26FEB Semi-Annual Report. to Unitholders

Transcription

1 Semi-Annual Report to Unitholders June 30, 2014

2 Notice: The unaudited interim financial statements of the Fund have been prepared by and are the responsibility of the Fund s management. The Fund s independent auditor has not reviewed these financial statements.

3 REPORT TO UNITHOLDERS The following presents the financial results of Europe Blue-Chip Dividend & Growth Fund (the Fund ) from its commencement of operations on March 21, 2014 to June 30, Commencement of Operations The Fund is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of units (the Units ) 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 Fund s investment objectives are to: (i) provide Unitholders with stable quarterly 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. 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. The Fund issued a total of 7,925,000 Units including 7,500,000 Units closing on March 21, 2014 and an additional 425,000 Units under the over-allotment option closing on April 2, 2014, at a price of $10.00 per Unit for total gross proceeds of $79.3 million. To pursue its investment objectives, the Fund used the combined net proceeds aggregating $74.5 million to purchase the Portfolio. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides any investment advisory and portfolio management services required by the Fund, including currency hedging strategies, and acts as the options advisor to execute and maintain the option writing strategy of the Fund. The Portfolio is reconstituted annually to include the then 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 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 and distributions 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 Fund to pay the targeted distribution. The Fund 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 Fund are listed for trading on the Toronto Stock Exchange under the symbol EBC.UN. 1

4 Report from 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 Fund s income requirements. Highstreet may choose to close out option positions prior to their expiry, for options that are both out-of-the-money, and/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 Fund 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 Market performance in Europe was positive over the first six months of the year, with the broad market index, as measured by the MSCI Euro Index up 13.9%. The European equity markets had a strong start to the year with worries over sovereign debt largely abated. Leading economic and sentiment indicators continued to turn and show significant improvement. 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 continued its dovish monetary posture keeping its benchmark interest rate at a record low of 0.25%. Moving into the second quarter, lower-than-expected inflation continued to worry policy makers with annual Euro-zone inflation slumping from 0.7% in April to 0.5% in May falling below the 2% level that the European Central Bank 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. Positive performance for the MSCI Euro index was widespread with seven out of ten sectors delivering positive performance. The best performing sectors were Utilities and Energy, while the worst performing sectors were Information Technology and Telecommunication Services. The Fund benchmark, the Europe Dow delivered a return of approximately 5.8%. 2

5 Portfolio Performance The Portfolio delivered a total return of 5.2% for the period comprised of: 2.3% from price change, 2.0% from dividends received and 0.9% from premium earned. Performance for each of the individual Portfolio Securities held during the period was as follows: Securities Performance (%) (1) Consumer Discretionary Daimler AG (DAI) 8.5 Consumer Staples Nestle SA (NESN) 9.4 TESCO PLC (TSCO) 0.6 Unilever NV (UNA) 14.1 Energy BP PLC (BP) 11.3 Royal Dutch Shell PLC (RDSA) 18.6 Total SA (FP) 15.3 Financials Allianz SE (ALV) 6.7 Banco Santander SA (SAN) 21.0 HSBC Holdings PLC (HSBA) (1.2) Health Care GlaxoSmithKline PLC (GSK) (1.0) Novartis AG (NOVN) 12.1 Information Technology Telefonaktiebolaget LM Ericsson (ERICB) 0.6 Materials Anglo American PLC (AAL) (0.7) BASF SE (BAS) 14.3 Rio Tinto PLC (RIO) (2.5) Telecommunication Services Telefonica SA (TEF) 16.1 Vivendi SA (VIV) (4.0) Vodafone Group PLC (VOD) (8.6) Utilities E.ON SE (EOAN) 14.4 (1) Performance comprised of price change and dividends. 3

6 For the period, call options were written on the Fund s Portolio Securities raising $0.7 million in premium or approximately 0.9% on the Portfolio. The average percentage written on the Portfolio was approximately 28.9% with an average strike percentage of 101.3%. 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 period for the Fund relative 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) Index Europe Blue-Chip Dividend & Growth Fund 8.3% 8.5% 9.2% 9.40% 9.20% 9.00% Volatility 8.80% 8.60% 8.40% 8.20% 8.00% 7.80% Europe Blue-Chip Dividend & Growth Fund Portfolio Portfolio (No Call Writing) Europe Dow Index 1AUG

7 On an individual security basis, volatilities were quite variable. The following chart shows the 30 day, 90 day, and average 30 day annualized realized return volatility for each of the names held during the period. Anglo American PLC (+27.5%) had the highest volatility of any name, followed by Vodafone Group PLC (+26.2%), while BASF SE (+8.1%) and Nestle SA (+8.3%) had the lowest. On average, on an individual security basis, realized volatilities decreased during the period. 40.0% Realized Volatility 35.0% 30.0% 25.0% Volatility 20.0% 15.0% 10.0% 5.0% 0.0% AAL LN ALV GR BAS GR BP/LN DAI GR EOAN GR ERICB SS FP FP GSK LN HSBA LN NESN VX NOVN VX RDSA NA RIO LN 30 Day 90 Day Average 30 Day SAN SM TEF SM TSCO LN UNA NA VIV FP VOD LN 1AUG Financial Performance The Fund commenced operations on March 21, 2014 with net assets attributable to Unitholders, after deduction of issue expenses, of $9.40 per Unit. The net assets attributable to Unitholders as at June 30, 2014 increased to $9.63 per Unit and reflects appreciation in the fair value of the Portfolio Securities offset by the Fund s operating expenses, including distributions paid on the Units. Pursuant to the mandatory market purchase program, the Fund may purchase any Units offered in the market at a price less than 98% of the latest net asset value per Unit. For the period ended June 30, 2014, no Units were purchased under this program. Distributions The Fund does not have a fixed distribution but intends to pay equal quarterly distributions based on, among other things, the actual and expected returns on the Portfolio and the actual and expected 5

8 expenses of the Fund. Quarterly distributions are targeted to be $0.15 per Unit ($0.60 per annum) representing an annual yield of 6.0% on the issue price of the Units. For the period ended June 30, 2014, the Fund declared total distributions of $1.3 million or $ per Unit. Dividends and other distributions earned on the Portfolio Securities and premiums received on writing covered call options on a portion of the Portfolio Securities funded the distributions and operating expenses of the Fund. For the period ended June 30, 2014, $1.9 million was available for distribution comprised of dividends earned on the Portfolio Securities (including interest) of $1.4 million and option premiums received of $0.7 million offset by total operating expenses (excluding transaction costs) of $0.2 million. This report, along with the accompanying financial statements of the Fund, is respectfully submitted to you on behalf of the Board of Directors of EBC Limited Partnership, Trustee for Europe Blue-Chip Dividend & Growth Fund. Toronto, Canada August 6, MAY Brian D. McChesney President and Chief Executive Officer 6

9 STATEMENT OF FINANCIAL POSITION As at June 30, 2014 (unaudited) Assets Current assets Investments and options, at fair value $ 73,210,857 Cash 3,903,664 Dividends receivable 319,800 Unrealized gain on foreign exchange contracts (note 4) 523,383 77,957,704 Liabilities Current liabilities Issue costs payable 268,336 Distribution payable to Unitholders 1,318,720 Accrued liabilities (note 7) 40,587 1,627,643 Net assets attributable to Unitholders $ 76,330,061 Number of Units outstanding (note 5) 7,925,000 Net assets attributable to Unitholders per Unit $ 9.63 See accompanying notes to financial statements. On behalf of the Board of Directors of EBC Limited Partnership, Trustee for Europe Blue-Chip Dividend & Growth Fund: 6MAY Brian D. McChesney President and Chief Executive Officer 16OCT Thomas A. Pippy Chairman of the Board 7

10 STATEMENT OF COMPREHENSIVE INCOME For the period from March 21 to June 30, 2014 (note 1) (unaudited) Income Investments and options Dividends $ 1,776,521 Net realized loss on investments and options (note 8) (388,619) Net unrealized loss on investments and options (256,678) Withholding taxes (352,754) Net gain on investments and options 778,470 Foreign exchange contracts Realized gain on foreign exchange contracts 2,185,426 Net unrealized gain on foreign exchange contracts 523,383 Net gain on foreign exchange contracts 2,708,809 Interest 6,772 Total income, net 3,494,051 Expenses Management fees (note 7) 182,362 Transaction costs (note 7) 74,356 Unitholders information costs 14,201 Directors fees 13,038 Audit fees 8,200 Custodial fees 6,733 Filing fees 4,833 Legal fees 3,733 Transfer agent fees 3,167 Independent Review Committee fees 2,210 Insurance premiums 767 Other 2,720 Total expenses 316,320 Increase in net assets attributable to Unitholders $ 3,177,731 Increase in net assets attributable to Unitholders per Unit $ 0.40 See accompanying notes to financial statements. 8

11 STATEMENT OF CASH FLOWS For the period from March 21 to June 30, 2014 (note 1) (unaudited) Operating activities Increase in net assets attributable to Unitholders $ 3,177,731 Adjustments for: Net realized loss on investments and options 388,619 Unrealized loss on investments and options 256,678 Unrealized gain on foreign exchange contracts (523,383) Purchase of investments and options (75,152,218) Proceeds on sale of investments and options 1,296,064 Dividends receivable (319,800) Accrued liabilities 40,587 Net cash flow used in operating activities (70,835,722) Financing activities Proceeds from issuance of Units 79,250,000 Issue costs paid (4,510,614) Net cash flow provided by financing activities 74,739,386 Net increase in cash 3,903,664 Cash, beginning of period Cash, end of period $ 3,903,664 See accompanying notes to financial statements. 9

12 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS For the period from March 21 to June 30, 2014 (note 1) (unaudited) Net assets attributable to Unitholders, beginning of period: $ Increase in net assets attributable to Unitholders: 3,177,731 Financing Unit transactions Distributions to Unitholders (1,318,720) Unit transactions (note 5) Units issued 79,250,000 Related issue costs (4,778,950) 74,471,050 Net assets attributable to Unitholders, end of period $ 76,330,061 See accompanying notes to financial statements. 10

13 SCHEDULE OF INVESTMENTS As at June 30, 2014 (unaudited) Number of Average % of Portfolio Shares Securities Cost Base Fair Value at Fair Value BASIC MATERIALS 132,800 Anglo American $ 3,571,466 $ 3,466, ,800 BASF SE 3,702,403 3,825, ,200 Rio Tinto PLC 3,715,161 3,529, ,989,030 10,821, COMMUNICATIONS 123,000 Vivendi S.A. 3,756,439 3,210, ,300 Vodafone Group PLC 3,973,153 3,375, ,200 L.M. Ericsson Telephone Co. 3,843,543 3,377, ,600 Telefonica S.A. 3,622,546 3,814, ,195,681 13,778, CONSUMER 36,400 Daimler AG 3,702,183 3,636, ,000 Nestle SA 3,711,184 3,719, ,400 Vovartis AG 3,524,041 3,710, ,500 GlaxoSmithKline PLC 3,729,902 3,554, ,900 Tesco PLC 3,760,721 3,630, ,700 Unilever NA 3,486,240 3,766, ,914,271 22,018, ENERGY 50,100 Total S.A. 3,656,086 3,862, ,200 BP PLC 3,544,902 3,817, ,700 Royal Dutch Shell PLC A 3,612,569 4,006, ,813,557 11,686, FINANCIAL 349,800 Banco Santander S.A. 3,535,456 3,898, ,500 Allianz SE 3,811,980 3,644, ,600 HSBC Holdings PLC 3,697,136 3,567, ,044,572 11,110, UTILITIES 179,800 E. ON. AG 3,821,920 3,960, ,821,920 3,960, Total fair value of common shares $ 73,779,031 $ 73,376,

14 SCHEDULE OF INVESTMENTS (unaudited) % of Maturity Number of Strike Premium Portfolio at Options Date Contracts Price Received Fair Value Fair Value Written Call Options (100 shares per contract) Anglo American 7/18/ $ $ (20,563) $ (14,763) Allianz SE 7/18/ (10,187) (8,828) Banco Santander S.A. 7/18/ (4,845) (7,477) BASF SE 7/18/ (11,081) (6,889) BP PLC 7/18/ (8,583) (4,781) Daimler AG 7/18/ (12,831) (13,720) E. ON. AG 7/18/ (14,326) (6,129) GlaxoSmithKline PLC 7/18/ (10,189) (7,764) HSBC Holdings PLC 7/18/ (11,482) (4,679) L.M. Ericsson Telephone Co. 7/18/ (16,528) (7,751) Nestle SA 7/18/ (8,650) (1,916) Rio Tinto PLC 7/18/ (19,108) (21,313) Royal Dutch Shell PLC A 7/18/ (9,236) (9,034) Telefonica S.A. 7/18/ (10,879) (7,328) Tesco PLC 7/18/ (13,921) (6,106) Total S.A. 7/18/ (11,697) (4,271) Unilever NV 7/18/ (14,149) (6,729) Vodafone Group PLC 7/18/ (17,590) (20,187) Novartis AG 7/18/ (12,099) (6,272) Total written call options $ (237,944) $ (165,937) (0.2) Average Cost Base/ % of Premium Portfolio at Summary Received Fair Value Fair Value Total common shares $ 73,779,031 $ 73,376, Total options (237,944) (165,937) (0.2) Adjustment for trading commissions (73,552) Total investments and options $ 73,467,535 $ 73,210, See accompanying notes to financial statements. 12

15 NOTES TO FINANCIAL STATEMENTS June 30, 2014 (unaudited) 1. GENERAL INFORMATION Europe Blue-Chip Dividend & Growth Fund (the Fund ) 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 February 26, 2014 (the Declaration of Trust ). The address of the Fund s registered office is 40 King Street West, Toronto, Ontario, M5W 2X6. Pursuant to this Declaration of Trust, EBC Limited Partnership acts as the trustee (the Trustee ) and is responsible for managing the affairs of the Fund. 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 Fund. The Fund is scheduled to terminate on March 29, 2019 (the Termination Date ). The Fund commenced operations on March 21, 2014 and issued a total of 7,925,000 Units including 7,500,000 Units closing on March 21, 2014 and an additional 425,000 Units under the over-allotment option closing on April 2, 2014, at a price of $10.00 per Unit for total gross proceeds of $79.3 million. To pursue its investment objectives, the Fund used the combined net proceeds aggregating $74.5 million to purchase the Portfolio. The Fund provides holders (the Unitholders ) of units (the Units ) 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. Substantially all of the foreign exchange exposure of the Portfolio is hedged back to the Canadian dollar. The Portfolio is reconstituted annually to include the then 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. The Fund s investment objectives are to: (i) provide Unitholders with stable quarterly 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. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides portfolio management services required by the Fund and acts as the options advisor to execute and maintain the option writing strategy of the Fund. 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 and distributions 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. 13

16 These financial statements were authorized for issuance by the Board of Directors of the Fund on August 6, BASIS OF PRESENTATION Statement of compliance These financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) applicable to the preparation of interim financial statements including, IAS 34, Interim Financial Reporting. 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. Functional currency and presentation currency These financial statements are presented in Canadian dollars, which is the functional currency of the Fund. 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 Fund has made in preparing the financial statements: Classification and measurement of investments and application of the fair value option The Fund 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 (IAS 39). The most significant judgment made in preparing the financial statements is that certain investments are held-for-trading and that the fair value option could be applied to those which are not. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 14

17 exchange gains and losses relating to cash are presented as Foreign exchange gain (loss) on cash and those relating to other financial assets and liabilities are presented within Net realized gain (loss) and Change in unrealized appreciation (depreciation) in the Statement of Comprehensive Income. Financial Instruments The Fund recognizes financial assets and liabilities at fair value on the trade date when the Fund becomes a party to the contractual provisions of the instrument. The Fund has designated investments in financial assets as fair value through profit or loss ( FVTPL ) as the financial assets are managed and its performance is evaluated on a fair value basis. This is consistent with the Fund s investment strategy. The Fund 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 Fund 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 ( Transaction NAV ) with Unitholders. Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets are based on quoted market prices at the close of trading on the reporting date. The Fund uses the last traded market price for both financial assets and financial liabilities where the last traded price falls within that day s bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, the Manager determines the point within the bid-ask spread that is most representative of fair value based on the specific facts and circumstances. The difference between fair value and the adjusted cost base ( ACB ) of the security is recorded as unrealized appreciation (depreciation) of investments. Investment transactions are recorded on a trade-date basis. Realized gains (losses) on the disposition of investments and unrealized appreciation (depreciation) of investments are determined on an average cost basis. The total cost base of the Portfolio has been reduced by any net buying commissions incurred. Options are contracts entitling the holder to purchase or sell a specified item at a specified price, during a specified period or on a specified date. Options purchased are recorded as investments; options written (sold) are recorded as liabilities in the Statement of Financial Position. Any gain or loss resulting from revaluation is included in unrealized appreciation (depreciation) in value of investments and options in the Statement of Comprehensive Income. Upon closing of an option other than by exercise, which results in a cash settlement, the difference between the premium (original option value) and the settlement proceeds is included in gain (loss) on investments and options in the Statement of Comprehensive Income. When securities are acquired or delivered upon exercise, the acquisition cost or sale proceeds are adjusted by the amount of the premium. When an option is closed, the difference between the premium and the cost to 15

18 close the position is included in gain (loss) on investments and options in the Statement of Comprehensive Income, as is the premium for options written or purchased when an option expires. Over the counter options are priced using an options pricing model. Cash Cash is comprised of demand deposits. Income Taxes The Fund qualifies as a mutual fund trust under the Income Tax Act (Canada). All of the Fund 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 Fund. As a result, the Fund does not record income taxes. Since the Fund does not record income taxes, the tax benefit of capital and non-capital losses has not been reflected in the Statement of Financial Position as a deferred income tax asset. Revenue Recognition Dividend income is recorded on the ex-dividend date. Interest 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 during the period. Classification of Units The Fund is a limited life entity and its units are redeemable on an ongoing basis and at maturity on May 29, As a result, the units contain multiple contractual obligations and are therefore classified as a financial liabilities in accordance with the requirements of International Accounting Standard 32 Financial Instruments: Presentation (IAS 32). 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. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an 16

19 asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognised in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however is available for early adoption. In addition, the credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The Fund is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 4. FOREIGN EXCHANGE CONTRACTS The foreign exchange contracts have been entered into with The Bank of Nova Scotia whose current credit rating is AA rated by DBRS. Foreign Exchange Contracts As at June 30, 2014 Settlement Unrealized Date Purchased Sold Contract Price Gain (Loss) July 17, 2014 $25,262,070 CAD $13,701,833 Pound $235,281 July 17, ,503,394 CAD 26,181,920 Euro ,395 July 17, ,839,226 CAD 11,262,682 Krona ,304 July 17, ,769,377 CAD 3,122,175 Franc ,403 $523, NET ASSETS ATTRIBUTABLE TO UNITHOLDERS The Fund is authorized to issue an unlimited number of redeemable Units of one class which represents an equal, undivided interest in the assets of the Fund, with all Units having equal rights and privileges. The Fund may purchase any Units offered in the market at a price that is less than 98% of the latest Transaction NAV per Unit. Pursuant to the mandatory market purchase program, the Fund 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 period ended June 30, 2014, no Units were purchased under the mandatory market purchase program. 17

20 Redemption of Units Units may be redeemed on the second last business day in December of each year (each, an Annual Redemption Date ) at a redemption price per Unit equal to 100% of the net asset value per Unit redeemed. Units must be surrendered for annual redemption to the Fund s registrar at least 45 days before an Annual Redemption Date. Payment of the proceeds of redemption will be made on or before the 15th day following the Annual Redemption Date. The number of Units issued and outstanding as at June 30, 2014 is summarized below: Units outstanding, beginning of period Units issued for cash 7,925,000 Units outstanding, end of period 7,925,000 The market value of the Units on June 30, 2014 was $9.85 per Unit. 6. INCOME TAXES Where the Fund realizes income for tax purposes which is in excess of any distributions paid or made payable to the Unitholders during the year, the Declaration of Trust provides that an additional distribution (the Additional Distribution ) will be automatically payable in each year to the Unitholders on December 31. The Additional Distribution will be automatically reinvested in additional Units of the Fund on December 31, following which the outstanding Units of the Fund will be automatically consolidated on a basis such that the number of consolidated Units is equal to the number of Units outstanding immediately preceding the Additional Distribution. 7. RELATED PARTY INFORMATION In connection with the initial public offering, the Fund engaged SCI to offer for sale to the public the Units pursuant to a prospectus dated February 26, SCI acted as lead agent and received compensation of $1,890,182 upon issue of the Units. For its services to the Fund which include the provision of key management personnel, SMCAI is entitled to receive a management fee equal to 0.75% 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 period ended June 30, 2014 was $182,362. The ongoing management fee is calculated and accrued weekly and is payable quarterly in arrears. At June 30, 2014, the Fund had no accrued liabilities payable to SMCAI and had cash on deposit with SCI and The Bank of Nova Scotia of $233,

21 The Portfolio Manager and Options Advisor is responsible for managing the purchase and sale of Portfolio Securities and writing covered call options as required to meet investment objectives and operating policies of the Fund. Such transactions may be carried out using the services of SCI on an agency basis. During the period ended June 30, 2014, no portfolio transactions were conducted through SCI. 8. INVESTMENT TRANSACTIONS Investment transactions for the period ended June 30, 2014 were as follows: Proceeds from sale of investments and options $ 1,296,064 Less cost of investments sold: Investments and options at cost, beginning of period Investments purchased and options written during the period 75,152,218 75,152,218 Investment and options at cost, end of period (73,467,535) Cost of investment sold and options written during the period 1,684,683 Net realized loss on sale of investment and options $ (388,618) 9. CAPITAL MANAGEMENT The Fund 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 Fund, including the receipt of revenue and the payment of distributions to the Unitholders. The Fund makes cash distributions from net investment income and option premiums received after deduction of operating expenses of the Fund 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 June 30, Level 1 Level 2 Level 3 Total Investments $ 73,376,794 $ $ $ 73,376,794 Options (165,937) (165,937) Foreign exchange contracts 523, ,383 $ 73,210,857 $ 523,383 $ $ 73,734,240 All fair value measurements are recurring. The carrying amounts of cash, dividends receivable and all 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 19

22 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. There were no transfers between levels during the current period. Foreign exchange contracts The fair value is based on the contract notional amount, the difference between the contract rate and the forward market rate for the same currency, interest rates and credit spreads. Contracts for which the counterparty credit spreads are observable and reliable, or for which the credit-related inputs are determined not to be significant to fair value, are classified as Level FINANCIAL INSTRUMENT RISK MANAGEMENT In the normal course of business, the Fund 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 Fund s mandate to be fully invested in a defined portfolio and pay distributions from cash flows to the maximum extent possible, the Fund s overall risk management program focuses on compliance and execution of the Fund s investment objectives and strategies. Price Risk Price risk is the risk that securities will fluctuate in value because of changes in market prices (other than those arising from interest rate risk or currency risk). All investments present a risk of loss of capital. The value of Units is dependent on the value of the Portfolio Securities. The value of the Portfolio Securities can fluctuate on a daily basis as a result of factors outside of the Fund 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 the Fund s mandate is to track the 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 the Fund had increased or decreased by 5% as at June 30, 2014, with all other variables held constant, the Fund s net assets would have increased or decreased, respectively, by approximately $3.7 million. In practice, the actual results may differ materially from this sensitivity analysis. 20

23 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. The majority of the Fund s assets are equities that do not pay a fixed rate of interest; however the Fund 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 Fund s functional and presentation currency. The Fund 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 the Fund for hedging purposes to reduce its foreign currency exposure. The table below indicates the foreign currencies to which the Fund had exposure as at June 30, 2014 in Canadian dollar terms. The table also illustrates the potential impact to the Fund s net assets as at June 30, 2014 if the Fund s functional currency, the Canadian dollar, had strengthened or weakened by 5% in relation to all other currencies, with all other variables held constant. In practice, the actual results may differ materially from this sensitivity analysis. Net Impact on Exposure Net Assets British Pound $ 2,466 $ 123 Euro 349,302 17,465 Swedish Krona 1,677,477 83,874 Swiss Franc 3,876, ,813 $ 5,905,497 $ 295,275 As a % of Net Assets 7.74% 0.39% 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 the Fund. The Fund maintains all its cash and cash equivalents at its custodian or in bankers acceptances or term deposits with financial institutions with a minimum debt rating of A. All transactions in listed securities 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 the Fund has received payment. Payment is made on purchases once the securities have been received by the Fund. Should either party not meet its obligation, the trade will fail. 21

24 Liquidity Risk Liquidity risk is defined as the risk that the Fund may not be able to settle or meet its obligations on time or at a reasonable price. The Portfolio Securities are traded in an active market and can normally 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. Low trading volumes for the Portfolio Securities could make it difficult to liquidate holdings quickly. The Fund maintains cash and cash equivalents to offset all of its liabilities with the exception of its obligation for net assets attributable to Unitholders. 22

25 CORPORATE INFORMATION PRINCIPAL OFFICE Scotia Plaza, 26th Floor 40 King Street West Station A, P.O. Box 4085 Toronto, Ontario M5W 2X6 Telephone: (416) Facsimile: (416) Web site: TRUSTEE EBC Limited Partnership Toronto, Ontario DIRECTORS AND OFFICERS Thomas A. Pippy CPA, CA * Director and Chairman of the Board James P. Bowland CPA, CA * Director and Chairman of the Audit Committee Brian D. McChesney Director, President and Chief Executive Officer Farooq N. P. Moosa Director and Secretary Stephen D. Pearce CPA, CA Director and Chief Financial Officer PORTFOLIO MANAGER AND OPTIONS ADVISOR Highstreet Asset Management Inc. 244 Pall Mall Street, Suite 350 London, Ontario N6A 5P6 REGISTRAR & TRANSFER AGENT Computershare Investor Services Inc. 100 University Avenue Toronto, Ontario M5J 2Y1 LEGAL COUNSEL Stikeman Elliott LLP Toronto, Ontario AUDITOR PricewaterhouseCoopers LLP Toronto, Ontario STOCK EXCHANGE LISTING The Toronto Stock Exchange SYMBOL EBC.UN Thomas C. Dawson CPA, CA * Director * Audit Committee Member INDEPENDENT REVIEW COMMITTEE Thomas C. Dawson CPA, CA (Chairman) James P. Bowland CPA, CA Thomas A. Pippy CPA, CA

26 EUROPE BLUE-CHIP DIVIDEND & GROWTH FUND 40 KING STREET WEST, SCOTIA PLAZA, 26TH FLOOR Toronto, Ontario M5W 2X6