Interim Management Report of Fund Performance

Transcription

1 Interim Management Report of Fund Performance 26OCT The following is an interim report on the performance of Top 20 Europe Dividend Trust (the Trust ) and contains financial highlights but does not contain either the interim or annual financial statements of the Trust. This report should be read in conjunction with the unaudited interim financial statements for the six months ended June 30, 2013 and the audited annual financial statements for the period ended December 31, You can get a copy of the interim or annual financial statements at your request and at no cost by calling (416) , by writing us at 40 King St. West, Scotia Plaza, 26 th Floor, Box 4085, Station A, Toronto, Ontario M5W 2X6, Attention: Top 20 Europe. Dividend Trust Investor Relations or by visiting our website located at or SEDAR at You may also contact us using one of these methods to request a copy of the Trust s proxy voting policies and procedures, proxy voting disclosure and quarterly portfolio disclosure. The Trust s voting disclosure record for the annual period ended June 30, 2013 will be available on our website in August Investment Objectives and Strategies The Trust is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of units (the Units ) of the Trust with investment exposure, on a tax-advantaged basis, to an equally-weighted portfolio (the Portfolio ) comprised of the 20 highest yielding equity securities (the Portfolio Securities ) included in the Europe Dow, a regional index of the Dow Jones Industrial Average (the Europe Dow ). The Europe Dow measures the stock market performance of 30 leading publicly traded blue-chip companies from Western Europe. The Trust s investment objectives are to: (i) provide Unitholders with stable quarterly tax-advantaged distributions; (ii) provide Unitholders with the opportunity for capital appreciation; and (iii) mitigate the impact of foreign exchange exposure through the use of currency hedging strategies, in each case through exposure by virtue of the Forward Agreement (as defined herein). The Trust used the net proceeds of its initial public offering and over-allotment option for payment of its purchase obligation under a forward purchase agreement (the Forward Agreement ) which the Trust entered into with The Bank of Nova Scotia (the Counterparty ) pursuant to which the Counterparty has agreed to pay the economic return provided by the Portfolio. The Portfolio is held by TTE Trust an investment fund established for holding the Portfolio. Substantially all of the value of the Portfolio is hedged back to the Canadian dollar. The Trust partially pre-settles the Forward Agreement in order to fund: (i) quarterly distributions on the Units; (ii) redemptions of Units from time to time; and (iii) operating expenses and other liabilities of the Trust. As a result of the forgoing, the net asset value per Unit will vary depending on the performance of TTE Trust by virtue of the Forward Agreement. The Portfolio is managed by Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) and provides any portfolio management services required by TTE Trust including currency hedging strategies and acts as the options advisor to execute and maintain the option writing strategy of TTE Trust. The Portfolio Manager and Options Advisor determines the Portfolio Securities on which TTE Trust writes covered call options and at what level relative to the current market price. The Portfolio Manager and Options Advisor writes covered call options from time to time on respect of not more than 33% of the Portfolio in order to earn income from option premiums to supplement dividends generated by the Portfolio. The Portfolio Manager and Options Advisor will generally only write covered calls to the extent needed to increase the yield on the Portfolio to a targeted yield. This targeted yield will enable the Trust, by virtue of the Forward Agreement, to pay the targeted distribution. The Trust will purchase Units under the mandatory market purchase program to the extent premiums generated from writing covered call options are in excess of amounts needed to fund the distribution. Top 20 Europe Dividend Trust 1 Interim Management Report of Fund Performance

2 Report from Portfolio Manager Overview Highstreet manages an option overlay strategy that involves selling call options on up to, but not more than, 33% of the Fund. The percentage of write 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 targetted monthly cash distributions, to provide the opportunity for capital appreciation, and to provide lower overall volatility of portfolio returns than would otherwise be experienced from owning the equity securities on a stand alone basis. Market Performance The latter half of 2012 exhibited a return to stability in European capital markets following a commitment by the European Central Bank (ECB) to purchase bonds of debtor countries in an effort to lower borrowing costs. However, the beginning of 2013 brought a sense of instability to the region as the election in Italy resulted in a fragmented outcome, bringing into question the appetite of the Italian electorate to accept further reforms. Additionally, two of the largest banks in Cyprus required a A17 billion bailout. These events caused a spike in volatility in the first quarter, although investors remained encouraged by a number of economic and sentiment indicators turning positive. Most countries should run budget surpluses this year, which is an indication that austerity policies adopted by most of Europe appear to be working. Although heightened volatility should persist, the expectation is positive for European markets given three themes: improving conditions in the U.S.; a reduction in the intensity of the European crisis; and constructive monetary stimulus measures in Japan. The Europe Dow 30 delivered a total return of (+6.0%) in the first six months of Portfolio Performance The Portfolio delivered a total return of 3.5% for the six month period comprised of: 2.2% from price change, 3.0% from dividends and 2.7% from premium earned. The performance of the individual names was as follows: Holding Performance* Telefonaktiebolaget LM Ericsson B (ERICB SS) 17.9% GlaxoSmithKline PLC (GSK LN) 20.4% Novartis AG (NOVN VX) 18.8% Vodafone Group PLC (VOD LN) 20.8% ABB Limited (ABBN VX) 13.4% Tesco PLC (TSCO LN) 1.6% HSBC Holdings PLC (HSBA LN) 2.7% BP PLC (BP LN) 9.0% Daimler AG (DAI GR) 16.4% Hennes & Mauritz AB B (HMB SS) 4.5% Allianz SE (ALV GR) 10.0% Vinci SA (DG FP) 11.3% Royal Dutch Shell PLC A (RDSA NA) 1.2% BASF SE (BAS GR) 0.5% TOTAL SA (FP FP) 0.1% Siemens AG (SIE GR) 0.3% Banco Santander SA (SAN SM) 13.3% Vivendi SA (VIV FP) 4.2% E.ON SE (EOAN GR) 1.0% Rio Tinto PLC (RIO LN) 21.7% * Total return includes dividends and effected for covered call writing. Interim Management Report of Fund Performance 2 Top 20 Europe Dividend Trust

3 Option Activity In the first six months of 2013 call options were sold on the Fund s underlying holdings in each month. The percentage written was approximately 29.9% on average for the six writes with an average strike price for the calls being 100.7%. A summary of the monthly write activity is as follows: January February March April May June Total Premium Received*... $47,512 $120,866 $130,325 $158,424 $152,282 $148,609 $758,018 Percent Written % 30.0% 30.2% 28.6% 30.3% 30.0% 29.9% Average Strike % 100.1% 101.0% 100.5% 100.0% 101.5% 100.7% * by expiry date Highstreet s proprietary option overlay model examines a number of factors, including short-term price change, momentum metrics, and skew 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 (OTM) to allow the opportunity to capture potential positive performance of the underlying stocks in addition to option premiums. Volatility Volatility levels increased throughout the quarter, averaging 22.2% for the portfolio at the end of June. The level of volatility at the beginning of the period was significantly lower at only 11.6% Average 30 Day Realised Volatility 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Jun-12 Oct-12 Jan-13 Apr-13 31JUL At the stock level, stocks with the highest level of volatility include Rio Tinto (+32.4%) followed by Allianz (+29.8%). The stocks that exhibited the lowest volatility over the six-month period were Royal Dutch Shell (+10.9) followed by Vivendi (+12.5%). Individual Volatilities (30 day) 40.0% 30.0% 20.0% 10.0% 0.0% ABBN VX ALV GR BAS GR BP / LN DAI GR DG FP EOAN GR ERICB SS FP FP GSK LN HMB SS HSBA LN NOVN VX RDSA NA RIO LN SAN SM SIE GR Volatility Average TSCO LN VIV FP VOD LN 31JUL Top 20 Europe Dividend Trust 3 Interim Management Report of Fund Performance

4 Results of Operations The Trust s Net Assets decreased over the six month period ended June 30, 2013 from $9.28 per Unit to $9.07 per Unit based on a decrease in the fair value of the Portfolio Securities, the Trust s operating expenses including forward fees and distributions paid on the Units. Pursuant to the mandatory purchase program, the Trust may purchase any Units offered in the market at a price that is less than 98% of the latest Net Asset Value per Unit. For the six months ended June 30, 2013, 3,667 Units were purchased under this program at an average price of $9.17 per Unit for a total purchase amount of $33,690. The Trust does not have a fixed distribution but intends to pay equal quarterly distributions through pre-settlement of the Forward Agreement based on, among other things, the actual and expected returns on the Portfolio and the actual and expected expenses of the Trust and TTE Trust. Quarterly distributions are expected to be $ per Unit ($0.65 annually) representing an annual yield of 6.5% on the issue price of the Units. For the six months ended June 30, 2013, the Trust declared and paid total distributions of $1.1 million or $ per Unit consistent with the initially estimated quarterly distribution of $ per Unit, prorated from December 31, Dividends earned on the Portfolio Securities and premiums received on writing covered call options on a portion of the Portfolio Securities fund the distributions and operating expenses of the Trust. For the six months ended June 30, 2013, $1.5 million was available for distribution comprised of dividends earned on the Portfolio Securities of $0.8 million and option premiums received of $0.9 million offset by total operating expenses of $0.2 million. Recent Developments Tax Changes Affecting Forward Agreement Structures In the budget announced March 21, 2013, the government proposed to eliminate the tax benefits associated with forward agreements used by some investment funds to achieve capital gains treatment on income that would otherwise be treated as ordinary income. The government refers to these as character conversion transactions. Distributions from investment funds which enter into a forward agreement will now generally be taxed as income at the time of distribution as opposed to returns of capital which are not generally taxable at time of receipt and capital gains. This measure will apply to forward agreements entered into on or after March 21, The less favorable tax treatment will also apply to forward agreements entered into before March 21st, if the terms of the agreement are extended or modified. This measure does not immediately affect the Trust as it entered into its forward agreement before March 21, 2013 and as such, we expect the distributions will continue to be characterized primarily as returns of capital and capital gains until the forward agreement matures on January 31, The Trust and its legal and tax advisors continue to consider the implications of the budget and to seek clarification on how this measure will be implemented. Over-allotment option On January 8, 2013, the Trust completed the issuance of 100,000 Units for gross proceeds of $1,000,000. The issuance was pursuant to the exercise of the over-allotment option granted to the agents in connection with the Trust s initial public offering. The net proceeds of $932,500, after deducting agent fees of $67,500 were invested in the Portfolio in accordance with the investment objectives of the Trust. Interim Management Report of Fund Performance 4 Top 20 Europe Dividend Trust

5 Related Party Information For its services to the Trust Scotia Managed Companies Administration Inc. ( SMCAI ), a wholly owned subsidiary of Scotia Capital Inc. ( SCI ), is entitled to receive a management fee equal to 0.25% per annum of the net asset value of the Trust. SMCAI is responsible for paying fees to Highstreet. The total management fee paid or payable to SMCAI for the six months ended June 30, 2013 were $23,292. The ongoing management fee is calculated and accrued weekly and is payable quarterly in arrears. Under the Forward Agreement, the Trust pays to the Counterparty an additional purchase amount, calculated weekly and payable quarterly in arrears, of 0.45% per annum of the notional amount of the Forward Agreement being the net asset value of TTE Trust. The total fees paid or payable to The Bank of Nova Scotia relating to the Forward Agreement for the six months ended June 30, 2013 were $59,102. At June 30, 2013, the Trust had accrued liabilities of $50,565 payable to SMCAI (December 31, 2012 $2,618) and had an overdraft with SCI and its parent company, The Bank of Nova Scotia of $4,848 (December 31, 2012 cash on deposit of $450,000). Highstreet is responsible for managing the purchase and sale of Portfolio Securities and writing covered call options. Such transactions may be carried out using the services of SCI on an agency basis. For the six month period ended June 30, 2013, no options were written with SCI. For the six months ended June 30, 2013, the Trust purchased 3,667 Units under the mandatory market purchase program at an average price of $9.17 per Unit for a total repurchase amount of $33,630. Commissions of $73 were paid to SCI under the mandatory market purchase program. Financial Highlights The following tables show selected key financial information about the Trust and are intended to help you understand the Trust s financial performance since commencement of operations on December 20, 2012 to June 30, The information for the six months ended June 30, 2013 is derived from the Trust s unaudited financial statements while the December 31, 2012 annual information is derived from the Trust s audited financial statements. For the For the Six Months Period Ended Ended June 30, December 31, (1) Net assets per Unit, beginning of period (1)... $9.28 $10.00 Increase (decrease) from operations: Total revenue... Total expenses (2)... (0.08) (0.69) Realized gains for the period Unrealized gains (losses) on forward agreement for the period (3) (0.03) Total increase (decrease) from operations (0.72) Distributions (4)... (0.34) Net assets per Unit, end of period... $9.07 $ 9.28 Based on the weighted average number of Units during the period except for the net assets and distributions wherein the actual number of Units outstanding at the relevant time are used. (1) Results for the period December 20, 2012 (inception date) to December 31, (2) Total expenses include issue costs of 67,500 and $2,025,000 for the six months ended June 30, 2013 and for the period ended December 31, 2012, respectively. (3) In 2013, an adjustment of $0.02 was made to reconcile the basis between the weighted average and the end of period number of Units. (4) All distributions were paid in cash. Top 20 Europe Dividend Trust 5 Interim Management Report of Fund Performance

6 Ratios and Supplemental Data (based on Net Asset Value) June 30, December 31, Net asset value (000 s) (1) (2)... $ 28,079 $ 27,825 Number of Units outstanding (1)... 3,096,333 3,000,000 Management expense ratio (3) % 8.61% Trading expense ratio (4) % 0.07% Portfolio turnover rate (5) % 0.00% Net asset value per Unit (1)... $ 9.07 $ 9.28 Market value per Unit... $ 8.75 $ 9.95 (1) This information is provided as at June 30, 2013 and December 31, (2) Net asset value is equal to net asset value per Unit multiplied by the number of Units outstanding. (3) Management expense ratio ( MER ) is based on total expenses of the Trust for the stated period. The ratio is expressed as an annualized percentage of the weekly average net asset value during the period. The Trust realized issue costs of $67,500 and $2,025,000 for the six months ended June 30, 2013 and the period ended December 31, Without these costs, the MER would have been 1.17% and 1.37%, respectively. (4) 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. (5) The portfolio turnover rate indicates how actively the Portfolio Manager manages the 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 period. Past Performance Year by Year Returns The following chart shows the performance of the Trust s Units based on net asset value since inception including the six months ended June 30, 2013, indicating in percentage terms, how much an investment made on the first day of each financial period would have increased or decreased by the last day of each financial period assuming reinvestment of all dividends at net asset value. Past performance is not an indication of how the shares will perform in the future. The calculation of returns based on net asset value follows the requirements of NI As an investor cannot purchase or sell the Units at net asset value, the following is an indication of the performance of the assets of the Trust rather than returns available to Unitholders. Returns based on market value are also presented for the Units in narrative form below as an indication of returns actually available to Unitholders. 10% 0% 1.5% -10% -7.3% For the period December 20 to December 31, 2012 and for the six months ended June 30, AUG The market value return for the Units was (0.5)% for the period ended December 31, 2012 and was (8.8)% for the six month period ended June 30, 2013, respectively. This performance from inception reflects payment of upfront costs related to the establishment of the Trust and assumes that distributions are reinvested in additional Units at the then market price on the Toronto Stock Exchange, which price may reflect a premium or discount to net asset value. Interim Management Report of Fund Performance 6 Top 20 Europe Dividend Trust

7 Summary of Investment Portfolio Below is a summary of TTE Trust s Portfolio by sector based on closing sale prices as at June 30, This summary may change due to ongoing portfolio transactions. Weekly updates are available on the internet at or by contacting investor relations at Investment portfolio, at market value... $27,378,506 PORTFOLIO SECTOR WEIGHTINGS Industrial 15.2% Utilities 5.0% Options (1.0%) Basic Materials 9.7% Communications 15.3% Financial 15.1% Energy 15.1% Consumer 25.6% 7AUG NI requires that the Trust disclose the top 25 positions held. The Trust has not done so as it holds an approximately equally weighted portfolio of 20 securities. Top 20 Europe Dividend Trust 7 Interim Management Report of Fund Performance