2015 INTERIM MANAGEMENT REPORT OF FUND PERFORMANCE For the period ended June 30, 2015

Transcription

1 2015 INTERIM MANAGEMENT REPORT OF FUND PERFORMANCE For the period ended June 30, 2015 Offered by Educators Financial Group Portfolio Adviser: HSBC Global Asset Management (Canada) Limited, Toronto, Ontario Educators Mortgage & Income Fund

2 This interim management report of fund performance contains financial highlights but does not contain either the interim financial report or annual financial statements of the investment fund. You can get a copy of the interim financial report or annual financial statements at your request, and at no cost, by calling , by writing to us at Educators Financial Group, 2225 Sheppard Ave. East, Suite 1105, Toronto, Ontario, M2J 5C2, or by visiting our website at or SEDAR at Securityholders 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. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Results of Operations For the six-month period ending June 30, 2015, the Fund provided a return of 1.44%, versus the FTSE TMX Canada Short Term Bond Index (the Benchmark ) return of 2.11%. Note that investors cannot invest in the Benchmark without incurring fees, expenses and commissions which are not reflected in index returns. The Fund s net assets increased by 0.1% to $205.5 million at the end of June 2015, up from $205.3million at the end of December As bond yields fell in the first half of 2015, the Fund s short duration (interest rate risk) and exposure to residential mortgages detracted from relative performance while the Fund s overweight positions in corporate bonds and a higher running yield helped performance. One of the most surprising developments in financial markets over the course of 2014 was the sharp decline in global bond yields. This trend picked up further momentum during the first quarter of Yet despite this strong start to the year, global fixed income markets came under pressure for most of the second quarter. Generational lows in yields, expectations for improving global growth and the approaching start to the Federal Reserve tightening cycle all put upward pressure on yields in the second quarter. The 5-year Government of Canada bond yield commonly looked at as a proxy for the broad short term market rose by 6 basis points in the second quarter but has declined 52 basis points year-to-date. The FTSE TMX Short Term Bond Index posted a total return of 0.21% in the second quarter as short term Federal government debt returned 0.17%, outperforming Provincial debt (0.13%) but underperforming corporate (0.31%) debt in the second quarter. Year-to-date, the Canadian Short Term Bond Index returned 2.11%, with sector returns again somewhat varied. Federal government, Provincial government and corporate bonds returned 1.89%, 2.18% and 2.37% respectively. Market expectations surrounding the Bank of Canada s course of action for 2015 and beyond have been quite volatile following the Bank s surprise rate cut decision in 1 January. Given the sharp sell-off in energy prices and the potential shock to the Canadian economy this might cause, the Bank of Canada decided to take out an insurance policy in the form of additional monetary stimulus early this year. The Bank cut its overnight rate by 25 basis points to 0.75%. While we believe the current policy level to be appropriate, clearly the central bank is prepared to offer additional stimulus if the oil price shock is more acute than expected. Furthermore, with the recent weakness in the economy, the likelihood of another rate cut from the Bank of Canada has increased. After having steepened dramatically early in 2015 following the Bank of Canada s surprise cut in the overnight rate, the yield curve flattened in the second quarter. The difference between 2 year and 10 year Government of Canada yields widened to 120 bps from 85 bps at the start of the second quarter and 78 bps at the start of the year. Short-term Government bond yields rose slightly in the quarter, rising on average from 0.65% to 0.70%. In contrast, broad posted mortgage rates were unchanged in the quarter, with the yield on the FTSE/TMX Residential Mortgage Index steady at 3.39%. The yield differential between 5-year fixed mortgage rates and the 5-year Government of Canada bond narrowed slightly in the second quarter from 398 bps to 382 bps. Overall, mortgages outperformed short-term Government bonds in the second quarter but only recouped some of the underperformance experienced in the first quarter. We believe that residential mortgages represent very attractive value at current levels, with the yield spread near multi-year highs and much wider than its historical average. Asset quality in the Canadian residential mortgage market remains very strong. The current average delinquency rate across the country is 0.28%, down slightly year-to-date and close to the lower end of its long-term range. Recent Developments As expected, lower energy prices put short term pressure on North American economies early in Growth in both the US and Canada contracted in the first quarter, and has been slow to rebound in the second quarter, as business investment and trade have been disappointing. That said, strength in the labour and housing markets continues to

3 support the consumer and growth is expected to improve in the second half of the year. HSBC forecasts 2015 growth of 2.2% in the US, 1.4% in Canada and 2.4% globally. Further improvements in growth are anticipated for Reasonable growth in emerging economies and accommodative monetary policy and a resilient consumer in the developed world should support continued progress toward achieving potential growth rates. We fully expect the Federal Reserve to take a gradual, measured approach to unwinding monetary stimulus starting in late For the Canadian economy the additional stimulus provided by the Bank of Canada, coupled with the depreciation of the Canadian $ should provide a boost to growth later in the year. Further, with household balance sheets in good shape, stability in the housing and labour markets and lower energy costs the consumer is expected to remain a key engine of growth. However, the rebound in growth has been slow to materialize and the recent softness in the domestic economy has increased the likelihood on another rate cut from the Bank of Canada. At this point, with longer term yields expected to rise modestly over the next year, the objective will be to maintain the Fund s interest rate exposure below the benchmark in the near term. We feel that the corporate sector remains fundamentally sound with continuing strong profit growth and defensively positioned balance sheets. Valuations in credit markets continue to look attractive, and we continue to prefer residential mortgages and corporate bonds over Government of Canada bonds and will look to remain overweight these sectors. Potential risks to our central outlook include disappointing global growth, further weakness in commodity prices and heightened geopolitical concerns in the Eurozone. Caution Regarding Forward-looking Statements This report may contain forward-looking statements about the Fund, including its strategy, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as expects, anticipates, intends, plans, believes, estimates or negative versions thereof and similar expressions. materially from those expressed or implied in any forwardlooking statements made by the Fund. Any number of important factors could contribute to these digressions, including, but not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. It should be stressed that the above-mentioned list of factors is not exhaustive. You are encouraged to consider these and other factors carefully before making any investment decisions and you are urged to avoid placing undue reliance on forward-looking statements. Further, you should be aware of the fact that the Fund has no specific intention of updating any forward-looking statements, whether as a result of new information, future events or otherwise, prior to the release of the next Management Report of Fund Performance. Related Party Transactions Pursuant to the Fund s investment strategies included in the Fund s Simplified Prospectus, the Fund may invest in other mutual funds and for the period has invested in HSBC Emerging Markets Debt Fund, Institutional Series; HSBC Mortgage Fund, Institution Series; and HSBC U.S. High Yield Bond Pooled Fund which are funds managed by the Fund s Portfolio Adviser. In the first six months of 2015 Educators Financial Group did not refer any conflict of interest matters to the Fund s Independent Review Committee (IRC) and accordingly did not rely upon any recommendation of the IRC in respect of any related party transactions. Educators Financial Group is the Manager and Trustee of the Fund. Educators Financial Group is a wholly-owned subsidiary of the Ontario Secondary School Teachers Federation ( OSSTF ). OSSTF may from time to time invest in units of the Fund. In addition, any statement that may be made concerning future performance, strategies or prospects, and possible future Fund action is also a forward-looking statement. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about the Fund and economic factors. Forward-looking statements are not guarantees of future performance, and actual events and results could differ 2

4 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 six month period ended June 30, 2015, and for each year ended December 31 for the past five years. The Fund s Net Assets per Unit (1) Six months ended June 30 Year ended December Net Assets, beginning of period $11.44 $11.38 $11.50 $11.46 $11.40 $11.38 Increase (decrease) from operations: Total revenue $0.19 $0.38 $0.39 $0.40 $0.43 $0.51 Total expenses [excluding distributions] $(0.07) $(0.14) $(0.14) $(0.14) $(0.14) $(0.13) Realized gains (losses) for the period $0.01 $0.03 $(0.03) $(0.08) $(0.01) $(0.03) Unrealized gains (losses) for the period $0.03 $0.05 $(0.09) $0.11 $0.06 $0.04 Total increase (decrease) from operations (2) $0.16 $0.32 $0.13 $0.29 $0.34 $0.39 Distributions: From net investment income (excluding dividends) $0.12 $0.25 $0.25 $0.26 $0.29 $0.38 From dividends $-- $-- $-- $-- $-- $-- From capital gains $-- $-- $-- $-- $-- $-- Return of capital $-- $-- $-- $-- $-- $-- Total Annual Distributions (3) $0.12 $0.25 $0.25 $0.26 $0.29 $0.38 Net Assets, end of period $11.48 $11.44 $11.38 $11.49 $11.46 $11.40 (1) (2) (3) This information is derived from the Fund s interim financial report and audited annual financial statements. For the financial year beginning after January 1, 2014, the financial highlights were derived from the Fund s financial statements prepared in accordance with International Financial Reporting Standards ( IFRS ). For the financial year ended December 31, 2013, the financial highlights numbers were restated to comply with IFRS reporting. For financial years beginning before January 1, 2013, the financial highlights were derived from the Fund s financial statements prepared in accordance with Canadian GAAP. For financial years beginning after January 1, 2013, all references to Net Assets or Net Assets per Unit in these financial highlights are references to net assets attributable to holders of redeemable units determined in accordance with IFRS as presented in the financial statements of the Fund. Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. Distributions were either paid in cash or reinvested in additional units of the Fund. Ratios and Supplemental Data (based on Net Asset Value) Six months ended June 30 Year ended December Net Asset Value (000 s) (1) $205,523 $205,273 $206,956 $207,194 $177,749 $160,863 Number of units outstanding (1) 17,899,027 17,939,038 18,192,370 18,021,968 15,495,515 14,088,814 Management expense ratio (2) 1.19% 1.19% 1.20% 1.20% 1.20% 1.16% Management expense ratio before waivers or 1.25% 1.25% 1.25% 1.26% 1.25% 1.21% absorptions (3) Trading expense ratio (4) Portfolio turnover rate (5) 11.13% 27.89% 40.50% 32.41% 23.66% 82.06% Net Asset Value per unit $11.48 $11.44 $11.38 $11.50 $11.47 $11.42 (1) (2) This information is provided as at June 30 or December 31 of the year shown. Management expense ratio is based on total expenses (excluding [distributions], commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. 3

5 (3) (4) (5) The management expense ratio before waivers or absorptions shows what the management expense ratio of the Fund would have been if Educators Financial Group had not charged a lesser amount for its management fee. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. The Fund s portfolio turnover rate indicates how actively the Fund s portfolio adviser 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 rates 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. Management Fees Educators Financial Group is the Manager-Trustee, promoter and principal distributor of the Fund, and is responsible for the day-to-day management and administration of the Fund. The Manager-Trustee monitors and evaluates the performance of the Fund, and pays for the investment management services of the portfolio adviser, as well as all administrative services required by the Fund. As compensation for these services, Educators Financial Group is entitled to receive a fee, payable monthly and calculated daily, based on the Net Asset Value of the Fund, at the annual rate of 1.10%. The Fund is responsible for paying any applicable tax owing on its management fee. Year-by-Year Returns The bar chart shows the Fund s performance for each of its past 10 financial years and illustrates how the Fund s performance has changed for the 6-month period ended June 30, 2015 and each 12-month period ending December 31. The chart shows, in percentage terms, how much an investment made on the first day of each financial period would have grown or decreased by the last day of each financial period Approximately 12.0% of the management fees were used to pay for portfolio management services, with the remainder of the fees allocated to custodial services, marketing, technology and Manager-Trustee operating expenses. PAST PERFORMANCE General The Fund s performance information shown assumes that all distributions made by the Fund in the periods shown were reinvested in additional units of the Fund. The performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. Please remember that how the Fund has performed in the past does not necessarily indicate how it will perform in the future % Increase/decrease For the six-month period ended June 30,

6 SUMMARY OF INVESTMENT PORTFOLIO (Based on Net Asset Value) Asset-Backed 5.14% Cash & Cash Equivalents 0.32% Government Bonds 1.67% Net Other Assets 0.33% Corporate Bonds 40.33% Canadian Mutual Funds 52.21% Top 25 Holdings Security Name Coupon Rate Maturity Date Percentage of Net Asset Value HSBC Mortgage Fund, Institutional Series 49.68% HSBC Global High Yield Bond Pooled Fund 2.51% AT&T Inc. 3.83% November 25, % Cameco Corp. 5.67% September 2, % Genworth MI Canada Inc. 5.68% June 15, % TMX Group Ltd. 3.25% October 3, % BAA Funding Ltd. 4.00% July 3, % BP Capital Markets PLC 3.50% November 9, % Canada Housing Trust No % January 15, % Merrill Lynch & Co. Inc. 5.29% May 30, % CDP Financial Inc. 4.60% July 15, % Goldman Sachs Group Inc. 5.20% April 19, % WestJet Airlines Ltd. 3.29% July 23, % General Motors Financial of Canada Ltd. 3.25% May 30, % MCAP RMBS Issuer Corp. 2.17% April 15, % Brookfield Asset Management Inc. 5.30% March 1, % Real Estate Asset Liquidity Trust 2.56% October 12, % Canadian Western Bank 3.08% January 14, % Manufacturers Life Insurance Co. 2.64% January 15, % Royal Bank of Canada 3.04% July 17, % bcimc Realty Corp. 2.79% August 2, % Institutional Mortgage Securities Canada Inc. 1.94% September 12, % Granite REIT Holdings LP 4.61% October 2, % Brookfield Asset Management Inc. 5.29% April 25, % Home Trust Co. 3.40% December 10, % Total Net Assets (000 s) $205,523 The top 25 holdings represent approximately 84.48% of the total net assets of the Fund. The summary of investment portfolio of the Fund is as at June 30, 2015 and may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly. Information about the holdings of the HSBC Funds owned by the Fund is contained in their simplified prospectus, annual information form and fund facts documents available on SEDAR at 5

7 EDUCATORS FINANCIAL GROUP 2225 Sheppard Ave. East Suite 1105 Toronto, Ontario M2J 5C2 Telephone: Fax: Web: