26OCT Annual Report. to Unitholders

Transcription

1 26OCT Annual Report to Unitholders December 31, 2014

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3 REPORT TO UNITHOLDERS 26OCT The following presents the financial results of Top 20 Europe Dividend Trust (the Trust ) for the years ended December 31, 2014 and Adoption of International Financial Reporting Standards ( IFRS ) The Trust s financial statements have been prepared in compliance with IFRS commencing January 1, 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Trust prepared its financial statements in accordance with Part V of the CPA Canada Handbook. Trust Structure The Trust is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of units (the Units ) of the Trust with investment exposure, on a tax-advantaged basis, to an equally-weighted portfolio (the Portfolio ) comprised of the 20 highest yielding equity securities (the Portfolio Securities ) included in the Europe Dow, a regional index of the Dow Jones Industrial Average (the Europe Dow ). The Europe Dow measures the stock market performance of 30 leading publicly traded blue-chip companies from Western Europe. The Trust s investment objectives are to: (i) provide Unitholders with stable quarterly tax-advantaged distributions; (ii) provide Unitholders with the opportunity for capital appreciation; and (iii) mitigate the impact of foreign exchange exposure through the use of currency hedging strategies, in each case through exposure by virtue of the Forward Agreement (as defined herein). The distributions are funded from dividends generated by the Portfolio and supplemented by premiums received on writing options on a portion of the Portfolio Securities. To pursue its investment objectives, the Trust entered into a forward purchase agreement (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 TTE Trust, an investment fund established for holding the Portfolio. Substantially all of the value of the Portfolio is hedged back to the Canadian dollar. As a result of the forgoing, the net asset value per Unit will vary depending on the performance of TTE Trust by virtue of the Forward Agreement. The Trust 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 Trust. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides portfolio management services required by TTE Trust including currency hedging strategies and acts as the options advisor to execute and maintain the option writing strategy of TTE Trust. The Portfolio is reconstituted annually to include the top 20 highest yielding constituents included in the Europe Dow and is re-balanced to an equal weight basis prior to the end of each calendar quarter. Highstreet determines the Portfolio Securities on which TTE Trust writes covered call options and at what level relative to the current market price. Highstreet writes covered call options from time to time in respect of not more than 33% of the Portfolio in order to earn income from option premiums to supplement dividends generated by the Portfolio. Highstreet will generally only write covered calls to the extent needed to increase the yield on the Portfolio to a targeted yield. This targeted yield will enable the Trust, by virtue of the Forward Agreement, to pay the targeted distribution. The Trust will purchase Units under the mandatory market purchase program to the extent premiums generated from writing covered call options are in excess of amounts needed to fund the distribution. The Units of the Trust are listed for trading on the Toronto Stock Exchange under the symbol TTE.UN. 1

4 26OCT Tax Changes Affecting Forward Agreement Structures In the budget announced March 21, 2013, the government proposed and enacted legislation 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 applies to forward agreements entered into on or after March 21, The less favorable tax treatment also applies 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 Trust as it entered into its Forward Agreement before March 21, 2013 and as such, we expect the distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on January 31, Report from the Portfolio Manager and Options Advisor Overview Highstreet manages the option overlay strategy which involves selling call options on up to, but not more than, 33% of the Portfolio. The percentage of Portfolio Securities written on for each holding and the strike prices chosen are primarily a function of the Trust s income requirements. Highstreet may choose to close out option positions prior to their expiry, for options that are both out-of-the-money, or in-the-money, when prudent. Highstreet endeavors to avoid assignment, when possible, on any in-the-money positions. The overall investment objectives of the Trust are to provide targeted monthly cash distributions, to provide the opportunity for capital appreciation, and to provide lower overall volatility of portfolio returns than would otherwise be experienced from owning the equity securities on a stand-alone basis. Market Performance The European equity markets started off the first quarter with worries about sovereign debt largely abated. Leading economic and sentiment indicators continued to improve throughout the quarter supporting strong market returns. The Eurozone PMI reached 53.2 in March, suggesting that Europe s manufacturing sector continued to expand for the ninth consecutive month. Additionally, the European Central Bank (ECB) continued its dovish monetary posture keeping its benchmark interest rate at a record low of The second quarter of 2014 was muted in Europe as lower-than-expected inflation continued to worry policymakers, with annual Euro-zone inflation slumping from 0.7% in April to 0.5% in May, falling further below the 2% level that the ECB considers healthy. This fostered expectations for a more accommodative monetary policy posture, eventually coming to fruition in early June when the ECB adopted a negative deposit-rate policy. The broad European market, as measured by the MSCI Euro index delivered a return of 6.7% over the first six months of the year. The second half of the year brought weaker markets in Europe. ECB President Mario Draghi highlighted that inflation expectations had fallen to excessively low levels and that the ECB could change the size, pace or 2

5 26OCT composition of its purchases to help provide additional stimulus by beginning the acquisition of asset-backed debt. Modest GDP growth in the broader European Union of 0.3%, and contraction of manufacturing activity in some major countries such as France, provided the backdrop of concern for market performance. As a result, market gains were primarily delivered by highest quality companies, which have generally underperformed the broader market early on in cycles. The MSCI Euro index delivered a return of 0.9% over the second half of the year, bringing the annual return for this broad European index to 7.7%. 3

6 26OCT Portfolio Performance The Portfolio delivered a total return of 2.2% for the period comprised of: (6.9)% from price change, 4.6% from dividends received and 4.5% from premium earned. Performance for each of the individual Portfolio Securities held during the period was as follows: Holding Performance* Consumer Discretionary Daimler AG (DAI GR) 13.3% Hennes and Mauritz AB (HMB SS) 13.9% Consumer Staples TESCO PLC (TSCO LN) 40.9% Unilever NV (UNA NA) 15.8% Energy BP PLC (BP LN) 11.0% Royal Dutch Shell PLC (RDSA LN) 12.3% Total SA (FP FP) 0.6% Financials Allianz SE (ALV GR) 10.0% Banco Santander SA (SAN SM) 17.1% HSBC Holdings PLC (HSBA LN) 3.1% Health Care GlaxoSmithKline PLC (GSK LN) 9.5% Novartis AG (NOVN VX) 34.0% Industrials Vinci SA (DG FP) 0.3% Information Technology Telefonaktiebolaget LM Ericsson (ERICB SS) 24.5% Materials Anglo American PLC (AAL LN) 3.8% BASF SE (BAS GR) 6.8% Rio Tinto PLC (RIO LN) 8.4% Telecommunication Services Verizon Communications Inc. 1.50% Vivendi SA (VIV FP) 13.9% Vodafone Group PLC (VOD LN) 8.4% Utilities E.ON SE (EOAN GR) 10.7% * Performance comprised of price change, and dividends. 4

7 26OCT Options Activity For the year, call options expiring in all months from January to December were sold on the Trust s Portfolio Securities raising $1.3 million in premium or approximately 4.5% on the Portfolio. The average percentage written on the Portfolio was approximately 29.8% with an average strike percentage of 100.9%. Highstreet s proprietary option overlay model examines a number of factors, including short-term price change and momentum metrics, to determine a target level of write and level of strike for each holding in the underlying Portfolio. Targeted strike levels are preferably out-of-the-money to allow the opportunity to capture potential positive performance of the underlying stocks in addition to option premiums. Volatility The application of a covered call writing strategy endeavors to reduce the overall level of portfolio volatility. The following chart and table compares the annualized, realized volatility over the twelve month period for the Trust compared to: 1. The same underlying portfolio (with no covered call overlay); and 2. The benchmark index (no covered call overlay) Portfolio Europe Dow Portfolio (No call writing) Total Return Index Top 20 Europe 12.69% 13.72% 13.45% 13.80% 13.60% Realized Volatility 13.40% 13.20% 13.00% 12.80% 12.60% 12.40% 12.20% 12.00% Top 20 Europe Data Source: Bloomberg Fund Fund (Equity Only*) Benchmark 17MAR On an individual basis, stock volatilities levels were highly variable though The following chart shows the 90 day realized volatility (annualized) at each quarter end for each of the names held in the fund during the year. On average, Anglo American PLC had the highest volatility of any name, followed by Tesco, which 5

8 26OCT experienced a marked increase in volatility during the second half, while HSBC, GlaxoSmithKline PLC, and Novartis AG had the lowest. On average, on an individual security basis, realized volatilities increased during the year with most names experiencing notable increases in the fourth quarter. Individual Volatilities (90 day) 40% Q1 Q2 Q3 Q4 20% 0% AAL LN ALV GR BAS GR BP/LN Data source: Bloomberg DAI GR DG FP EOAN GR ERICB SS FP FP GSK LN HMB SS HSBA LN NOVN VX RDSA NA RIO LN SAN SM TSCO LN UNA NA VIV FP 17MAR VOD LN VZC LN Financial Performance The net assets attributable to Unitholders were $9.38 per Unit at December 31, 2014 as compared to $10.03 per Unit at December 31, 2013 representing a decrease of 6.48%, reflecting depreciation in the fair value of the Portfolio Securities coupled with the Trust s operating expenses including Forward Agreement fees and distributions paid on the Units. Pursuant to the mandatory market purchase program, the Trust may purchase any Units offered in the market at a price less than 98% of the latest net asset value per Unit. For the year ended December 31, 2014, 5,221 (2013 7,902) Units were purchased under this program at an average price of $9.46 (2013 $9.22) per Unit for a total purchase amount of $49,406 (2013 $72,840). 6

9 26OCT Distributions The Trust does not have a fixed distribution but intends to pay quarterly distributions through partial pre-settlement of the Forward Agreement based on, among other things, the actual and expected returns on the Portfolio less estimated expenses of the Trust and TTE Trust. Quarterly distributions are targeted to be $ per Unit ($0.65 annually) representing an annual yield of 6.5% on the issue price, consisting primarily of returns of capital which are not immediately taxable but which reduce the adjusted cost base of the Units. For the year ended December 31, 2014, the Trust declared total distributions of $2.0 million or $0.65 per Unit consistent with the estimated quarterly distribution of $ per Unit (2013 $2.07 million or per Unit, prorated from December 20, 2012 to December 31, 2013). Dividends earned on the Portfolio and premiums received on writing covered call options on a portion of the Portfolio funded the distributions and operating expenses of the Trust. For the year ended December 31, 2014, $2.11 million (2013 $2.19 million) was available for distribution comprised of dividends earned on the Portfolio (including interest) of $1.58 million (2013 $1.56 million) and option premiums received of $1.34 million (2013 $1.56 million) offset by total operating expenses (excluding transaction costs) and purchases under the mandatory market purchase program of $0.81 million (2013 $0.93 million). This report, along with the accompanying audited financial statements of the Trust, is respectfully submitted to you on behalf of the Board of Directors of TTE Ltd., as general partner of TTE Limited Partnership, Trustee for Top 20 Europe Dividend Trust. Toronto, Canada March 4, MAY Brian D. McChesney President and Chief Executive Officer 7

10 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING 26OCT The accompanying financial statements of Top 20 Europe Dividend Trust and all the information in this annual report are the responsibility of management and have been reviewed and approved by the Board of Directors of TTE Ltd., as general partner ( GP ) of TTE Limited Partnership, the Trustee for Top 20 Europe Dividend Trust. The financial statements have been prepared by management in accordance with International Financial Reporting Standards. Financial statements are not precise since they include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Management has ensured that the information presented in this annual report is consistent with the financial statements. The financial statements have been audited by PricewaterhouseCoopers LLP on behalf of the Unitholders. The GP has oversight responsibility for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The GP carries out these responsibilities through its Audit Committee (the Committee ). The Committee is appointed by the GP. The Committee meets periodically with management and external auditors to discuss internal controls, the financial reporting process, various auditing and financial reporting issues, and to review the semi-annual and annual reports, the financial statements and the external auditors report. The Committee reports its findings semi-annually to the GP for consideration when approving the financial statements for issuance to the Unitholders. The Committee also considers, for review by the GP, the engagement or re-appointment of the external auditors. PricewaterhouseCoopers LLP has full and free access to the Committee. 6MAY Brian D. McChesney President and Chief Executive Officer 18NOV Stephen D. Pearce Chief Financial Officer Toronto, Canada March 4,

11 INDEPENDENT AUDITOR S REPORT TO THE UNITHOLDERS To the Unitholders and Trustee of Top 20 Europe Dividend Trust (the Trust) We have audited the accompanying financial statements of the Trust, which comprise the statements of financial position as at December 31, 2014, December 31, 2013 and January 1, 2013 and the statements of comprehensive income, cash flows and changes in net assets attributable to unitholders for the years ended December 31, 2014 and December 31, 2013, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Trust as at December 31, 2014, December 31, 2013 and January 1, 2013 and its financial performance and its cash flows for the years ended December 31, 2014 and December 31, 2013 in accordance with International Financial Reporting Standards. Toronto, Canada March 23, MAR Chartered Professional Accountants Licensed Public Accountants 9

12 STATEMENTS OF FINANCIAL POSITION As at 26OCT December 31 December 31 January (note 12) (note 12) Assets Current assets Forward Agreement, at fair value (note 4) $ 28,820,136 $ 30,954,834 $ 27,889,428 Receivable from Counterparty (note 4) 596, ,100 Cash 114, , ,000 29,531,666 31,685,104 28,339,428 Liabilities Current liabilities Distribution payable to Unitholders 501, ,466 Accrued liabilities (note 8) 87, ,203 64,485 Retraction proceeds payable 1,791,773 Issue costs payable 66, ,000 2,381, , ,485 Net assets attributable to Unitholders $ 27,150,465 $ 31,006,592 $ 27,824,943 Number of Units outstanding (note 6) 2,895,577 3,092,098 3,000,000 Net assets attributable to Unitholders per Unit $ 9.38 $ $ 9.28 See accompanying notes to financial statements. On behalf of the Board of Directors of TTE Ltd: 6MAY Brian D. McChesney President and Chief Executive Officer 6MAR Thomas C. Dawson Chairman of the Board 10

13 STATEMENTS OF COMPREHENSIVE INCOME 26OCT For the years ended December (note 12) Income Forward Agreement Net realized gain on partial pre-settlements of the Forward Agreement $ 331,617 $ 267,666 Unrealized appreciation (depreciation) on Forward Agreement (51,607) 4,443,989 Forward Agreement fees (note 8) (137,828) (129,867) Net gain on Forward Agreement 142,182 4,581,788 Interest 353 Total income, net 142,182 4,582,141 Expenses Management fees (note 8) 86,975 83,722 Unitholders information costs 36,744 34,281 Directors fees 27,181 16,521 Audit fees 20,252 12,787 Filing fees 13, Listing fees 10,580 10,335 Insurance premiums 9,955 12,620 Legal fees 9,491 5,904 Transfer agent fees 8,776 8,575 Independent Review Committee fees 3,739 3,752 Other (1,952) , ,797 Increase (decrease) in net assets attributable to Unitholders $ (82,929) $ 4,393,344 Increase (decrease) in net assets attributable to Unitholders per Unit (note 3) $ (0.027) $ See accompanying notes to financial statements. 11

14 26OCT STATEMENTS OF CASH FLOWS For the years ended December (note 12) Operating activities Increase (decrease) in net assets attributable to Unitholders $ (82,929) $ 4,393,344 Adjustments for: Net realized gain on partial pre-settlements of the Forward Agreement (331,617) (267,666) Unrealized (appreciation) depreciation on Forward Agreement 51,607 (4,443,989) Proceeds on partial pre-settlements of the Forward Agreement 2,414,708 2,593,750 Receivable from Counterparty 26,350 (623,100) Purchases under Forward Agreement (947,501) Accrued liabilities (21,393) 44,718 Net cash flow provided by operating activities 2,056, ,556 Financing activities Units purchased for cancellation (49,406) (72,840) Proceeds on issuance of Units 1,000,000 Issue costs recovered (paid) 9,835 (450,657) Distributions paid to Unitholders (2,009,545) (1,568,889) Net cash flow used in financing activities (2,049,116) (1,092,386) Net increase (decrease) in cash 7,610 (342,830) Cash, beginning of year 107, ,000 Cash, end of year $ 114,780 $ 107,170 Supplemental Cash Flow Information* Interest received $ $ 353 * Classified as operating activities. See accompanying notes to financial statements. 12

15 STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS For the year ended December 31 26OCT (note 12) Net assets attributable to Unitholders, beginning of year $ 31,006,592 $ 27,824,943 Increase (decrease) in net assets attributable to Unitholders (82,929) 4,393,344 Unit transactions (note 6) Units issued 1,000,000 Related issue costs recovered (paid) 76,678 (67,500) Units purchased for cancellation (49,406) (72,840) Units retracted (1,791,773) (1,764,501) 859,660 Financing unit transactions Distributions to Unitholders (return of capital) (2,008,697) (2,071,355) Net assets attributable to Unitholders, end of year $ 27,150,465 $ 31,006,592 See accompanying notes to the financial statements. 13

16 26OCT NOTES TO FINANCIAL STATEMENTS December 31, 2014 and GENERAL INFORMATION Top 20 Europe Dividend Trust (the Trust ) 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 November 27, 2012 (the Declaration of Trust ). The address of the Trust s registered office is 40 King Street West, Toronto, Ontario, M5W 2X6. Pursuant to this Declaration of Trust, TTE Limited Partnership. acts as the trustee (the Trustee ) and is responsible for managing the affairs of the Trust. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides portfolio management services required by TTE Trust (see below) including hedging strategies and acts as the options advisor to execute and maintain the option writing strategy of TTE Trust. Scotia Managed Companies Administration Inc. ( SMCAI or the Manager ), a wholly-owned subsidiary of Scotia Capital Inc. ( SCI ) which in turn is a wholly-owned subsidiary of The Bank of Nova Scotia, provides all administrative services for the Trust. The Trust is scheduled to terminate on January 31, 2018 (the Termination Date ). The Trust was created to provide holders (the Unitholders ) of units (the Units ) of the Trust with investment exposure, on a tax-advantaged basis, to an equally-weighted portfolio (the Portfolio ) comprised of the 20 highest yielding equity securities (the Portfolio Securities ) included in the Europe Dow, a regional index of the Dow Jones Industrial Average (the Europe Dow ). The Europe Dow measures the stock market performance of 30 leading publicly traded blue-chip companies from Western Europe. The Trust s investment objectives are to: (i) provide Unitholders with stable quarterly tax-advantaged distributions; (ii) provide Unitholders with the opportunity for capital appreciation; and (iii) mitigate the impact of foreign exchange exposure through the use of currency hedging strategies, in each case through exposure by virtue of the Forward Agreement (as defined herein). To pursue its investment objectives, the Trust entered into a purchase obligation under a forward purchase agreement (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 TTE Trust, an investment fund established for holding the Portfolio. Substantially all of the value of the Portfolio is hedged back to the Canadian dollar. As a result of the forgoing, the net asset value per Unit will vary depending on the performance of TTE Trust by virtue of the Forward Agreement. The Portfolio Manager and Options Advisor determines the Portfolio Securities on which TTE Trust writes covered call options and at what level relative to the current market price. The Portfolio Manager and Options Advisor writes covered call options from time to time on not more than 33% of the Portfolio in order to earn income from option premiums to supplement dividends generated by the Portfolio. The Portfolio Manager and Options Advisor will generate only write covered calls to the extent needed to increase the yield on the Portfolio to a targeted yield. The targeted yield will enable the Trust, by virtue of the Forward Agreement, to pay the targeted distribution. The Trust will purchase Units under the mandatory market purchase program to the extent premiums generated from writing covered call options are in excess of amounts needed to fund the distribution. 14

17 26OCT These financial statements were authorized for issuance by the Board of Directors of TTE Ltd., as general partner of the Trustee on March 4, BASIS OF PRESENTATION Statement of Compliance These financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards. The Trust adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Trust 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 Trust 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 12 discloses the impact of the transition to IFRS on the Trust 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 Trust s financial statements for the year ended December 31, 2013 under Canadian GAAP. 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 and is computed on an average cost basis. Functional Currency and Presentation Currency These financial statements are presented in Canadian dollars, which is the functional and presentation currency of the Trust. 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 Trust has made in preparing the financial statements: Classification and measurement of investments and application of the fair value option The Trust 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. The most significant judgment made in preparing the financial statements is that certain investments are held-for-trading. The most significant estimate is the fair value of 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. 15

18 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 26OCT 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 to cash are presented as Foreign exchange gain (loss) on cash. Foreign exchange gains and losses relating to 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 Trust recognizes financial assets and liabilities at fair value on the trade date when the Trust becomes a party to the contractual provisions of the instrument. The Trust s investment in the Forward Agreement is held-for-trading. The Trust 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 Trust 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 Trust qualifies as a mutual fund trust as defined in the Income Tax Act (Canada). All of the Trust 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 Trust. As a result, the Trust does not record income taxes and therefore, the tax benefit of unused capital and non-capital losses has not been reflected in the Statements of Financial Position as a deferred income tax asset. Income Recognition Interest income represents the interest received on demand deposits accounted for on an accrual basis. Increase (Decrease) in Net Assets Attributable to Unitholders per Unit 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 (see note 6) during the year. 16

19 26OCT Classification of Units The Trust s Units contain multiple contractual obligations and therefore, 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, and applies to the classification and measurement of financial assets and liabilities as defined in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018; however, is available for early adoption. The Trust 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 acquire, on or before the Termination Date, securities of Canadian public issuers ( Canadian Securities ) having a value based on the economic return provided by the Portfolio from inception to the Termination Date. Under the Forward Agreement, the Counterparty will deliver, on the Termination Date, a specified portfolio of Canadian Securities with an aggregate value equal to the redemption proceeds of all of the corresponding units of TTE Trust, net of any amount then owing by the Trust to the Counterparty. The Trust partially settles the Forward Agreement prior to the Termination Date in order to fund (i) quarterly distributions on the Units; (ii) redemptions of Units; and (iii) operating expenses and other liabilities of the Trust. Settlement of the Forward Agreement is unconditionally guaranteed by The Bank of Nova Scotia, a company with a current credit rating of AA (December 31, 2013 AA) as rated by DBRS. As at December 31, 2014, the Counterparty received a confirmation notice to partially pre-settle the Forward Agreement and on January 15, 2015, the Counterparty delivered securities of a Canadian public issuer that were sold by the Trust for proceeds of $596,750 (2013 $623,100). As a result of the pre-settlement, the Trust recorded a gain of $84,366 (2013 $118,979), which is included in total net realized gain on partial pre-settlements of the Forward Agreement of $331,617 (2013 $267,666). The Trust 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 Trust 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 December 31, 2014, collateral of $28.1 million (December 31, 2013 $31.6 million and January 1, 2013 $27.9 million) consisting of liquid TSX-listed securities with no more than 10% of the value in any one issuer was held in trust for the Trust. 17

20 26OCT The Portfolio Securities whose fair value is based on the closing sale prices on the stock exchange on which such Portfolio Securities are listed and other net assets as reported by TTE Trust as at December 31, 2014, December 31, 2013 and January 1, 2013 are as follows. December 31 December 31 January Portfolio Securities $ 27,701,120 $ 31,187,651 $ 27,688,600 Other net assets 1,119,016 (232,817) 200,828 Net assets attributable to Unitholders $ 28,820,136 $ 30,954,834 $ 27,889,428 In addition to the income and expenses detailed in the Trust s Statements of Comprehensive Income, the following shows the combined operations of the Trust and TTE Trust including dividends earned on the Portfolio Securities net of administrative and operating expenses for the years ended December 31, 2014 and 2013 representing amounts available for distribution to Unitholders: Top 20 Europe Select information from the Dividend TTE Total Total Statements of Comprehensive Income Trust Trust Income Dividends $ $ 1,577,075 $ 1,577,075 $ 1,557,402 Interest 3,408 3,408 1,730 1,580,483 1,580,483 1,559,132 Expenses Management fees 86,975 86, , ,775 Withholding taxes 230, , ,826 Operating expenses (1) 138,136 82, , , , , , ,094 Income less expenses (225,111) 1,181, , ,038 Less: Forward Agreement fees (137,828) (137,828) (129,867) Available for distribution after deduction of Forward Agreement fees $ (362,939) $ 1,181,145 $ 818,206 $ 699,171 (1) excluding transaction costs 18

21 26OCT Amounts available for distribution to Unitholders consist of: Total Total Available for distribution after deduction of Forward Agreement fees $ 818,206 $ 699,171 Plus option premiums received 1,345,565 1,560,932 Less: Units purchased under mandatory market purchase program (49,406) (72,840) Amounts available for distribution to Unitholders $ 2,114,365 $ 2,187, OFFSETTING FINANCIAL ASSETS AND LIABILITIES Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements: Gross Gross amounts amounts of recognized Amounts of recognized financial Net amounts not set-off financial liabilities of financial financial assets offset assets instruments Net amount December 31, 2014 Forward Agreement $ 28,820,136 $ $ 28,820,136 $ $ 28,820,136 December 31, 2013 Forward Agreement $ 30,954,834 $ $ 30,954,834 $ $ 30,954,834 January 1, 2013 Forward Agreement $ 27,889,428 $ $ 27,889,428 $ $ 27,889,428 The Counterparty has pledged collateral in respect of their obligations under the Forward Agreement as indicated in note NET ASSETS ATTRIBUTABLE TO UNITHOLDERS The Trust is authorized to issue an unlimited number of transferable, redeemable Trust Units of one class each of which represents an equal, undivided ownership interest in the net assets of the Trust, with all Units having equal rights and privileges. The Trust may purchase any Units offered in the market at a price that is less than 98% of the latest NAV per Unit. Pursuant to the mandatory market purchase program, the Trust will purchase up to a maximum amount in any rolling 10 day period of 10% of the number of Units outstanding at the beginning of such 10 day period, subject to the terms set out in the Declaration of Trust. Purchases under the mandatory market purchase program will only be made to the extent they may be funded by premiums generated from writing covered call options in excess of amounts needed to fund the distribution up to the limit of 33% of the Portfolio. For the year ended December 31, 2014, 5,221 (2013 7,902) Units were purchased under this program at an average price of $9.46 (2013 $9.22) per Unit for a total purchase amount of $49,406 (2013 $72,840). 19

22 26OCT Redemption of Trust Units Units may be surrendered for retraction by delivery of a retraction notice to the Trust s registrar at least 45 days prior to the second last business day of December each year ( Annual Redemption Date ) and receive a redemption price per Unit equal to 100% of the net asset value per Unit on an Annual Redemption Date (less any costs associated with the redemption including brokerage costs, and less any net realized capital gains or income of the Trust that are distributed to a Unitholder concurrently with the proceeds of disposition on redemption). Units surrendered for redemption by a Unitholder will receive payment within 15 days of the Annual Redemption Date. The number of Units issued and outstanding for the years ended December 31, 2014 and 2013 is summarized as follows: Units outstanding, beginning of year 3,092,098 3,000,000 Units retracted (191,300) Units issued for cash 100,000 Units purchased under mandatory market purchase program (5,221) (7,902) Units outstanding, end of year 2,895,577 3,092,098 The weighted average number of Units outstanding for the year ended December 31, 2014 was 3,090,689 (2013 3,093,840). The market value of the Units on December 31, 2014 was $9.30 per Unit (December 31, 2013 $10.60 and January 1, 2013 $9.95). 7. INCOME TAXES The Trust 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 Trust s income by virtue of the acquisition of the Canadian Securities through partial pre-settlements or final settlement of the Forward Agreement. The cost to the Trust of such Canadian Securities will be that portion of the aggregate amount paid by the Trust under the Forward Agreement attributable to the Canadian Securities. The resulting gain or loss realized by the Trust 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 Trust 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 Trust. To the extent the Trust 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 Trust 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, 20

23 26OCT which are not generally taxable at time of receipt, and capital gains. Based on the Trust s legal structure and the Forward Agreement in place, this measure does not immediately affect the Trust as the Character Conversion Rules include grandfathering rules such that the Trust s distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on January 31, Capital losses may be carried forward indefinitely to reduce future realized capital gains. Non-capital losses may be carried forward up to twenty years and applied against net income and net realized taxable capital gains. As at December 31, 2014, the Trust has non-capital losses of $1,211,000 (2013 $682,000) available to offset future income for tax purposes, for which no benefit has been recognized in these financial statements. The non-capital losses by year of expiry are as follows: 2032 $ 99, , ,000 $ 1,211, RELATED PARTY INFORMATION For its services to the Trust, 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. SMCAI is responsible for paying fees to Highstreet.The total management fee paid or payable to SMCAI for the year ended December 31, 2014 was $86,975 (2013 $83,722). The ongoing management fee is calculated and accrued weekly and is payable quarterly in arrears. Under the Forward Agreement, the Trust pays to the Counterparty an additional purchase amount, calculated weekly and payable quarterly in arrears, of 0.45% per annum of the notional amount of the Forward Agreement being the net asset value of TTE Trust. The total fees paid or payable to The Bank of Nova Scotia relating to the Forward Agreement for the year ended December 31, 3014 were $137,828 (2013 $129,867). At December 31, 2014, the Trust had accrued liabilities of $32,891 (December 31, 2013 $34,786 and January 1, 2013 $101,629) payable to SMCAI and had cash on deposit with SCI and The Bank of Nova Scotia of $114,644 (December 31, 2013 $107,033 and January 1, 2013 $450,000). For the year ended December 31, 2014, transaction costs of $104 (2013 $158) were paid to SCI under the mandatory market purchase program. 9. CAPITAL MANAGEMENT The Trust 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 Trust, including the receipt of cash from partial unwinds of the Forward Agreement and the payment of distributions to the Unitholders. The Trust makes cash distributions funded from proceeds received from partial unwinds of the Forward 21

24 26OCT Agreement after deduction of operating expenses of the Trust subject to maintaining a minimum level of cash on hand. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table outlines the fair value hierarchy of the financial instruments as at December 31, 2014, December 31, 2013 and January 1, 2013: Level 1 Level 2 Level 3 Total As at December 31, 2014 Forward Agreement $ $ 28,820,136 $ $ 28,820,136 As at December 31, 2013 Forward Agreement $ $ 30,954,834 $ $ 30,954,834 As at January 1, 2013 Forward Agreement $ $ 27,889,428 $ $ 27,889,428 All fair value measures are recurring. The carrying amounts of receivable from Counterparty, cash and all current 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. The Trust s policy is to recognize transfers into and out of fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer. There were no transfers between levels during any of the years presented. Forward Agreement The fair value is based on the net asset value of TTE Trust, the difference between the contract rate and current market rates, substantially based on equity securities comprising the Portfolio. The inputs that are significant to the valuation are observable and therefore the Forward Agreement has been classified as Level FINANCIAL INSTRUMENT RISK MANAGEMENT In the normal course of business, the Trust is exposed to a variety of financial risks: market risk (including price risk, interest rate risk and currency risk), credit risk and liquidity risk. As it is the Trust s mandate, through the Forward Agreement, to be fully invested in a defined portfolio and pay distributions from cash flows to the maximum extent possible, the Trust s overall risk management program focuses on compliance and execution of the Trust s investment objectives and strategies. 22

25 26OCT Price Risk By virtue of the Forward Agreement, the value of a Unit is dependent on the value of the Portfolio Securities held by TTE Trust. The value of the Portfolio Securities can fluctuate on a daily basis as a result of factors outside of TTE Trust s control, including financial performance of the issuers, 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. As TTE Trust s mandate is to track the 20 highest yielding members of the Europe Dow and pay distributions to the maximum extent possible, it does not use any strategies in managing any of these market price risks. If the prices for the Portfolio Securities held by TTE Trust had increased or decreased by 5% as at, with all other variables held constant, the Trust s net assets would have increased or decreased, respectively, by approximately $1.4 million (December 31, 2013 $1.5 million and January 1, 2013 $1.4 million). 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, resulting in fluctuations in the value of interest bearing financial instruments. By virtue of the Forward Agreement, the majority of the Trust s assets are equities that do not pay a fixed rate of interest; however, the Trust is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on the Portfolio Securities. Any excess cash is invested in short-term money market instruments or in a deposit account. Currency Risk Currency risk arises from financial instruments that are denominated in a currency other than the Canadian dollar, which is the Trust s functional and presentation currency. By virtue of the Forward Agreement, the Trust is exposed to equity securities denominated in foreign currencies and is therefore indirectly exposed to currency risk due to changes in the foreign currency rates of those equity securities denominated in other currencies in relation to the Canadian dollar. The Manager enters into foreign exchange contracts in TTE Trust for hedging purposes to reduce its foreign currency exposure. The table below indicates the foreign currencies to which TTE Trust had exposure as at December 31, 2014, December 31, 2013 and January 1, 2013 in Canadian dollar terms. The table also illustrates the potential impact to TTE Trust s net assets as at December 31, 2014, December 31, 2013 and January 1, 2013 if TTE Trust s functional currency, the Canadian dollar, had strengthened or weakened by 5% in relation to all 23

26 26OCT 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 December 31 December 31 January 1 December 31 December 31 January British Pound 292, ,833 91,525 14,602 26,892 4,576 Euro 421,976 2,391, ,151 21, ,574 14,108 Swedish Krona 1,502,399 1,676,554 1,408,284 75,120 83,828 70,414 Swiss Franc 732,551 22,990 1,350,136 36,628 1,150 67,507 2,948,960 4,628,862 3,132, , , ,605 As a % of Net Assets 10.23% 14.95% 11.23% 0.51% 0.75% 0.56% Credit Risk Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with another party. The Trust 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 listed securities undertaken by TTE Trust are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is made only when TTE Trust has received payment. Payment is made on purchases once the securities have been received by TTE Trust. Should either party not meet its obligation, the trade will fail. Credit risk pertaining to the Forward Agreement is detailed in note 4. Liquidity Risk Liquidity risk is defined as the risk that the Trust may not be able to settle or meet its obligations on time or at a reasonable price. The Trust is only exposed to annual cash redemptions and receives notification 45 days prior to payment. By virtue of the Forward Agreement, the Trust invests its assets in investments that are traded in an active market and can be readily disposed of. There can be no assurance that an adequate market for the Portfolio Securities will exist at all times, or that the prices at which the Portfolio Securities trade, accurately reflect their net asset values. The Trust and TTE Trust maintain cash and cash equivalents to offset all of its liabilities with the exception of the Trust s obligation for net assets attributable to Unitholders. As at December 31, 2014, the maturity of the Trust s financial liabilities based on the remaining period between the financial statement date and the contractual maturity date was $2.4 million (December 31, 2013 $0.7 million and January 1, 2013 $0.5 million) due in 1 to 6 months. 24