRIVATE TRUST SERIES Total net assets, end of the year 1 $ 2,965,641,678 $ 3,011,805,704 $ 2,432,370,350 $ 2,504,202,736 $ 1,877,599,598 Number of units outstanding 136,034, ,251, ,116, ,556,199 96,357,797 Management expense ratio Management expense ratio before tax Management expense ratio before waivers 0.02% 0.02% 0.03% 0.04% 0.07% or absorptions Trading expense ratio % 0.19% 0.17% 0.18% 0.20% Portfolio turnover rate % 81.53% 81.97% 81.16% 75.70% Net assets per unit $ $ $ $ $ This information is provided as at December 31 of the year shown. 2 The management expense ratio ("MER") is based on total expenses for the stated period (excluding commissions, withholding taxes and other portfolio transaction costs) and the Fund's proportionate share of the MER, if applicable, of exchange traded funds ("ETFs") in which the Fund has invested, expressed as an annualized percentage of daily average net asset value during the period. 3 The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net assets during the period. 4 The Fund's portfolio turnover rate indicates how actively the Fund's portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the 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 MD Family of Funds Annual MRFP 2017

8 Summary of Investment Portfolio, December 31, 2017 NET ASSETS: $2,976.7 MILLION TOP 25 HOLDINGS (PERCENTAGE OF NET ASSETS) 97.9% Domestic Equities 1.8% Cash and Other Net Assets 0.3% Foreign Equities The Toronto-Dominion Bank 5.2% Royal Bank of Canada 5.0% The Bank of Nova Scotia 4.3% Canadian National Railway Company 3.7% Canadian Imperial Bank of Commerce 3.5% Brookfield Asset Management Inc. Cl. A 3.3% Canadian Pacific Railway Company 3.2% Enbridge Inc. 3.1% Bank of Montreal 2.9% Restaurant Brands International Inc. 2.5% ishares Core S&P/TSX Capped Composite Index ETF 2.2% Canadian Natural Resources, Ltd. 2.0% TELUS Corporation 1.8% Suncor Energy Inc. 1.8% Cash and short-term investments 1.7% Alimentation Couche-Tard Inc. Cl. B 1.6% Saputo Inc. 1.6% Manulife Financial Corporation 1.4% CGI Group Inc. Cl. A 1.3% SNC-Lavalin Group Inc. Cl. A 1.2% Loblaw Companies Limited 1.2% TransCanada Corporation 1.1% Onex Corporation 1.1% Dollarama Inc. 1.0% ATCO, Ltd. Cl I 0.9% PORTFOLIO ALLOCATION DOMESTIC EQUITIES Consumer Discretionary 8.9% Consumer Staples 4.3% Energy 16.3% Exchange Traded Funds 2.7% Financials 31.5% Industrials 15.7% Information Technology 3.2% Materials 9.6% Telecommunication Services 2.9% Utilities 2.8% 97.9% FOREIGN EQUITIES Bermuda 0.1% United States 0.2% 0.3% CASH AND SHORT-TERM INVESTMENTS 1.7% OTHER NET ASSETS 0.1% TOTAL NET ASSETS 100.0% The Cash and Short-Term Investments and Other Net Assets may appear negative due to the timing of cash flows between the trade date and settlement date for transactions on underlying securities. Note: Summary of Investment Portfolio may change due to ongoing portfolio transactions of the investment fund. A quarterly update is available. The Net Assets, Portfolio Allocation and Top 25 Holdings in the tables are based on the net assets as at December 31, Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. To obtain a copy of the prospectus, please call your MD Advisor, or the MD Trade Centre at MD Family of Funds Annual MRFP

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