Management Discussion of Fund Performance

Transcription

1 FOR THE PERIOD ENDED DECEMBER 3, 207 This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the Fund. If the annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the annual financial statements at your request, and at no cost, by calling , by writing to us at 20 Yonge Street, 7th Floor, Toronto, ON MB 2M8 Attention: Global Water Solutions Fund C/O BMO Investment Funds Group Investor Relations or by visiting our website located at com/investorsolutions under Investment Funds or SEDAR at You may also contact us using one of these methods to request a copy of the Fund s annual financial report, proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. Management Discussion of Fund Performance Investment Objectives and Strategies Global Water Solutions Fund (the Fund ) was created to invest in an actively managed global portfolio (the Portfolio ) comprised primarily of publicly-listed equity securities of Water Issuers that are providing solutions to water scarcity. Water Issuers means all manufacturers, service providers and operators across the water cycle, from water collection and treatment to distribution and wastewater remediation including the pump, pipe and valve makers to companies involved in the design, construction and management of large scale water infrastructure projects to the technology companies providing filtration, disinfection, test and measurement and metering products. The Portfolio is actively managed by KBI Global Investors (the Portfolio Manager ). The investment objectives of the Fund are to provide unitholders of the Fund (the Unitholders ) with: (i) the opportunity for capital appreciation; and (ii) quarterly cash distributions. The Portfolio is exposed to foreign currencies. The Portfolio Manager hedges substantially all of the Portfolio s exposure to the U.S. dollar back to the Canadian dollar. Distributions on the Portfolio securities are not hedged. The Fund may utilize various forms of leverage, including through borrowing and margin facilities. The leverage employed by the Fund is typically achieved primarily by way of margin facilities. The maximum aggregate amount of leverage that the Fund can employ is 2% of Total Assets. Total Assets means the aggregate value of the assets of the Fund. The Fund does not have a fixed distribution, but pays quarterly cash distributions based on, among other things, the actual and expected returns on the Portfolio. The Fund makes quarterly distributions to Unitholders of record on the last Business Day of each of March, June, September and December (each a Distribution Record Date ). Distributions are paid on a Business Day designated by BMO Nesbitt Burns Inc. (the Manager ) on or about the th day of the month following a Distribution Record Date. The Units of the Fund (the Units ) are listed on the Toronto Stock Exchange (the TSX ) under the symbol HTO.UN. Particular investment objectives, strategies, and restrictions of the Fund are set out in greater detail in the Fund s Annual Information Form for the year ended December 3, 207 (the AIF ).

2 Risk The risks of investing in the Fund are discussed in the Fund s AIF. There have been no material changes to the overall level of risk associated with an investment in the Fund during the financial period from January, 207 to December 3, 207 (the Period ). Results of Operations The net asset value ( NAV ) of the Fund at the beginning and at the end of the Period was $29,68,776 and $26,74,48 respectively. During the Period, the Fund paid or committed to pay $,229,829 in connection with the Units quarterly distribution. During the Period, $9,988,434 of Units were surrendered for redemption. During the Period, the Fund generated a return of approximately 33.6%. Factors contributing to the change in the return include changes in the value of the Fund s investments and payment of fees for investment management services. At the end of the Period, the Fund employed leverage of 4.30% of Total Assets for the purpose of purchasing additional securities for the Portfolio. During the Period, the leverage employed by the Fund ranged from.29% to.34% of Total Assets. The Portfolio Manager provided the following commentary with regard to the Fund s performance over the Period : Equity markets performed well in 207, aided by several supportive macroeconomic events, including solid global economic growth, low inflation, low volatility and supportive monetary policies of most of the world s central banks. The general trend of increased investment in water infrastructure continued, evident in many parts of the world. With demand for water growing at approximately twice the rate of population growth, the challenges of supplying clean, fresh water to the global population continued to be strained. Furthermore, recent highly publicized environmental pollutions helped to drive regulation and enforcement for water. During the Period, the Fund s holdings contributed to performance across the water infrastructure, water technology and water/wastewater utilities segments. Strong earnings from the companies held has boosted the Fund s performance, further backed by raised forecast and increased merger and acquisition activity throughout the year. The top individual contributors to performance included Veolia Environment S.A. and Pure Technologies Ltd. Veolia Environment S.A., a global operator in the municipal water and waste industry, has significant operations in France. The stock price declined in early 207 after its outlook for the year disappointed the market. However, good first-quarter results and improving economic conditions in Europe led to sustained outperformance as attractive valuation and good medium-term growth prospects offered a good buying opportunity. Pure Technologies Ltd. is a key player in infrastructure diagnostics and leak detection. During December, the company announced that it would be acquired by Xylem Inc. at a premium of more than 00% of its latest closing price. The stock was one of the Fund s top-0 holdings and, therefore, a significant contributor to relative performance. The most notable detractor from the Fund s performance was exposure to the utilities sector, which faced some challenges. Individual detractors from performance included holdings HD Supply Holdings Inc. and H20 Innovation Inc. HD Supply Holdings Inc. is a North American distributor whose waterworks division distributes water infrastructure products to utilities and construction markets, including pipes, valves, fire protection, metering systems and hydrants. The company s stock weakened after disappointing results and the announcement of the sale of its waterworks division. Backlogs at H20 Innovation Inc. have grown, but the progression of order to revenues was slower than expected as a result of delays with some projects. This caused some investors to question the company s growth trajectory. Information and commentary has been provided by the Portfolio Manager and has not been independently verified by the Fund, BMO Nesbitt Burns Inc., or any other person. Any views or opinions expressed herein do not necessarily reflect, and may differ significantly from, the views of Bank of Montreal, BMO Nesbitt Burns Inc. and any of their affiliates and from the views of other professionals within BMO Financial Group. 2

3 A new position in Aalberts Industries NV was introduced to the Fund during the Period. The company designs and manufactures equipment and products for flow control applications in industrial, construction and municipal markets. The Portfolio Manager believes that the company s organic growth rate is set to increase as improving end markets coincide with the positive effects of two years of capital investments. Existing holdings in Stantec Inc. were increased for its strong bidding activity, orders and increasing backlogs. The Fund s shares of Calgon Carbon Corp. were eliminated after the water treatment company announced that it would be acquired at a premium of more than 60%. Pure Technologies Ltd. holdings were trimmed after the stock price doubled following the announcement of its pending sale to Xylem Inc. Outlook The Portfolio Manager continues to have an optimistic outlook for the Fund and believes that several factors specific to global water will provide a compelling equity opportunity in the coming year. These factors include a global pick up in government spend on water and infrastructure, highly publicized pollution that is leading to more regulation and enforcement, better, more sustainable companies are emerging and long-term water spend drivers are becoming stronger over time. 3

4 Recent Developments Unitholder Activity At the beginning of the Period, 3,62,262 Units were outstanding. During the Period,,074,203 Units were surrendered for redemption. At the end of the Period, 2,38,09 Units remained outstanding. Annual Indicative Distribution On March 2, 207, the Fund announced that based upon prevailing market conditions and the anticipated income from the Portfolio for upcoming year, the annual indicative distribution amount of the Fund remains unchanged at $0.0 per Unit per quarter ($0.40 per Unit per annum). Related Party Transactions The Manager, an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ) is responsible for the management and administration of the Fund. The Manager is a member of BMO Financial Group. Fund Administration Services BMO Asset Management Inc., an indirect subsidiary of BMO and an affiliate of the Manager, has been retained by the Manager to provide certain services to the Fund, including, among others, fund accounting and valuation services, Unitholder communications and Unitholder services. The fees charged to the Fund for such services for the Period were $6,7. Prime Brokerage Services The Manager has been retained by the Fund to provide leverage loan facilities to the Fund. The interest amount charged to the Fund on the leverage loan facilities for the Period was $89,9. Currency Hedging Transactions From time to time the Portfolio Manager may enter into currency hedging transactions with BMO. The terms of such transactions (including any fees paid to BMO) are on market terms at the relevant time. Management Fee The Manager is responsible for providing, or arranging for the provision of, managerial, administrative and compliance services to the Fund. As compensation for management and administrative services, the Manager is paid an annual management fee (the Management Fee ) by the Fund of.0% of the net asset value of the Fund, accrued and calculated daily and payable monthly in arrears, together with applicable taxes. The Portfolio Manager is compensated for its services to the Fund by the Manager out of the Management Fee. 4

5 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 period indicated. The Fund s Net Assets Per Unit Periods ended December 3 Units ($) ($) ($) ($) ($) Net assets, beginning of period Increase (decrease) from operations: Total revenue Total expenses 2 (0.24) (0.23) (0.22) Realized gains (losses) for the period (0.74) Unrealized gains (losses) for the period (0.79) Total increase (decrease) from operations (.6) Distributions: Income Dividends 0.29 Capital gains 0.6 Return of capital Total annual distributions Net assets, end of period This information is derived from the Fund s audited financial statements. 2 Includes withholding taxes, commissions and other portfolio transaction costs. 3 Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase (decrease) from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. 4 Distributions were paid or are payable in cash, or reinvested notional distributions. The information shown in this column is for the period begining January 29, 20 (the Fund s inception date) and ending December 3, 20.

6 Financial Highlights (cont.) Ratios and Supplemental Data Periods ended December 3 Units Total net asset value $26,74,48 $29,68,776 $20,802,77 Number of units outstanding 2,38,09 3,62,262 2,800,000 Management expense ratio 2 2.3% 2.2% 2.40% Management expense ratio before waivers or absorptions 2 2.3% 2.2% 2.40% Trading expense ratio % 0.4% 0.39% Portfolio turnover rate % 30.20% 79.90% Net asset value per unit $0.3 $8.2 $7.43 Closing market price $0.2 $7.73 $7.04 This information is provided as at December 3 of the periods shown. 2 The management expense ratio is based on total expenses (excluding 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 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. 4 The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 00% 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. The information shown in this column is for the period begining January 29, 20 (the Fund s inception date) and ending December 3, 20. 6

7 Past Performance This section sets out the year-by-year returns and annual compounded returns of the Fund for the periods shown. The NAV returns are calculated using published NAV per Unit and assume that all distributions made by the Fund, if any, are reinvested in additional Units at the nearest subsequent NAV valuation date. For calculation purposes, the initial NAV is set at the initial offering price of $0.00 per Unit, less applicable issuance expenses. Market returns are calculated using market prices and assume that all distributions made by the Fund, if any, are reinvested in additional Units at the ex-date closing price on the TSX. For calculation purposes, the inception price is set at the initial offering price of $0.00 per Unit. The returns shown do not take into account sales, redemptions, distributions or operational charges or income taxes that would have reduced returns. How the Fund has performed in the past does not necessarily indicate how it will perform in the future. Year-by-Year Returns Figure A shows the performance of the Units calculated by published NAV. Figure B shows market prices for the periods shown. The rates of return indicate, in percentage terms, how much an investment made for the periods indicated. Annual Compound Returns Figure C sets out the Fund s annual compound return for each period indicated. The return of the MSCI World Index (the Index ) is provided to give an indication of the performance of the market on an overall basis for the same periods. The Index captures large- and mid-capitalization representation across 23 Developed Markets countries*. With,639 constituents, the Index covers approximately 8% of the free float-adjusted market capitalization in each country. The Fund does not invest in the same securities or in the same proportions as the Index and there are various costs associated with the Fund. Therefore, the performance of the Fund is not expected to reflect the performance of the Index. * Developed Markets countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US. FIGURE A: PERFORMANCE - NET ASSET VALUE PER UNIT (6.89%) 6.8% Return from February 27, 20 to December 3, % 207 FIGURE B: PERFORMANCE - MARKET VALUE PER UNIT (2.63%) 20.80% Return from February 27, 20 to December 3, 20. FIGURE C: ANNUAL COMPOUND RETURNS 37.9% year 3 Year Year 0 Year Since Inception Units 33.6% 9.38% MSCI World Index % 8.99% 3 Return from February 27, 20 to December 3, Source: Bloomberg, in U.S. dollars. 3 Annualized. 7

8 Summary of Investment Portfolio Geographic Allocation As at December 3, 207 % of Net Asset Value United States 4.3 United Kingdom 7.0 Canada 2.9 Hong Kong 0.3 France 9.7 Netherlands 4.2 Brazil 3. Philippines 2.8 Finland 2. Germany.9 Mexico.8 Cayman Islands.6 Japan.2 Cash/Receivables/Payables (6.6) Other 2.3 Total 00.0 Sector Allocation As at December 3, 207 % of Net Asset Value Industrials 3.9 Utilities 37.3 Financials 6.7 Materials.9 Health Care.4 Consumer Discretionary 4.9 Information Technology 2. Cash/Receivables/Payables (6.6) Total 00.0 Top 2 Holdings As at December 3, 207 % of Net Asset Value Cash/Receivables/Payables (6.6) Stantec Inc.. Danaher Corporation.4 Veolia Environnement SA.3 Enercare Inc. 4.9 PICO Holdings, Inc. 4.8 SUEZ 4. Rexnord Corporation 3.9 Severn Trent Plc 3.6 Fortune Brands Home & Security, Inc. 3.6 Beijing Enterprises Water Group Limited 3. Pennon Group plc 3. Aqua America, Inc. 3.2 China Everbright International Limited 3. AECOM Technology Corporation 3. United Utilities Group PLC 3. SPX Corporation 3. Roper Technologies, Inc. 2.8 Ecolab Inc. 2.8 Jacobs Engineering Group Inc. 2.6 Rotork plc 2. Uponor Corporation 2. Xylem Inc. 2.4 Pentair plc 2.4 Advanced Drainage Systems, Inc. 2.4 Top 2 holdings as a percentage of total net asset value 67.9 Total Net Asset Value $26.7 million The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly. 8

9 This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forwardlooking statements require assumptions to be made and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forwardlooking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, the effects of competition in the geographic and business areas in which the Fund may invest and the risks detailed from time to time in the Fund s AIF. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, none of the Fund, the Portfolio Manager, the Manager or any other person undertakes, and each specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. All capitalized terms that are not defined herein have the meanings given to them in the Fund s AIF. Administrative Office, 20 Yonge Street, 7th Floor Toronto, ON MB 2M under Investment Funds