2013 Annual Management Report of Fund Performance

Transcription

1 2013 Annual Management Report of Fund Performance for the year ended December 31, 2013 This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the investment trust. You can get a copy of the annual financial statements at your request, and at no cost, by calling , by writing to us at CI Investments Inc., 2 Queen Street East, Twentieth Floor, Toronto, ON M5C 3G7 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 trust s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure Y109

2 INVESTMENT OBJECTIVE AND STRATEGIES The s (the Trust ), objectives are to: 1) provide unitholders with monthly distributions; 2) endeavour to preserve capital throughout the life of the Trust; and 3) enhance the long-term total return of the Trust s portfolio. Under normal market conditions the assets of the Trust are invested in securities of income trusts, high-yield debt, dividend paying common shares, other common shares, other securities and cash and instalment receipts. The Trust may lever up to 25% of its net asset value. The Trust may invest in or use derivative instruments such as forward contracts, swap agreements, structured notes, and interest rate futures contracts and options thereon. It may take long and short positions in securities and derivative instruments. The Trust may also engage in intra-capital arbitrage which entails purchasing debt securities of an issuer while short-selling equity securities of the same issuer. The Trust may lend securities to generate additional returns. The Trust determines and announces each February an indicative distribution amount for the following twelve months. This indicative distribution amount may fluctuate from year to year. RISK The risks of investing in the Trust remain as discussed in its Initial Public Offering Prospectus. There can be no assurance that the Trust will be able to achieve its objectives of monthly distributions, preservation of capital and enhancing long-term total return. Investing in the Trust is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment and who can withstand the effect of the indicative distribution not being met in any period. RESULTS OF OPERATIONS The net asset value of the Trust decreased by $1.1 million to $54.2 million from December 31, 2012 to December 31, The Trust had net redemptions of $4.7 million for the period. The Trust paid distributions totalling $4.7 million while the portfolio s performance increased assets by $8.3 million. The Trust s one year return was 14.7%, as compared to its benchmark s return of 5.0% for the same period. The benchmark is a combination of the S&P/TSX Income Trust Total Return Index (40%), the Merrill Lynch U.S. High Yield Master II Total Return Index (30%) and the S&P/TSX Composite Total Return Index (30%). Most stock markets around the world enjoyed healthy gains in 2013 against a backdrop of an improving global economy and as central banks continued to employ monetary stimulus measures to keep interest rates at historic lows. Steady improvement in the U.S. around employment, housing and manufacturing data ultimately allowed the Federal Reserve to announce that it would scale back its massive quantitative easing efforts, a decision that reverberated through emerging markets and dampened many yield securities through the latter half of the year. The Trust outperformed its benchmark in Several large trust positions were the subject of takeovers and added value over the course of the year, including Shoppers Drug Mart Corp., Brookfield Properties and Patheon Inc., while many of our other large Canadian holdings continued to perform well, including Canadian National Railway Co., Toronto-Dominion Bank (the largest single equity holding) and Western Digital Corp. Despite a large underweight position in the materials sector, however, our positions in Goldcorp Inc. and Barrick Gold Corp. were the biggest drag on performance. Among our consumer discretionary holdings, we missed some gains in the media and retail areas, but our positions in automobile parts and manufacturing companies made strong contributions. These included Magna International Inc. and Delphi Automotive PLC, both of which benefited from the rebound in U.S. auto sales in Alimentation Couche-Tard Inc. was another strong performer, as its takeover of the Statoil chain in Europe demonstrated the company s management expertise and transformed the stock into a global growth story. In the fixed-income portion of the Trust, our high-yield positions added value with the asset class returning 7.42% for the year (Bank of America Merrill Lynch U.S. Master II Index, in U.S. dollars). By comparison, the U.S. 10-year Treasury bond lost 7.83% in We finished the period invested about 63% in Canadian and global equities, 15% in high-yield bonds, 13% in government and investment-grade bonds and 7% in cash.

3 RECENT DEVELOPMENTS We remain cautious on equities going into Although the U.S. consumer and service economy continues to recover and employment is improving, companies are still reluctant to undertake big investments. We expect slow growth to continue over the next year, and fixed-income to underperform. Should consumer interest rates rise too sharply, the profile of the U.S. recovery could be dampened somewhat. International Financial Reporting Standards On December 12, 2011 the Canadian Accounting Standards Board ( AcSB ) allowed investment funds to defer mandatory adoption of International Financial Reporting Standards ( IFRS ) as issued by the International Accounting standards Board ( IASB ) until the fiscal year beginning on or after January 1, Accordingly, the Trust will adopt IFRS for its fiscal year beginning January 1, 2014, and will issue financial statements in accordance with IFRS, including comparative information, for the semi-annual period ending June 30, The June 30, 2014 semi-annual and December 31, 2014 annual financial statements will include an opening Statement of Net Assets as at January 1, 2013 and comparative financial information prepared in accordance with IFRS. The Manager has evaluated the differences between Canadian GAAP and IFRS and implemented a transition plan to meet the AcSB implementation timeline. Based on the Manager s analysis to date, the adoption of IFRS may impact the Trust s Net Assets with the potential elimination of the difference between the Net Assets per Unit and the Net Asset Value per Unit at the financial statement reporting date, as disclosed in Note 10 Net Assets Comparison. The changeover to IFRS will also result in additional note disclosures and may result in the presentation of Net Assets representing unitholders equity as a liability instead of the current presentation as equity depending on Trust meeting certain criteria. The Manager s current evaluation may be subject to changes due to issuance of new standards or new interpretations of existing standards. RELATED PARTY TRANSACTION Manager CI Investments Inc. is the Manager of the Trust and in consideration of management fees of $0.6 million, provided management services required in the day-to-day operations of the Trust for the period. Management Fees 100% of the management fees received, for the period were used to pay for investment management and other general administration. Broker Commissions During the period, the Trust paid $1,038 in brokerage commissions to The Bank of Nova Scotia or its subsidiaries. The Bank of Nova Scotia has a significant interest in CI Financial Corp., the parent company of CI Investments Inc. Independent Review Committee The Trust received standing instructions from the Board of Governors ( BoG ) in its capacity as the Independent Review Committee ( IRC ) with respect to the following Related Party Transactions: a) trades in securities of CI Financial Corp. and The Bank of Nova Scotia; b) purchases or sales of securities of an issuer from or to another investment fund managed by the Manager (referred to as Inter-Fund Trades ); and c) mergers of funds with another fund that is subject to National Instrument ( Fund Mergers ). The applicable standing instructions require that Related Party Transactions be conducted in accordance with the Manager s policies and procedures. The Manager is required to advise the BoG of any material breach of a condition of the standing instructions. The standing instructions require, among other things, that the investment decision in respect to Related Party Transactions (a) are made by the Manager free from any influence by any entities related to the Manager and without taking into account any consideration to any affiliate of the Manager; (b) represent the business judgment of the Manager uninfluenced by considerations other than the best interests of the Trust; and (c) are made in compliance with the Manager s policies and procedures. Transactions made by the Manager under the standing instructions are subsequently reviewed by the BoG on a quarterly basis to monitor compliance. The Trust relied on the BoG s standing instructions regarding Related Party Transactions during this reporting period.

4 FINANCIAL HIGHLIGHTS The following table shows selected key financial information about the Trust and is intended to help you understand the Trust s financial performance for the past five years. The Ratios & Supplemental Data shown below are based on Net Asset Values. THE TRUST S NET ASSETS PER UNIT ($) (1) 2013 ($) 2012 ($) 2011 ($) 2010 ($) 2009 ($) Net assets, beginning of year (2) Increase (decrease) from operations: Total revenue Total expenses Realized gains (losses) for the year Unrealized gains (losses) for the year Total increase (decrease) from operations (2) (0.77) (0.20) (0.15) (0.25) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital Total annual distributions (2)(3) (0.06) (0.09) (0.55) (0.13) (0.08) (0.49) (0.17) (0.08) (0.45) (0.15) (0.07) (0.48) (0.15) (0.07) (0.49) (0.71) Net assets at December 31 of year shown (2) RATIOS AND SUPPLEMENTAL DATA Net asset value ($000 s) (7) Number of units outstanding (000 s) Portfolio turnover rate (%) (5) Trading expense ratio (%) (6) Net asset value per unit ($) (7) Closing market price (TSX) ($) 54,219 6, ,276 6, ,842 7, ,714 8, ,370 10, MANAGEMENT EXPENSE RATIO Management expense ratio before taxes (%) (4) Goods and services tax (GST)/Harmonized sales tax (HST) (%) (4) Management expense ratio after taxes (%) (4) GST/Effective HST Rate, for the prior calendar year or period (%) (4) (1) This information is derived from the Trust s audited annual financial statements. The net assets per unit presented in the financial statements differs from the net asset value calculated for Trust pricing purposes. An explanation of these differences can be found in the notes to the financial statements or in footnote (7) below. (2) Net assets per unit and distributions per unit are based on the actual number of units outstanding at the relevant time. The increase (decrease) in net assets from operations per unit is based on the weighted average number of units outstanding over the fiscal year. (3) Distributions were paid in cash or automatically reinvested in additional units of the Trust. (4) Management expense ratio is calculated based on expenses charged to the Trust (excluding commissions and other portfolio transaction costs) and is expressed as an annualized percentage of daily average net asset value for the period. As of July 1, 2010, Ontario combined the federal goods and services tax ( GST - 5%) with the provincial retail sales tax ( PST - 8%). The combination resulted in a Harmonized sales tax ( HST ) rate of 13%. The Effective HST tax rate is calculated using the attribution percentage for each province based on unitholder residency and can be different from 13%. For any particular year, the rate shown will be prorated based on the different rates in effect during that year. For the year ended December 31, 2010, the rate applied is 5% for the period January 1, 2010 to June 30, 2010 and the Trust s Effective HST rate for the period from July 1, 2010 to December 31, The rate shown for the year ended December 31, 2010, is the time weighted average of these rates. (5) The Trust s portfolio turnover rate indicates how actively the Trust s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Trust buying and selling all of the securities in its portfolio once in the course of the fiscal year. The higher a Trust s portfolio turnover rate in a year, the greater the trading costs payable by the Trust 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 higher turnover rate and the performance of a Trust. Portfolio turnover rate is calculated by dividing the lesser of the cost of purchases and the proceeds of sales of portfolio securities for the year, excluding cash and short-term investments maturing in less than one year, by the average of the monthly fair value of investments during the year. (6) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value of the Trust during the year. (7) Section 14.2 of National Instrument requires the net assets of an investment fund to be calculated using the fair value of the fund s assets and liabilities. Canadian GAAP requires a different valuation method for calculating net assets for financial reporting purposes. For the purpose of processing unitholder transactions, net assets are calculated based on the closing market price (referred to as Net Asset Value ), while for financial statement purposes net assets are calculated based on bid/ask price (referred to as Net Assets ).

5 PAST PERFORMANCE This section describes how the Trust has performed in the past. Remember, past returns do not indicate how the Trust will perform in the future. The information shown assumes that distributions made by the Trust in the years shown were reinvested in additional units of the Trust. In addition, the information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. Year-by-Year Returns The following chart shows the Trust s annual performance for each of the years shown, and illustrates how the Trust s performance has changed from year to year. In percentage terms, the chart shows how much an investment made on the first day of each financial year would have grown or decreased by the last day of each financial year, except where noted Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec This figure is for the period from February 18, 2004 to December 31, Annual Compound Returns The following table shows the Trust s annual compound returns for each period indicated, compared to themerrill Lynch U.S. High Yield Master II Total Return Index, S&P/TSX Composite Total Return Index, the S&P/TSX Income Trust Total Return Index, and the Blended Index composed of: 40% - S&P/TSX Income Trust Total Return Index, 30% - S&P/TSX Composite Total Return Index, and 30% - Merrill Lynch U.S. High Yield Master II Total Return Index. The Merrill Lynch U.S. High Yield Master II Total Return Index is an unmanaged index that tracks the performance of below investment grade U.S. dollardenominated corporate bonds publicly issued in the U.S. domestic market. The S&P/TSX Composite Total Return Index is a float adjusted market capitalization weighted index which is the principal broad measure of the Canadian equity market. It includes common stocks and income trust units of companies incorporated in Canada which are listed on the Toronto Stock Exchange. The S&P/TSX Income Trust Total Return Index is a modular component of the S&P/TSX Composite Index. The S&P/TSX Income Trust Index tracks the performance of all of the income trust constituents of the S&P/TSX Composite Index. A discussion of the performance of the Trust as compared to the benchmarks is found in the Results of Operations section of this report. One Year (%) Three Years (%) Five Years (%) Since Inception (%) Blended Index Merrill Lynch U.S. High Yield Master II Total Return Index S&P/TSX Composite Total Return Index S&P/TSX Income Trust Total Return Index (2.6)

6 SUMMARY OF INVESTMENT PORTFOLIO as at December 31, 2013 Portfolio Breakdown Percentage of Category Net Asset Value (%) Country allocation: Canada 41.3 U.S.A Switzerland 6.0 U.K. 3.4 France 2.9 Australia 2.5 Germany 2.2 Singapore 1.5 Japan 1.3 Bermuda 1.0 Norway 1.0 Netherlands 1.0 Luxembourg 1.0 Spain 0.7 Netherlands Antilles 0.6 Sweden 0.6 Ireland 0.5 Thailand 0.5 Cayman Islands 0.4 Mexico 0.3 Brazil 0.3 Russia 0.3 Jersey Island 0.2 South Korea 0.2 Hong Kong 0.2 Marshall Islands 0.2 China 0.2 South Africa 0.1 Foreign Currency Forward Contracts (0.4) Other Net Assets (Liabilities) (9.6) Portfolio Breakdown (cont d) Percentage of Category Net Asset Value (%) Sector allocation: Corporate Bonds 25.3 Financials 23.9 Energy 10.6 Consumer Staples 9.2 Health Care 8.4 Industrials 7.1 Information Technology 3.9 Telecommunication Services 3.7 Consumer Discretionary 3.6 Utilities 2.7 Materials 2.6 Warrants 2.5 Foreign Currency Forward Contracts (0.4) Other Net Assets (Liabilities) (9.6) Asset allocation: Common Equities 73.2 Corporate Bonds 25.3 Warrants 2.5 Reits 1.6 Preferred Shares 0.9 Foreign Currency Forward Contracts (0.4) Other Net Assets (Liabilities) (9.6) Top 25 Holdings Percentage of Security Name Net Asset Value (%) Toronto-Dominion Bank 6.7 Royal Bank of Canada 4.1 The Bank of Nova Scotia 3.5 Roche Holding AG 2.0 JPMorgan Chase & Co., Warrants (28Oct18) 1.9 Wells Fargo & Co., 7.98% 03/29/ Bank of America Corp., Callable, 8% 10/30/ JPMorgan Chase & Co., FRN, Callable, 7.9% 04/30/ Baxter International Inc. 1.6 Singapore Telecommunications Ltd. 1.5 Nestle S.A., Registered Shares 1.3 Bayer AG 1.3 Shaw Communications Inc., 6.5% 06/02/ Novartis AG, Registered Shares 1.2 Suncor Energy Inc. 1.1 Alimentation Couche-Tard Inc., Class B 1.1 Telstra Corp., Ltd. 1.1 Eksportfinans ASA 3% 11/17/ Canadian Imperial Bank of Commerce 1.0 Canadian National Railway Co. 1.0 Canadian Natural Resources Ltd. 1.0 Bank of Montreal 1.0 Citigroup Inc. 0.9 Brookfield Asset Management Inc., 3.95% 04/09/ Total Net Asset Value (thousands of dollars) $54,219 The summary of investment portfolio may change due to ongoing portfolio transactions and updates are available on a quarterly basis. A NOTE ON FORWARD-LOOKING STATEMENTS This report may contain forward-looking statements about the Trust, its future performance, strategies or prospects, and possible future Trust action. The words may, could, should, would, suspect, outlook, believe, plan, anticipate, estimate, expect, intend, forecast, objective, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forwardlooking statements involve inherent risks and uncertainties, both about the Trust and general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made by the Trust. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchanges rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.