26OCT Semi-Annual Report. to Unitholders

Transcription

1 26OCT Semi-Annual Report to Unitholders June 30, 2013

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

3 26OCT REPORT TO UNITHOLDERS The following presents the financial results of Top 20 Europe Dividend Trust (the Trust ) for the six months ended June 30, It is recommended that this report be read in conjunction with the 2013 Interim Management Report of Fund Performance. Trust Structure 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 distributions are funded from dividends generated by the Portfolio and supplemented by premiums received on writing options on a portion of the Portfolio Securities. To pursue its investment objectives, the Trust entered into a forward purchase agreement (the Forward Agreement ) 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. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides 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 is reconstituted annually to include the 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 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 in 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 1

4 26OCT 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. 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 Fund 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 Fund 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. Report from the Portfolio Manager and Options Advisor Overview Highstreet manages an option overlay strategy that involves selling call options on up to, but not more than, 33% of the Trust. The percentage of write for each holding and the strike prices chosen are primarily a function of the Trust 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 Trust 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. 2

5 26OCT 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 e17 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

6 26OCT 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 LN) 1.2% BASF SE (BAS GR) 0.5% TOTAL SA (FP FP) Siemens AG (SIE GR) Banco Santander SA (SAN SM) Vivendi SA (VIV FP) 0.1% 0.3% 13.3% 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. Option Activity In the first six months of 2013 call options were sold on the Trust 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: Expiry 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% 30.0% 30.2% 28.6% 30.3% 30.0% 29.9% Average Strike 101.0% 100.1% 101.0% 100.5% 100.0% 101.5% 100.7% * by expiry date 4

7 26OCT 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% % 25.00% Average 30 Day Realised Volatility 20.00% 15.00% 10.00% 5.00% 0.00% Jun-12 Oct-12 Jan-13 Apr-13 1AUG 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%). 40.0% Individual Volatilities (30 day) 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 Volatility GSK LN HMB SS HSBA LN NOVN VX RDSA NA Average RIO LN SAN SM SIE GR TSCO LN VIV FP VOD LN 1AUG

8 26OCT Financial Performance The Trust s Net Assets decreased over the six months period ended June 30, 2013 from $9.28 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. Distributions The Trust does not have a fixed distribution but intends to pay 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 targeted to be $ per Unit ($0.65 annually) representing an annual yield of 6.5% on the issue price of the Units. For the period ended June 30, 2013, the Trust declared total distributions of $1.1 million or $ per Unit consistent with the estimated quarterly distribution of $ per Unit, prorated from December 20, 2012 to June 30, Dividends earned on the Portfolio and premiums received on writing covered call options on a portion of the Portfolio funded 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 of $0.8 million and option premiums received of $0.9 million offset by total operating expenses of $0.2 million. This report, along with the accompanying financial statements of the Trust, is respectfully submitted to you on behalf of the Board of Directors of TTE Ltd., Trustee for Top 20 Europe Dividend Trust. Toronto, Canada August 7, MAY Brian D. McChesney President and Chief Executive Officer 6

9 26OCT STATEMENTS OF NET ASSETS (unaudited) As at June 30, December 31, * Assets Forward Agreement, at fair value (note 3) $ 28,113,345 $ 27,889,428 Receivable from Counterparty 685,364 Cash ,000 28,798,835 28,339,428 Liabilities Distribution payable to Unitholders 503,154 Accrued liabilities 149,580 64,485 Issue costs payable 66, , , ,485 Net assets representing Unitholders equity $ 28,079,258 $ 27,824,943 Number of Units outstanding (note 4) 3,096,333 3,000,000 Net assets per Unit $ 9.07 $ 9.28 *Extracted from audited financial statements. See accompanying notes to financial statements. 7

10 26OCT STATEMENT OF INVESTMENT OPERATIONS For the six months ended June 30, 2013 (unaudited) 2013 Revenue Interest $ 353 Expenses Administration fees 43,292 Unitholders information costs 9,750 Filing fees 9,450 Directors fees 8,250 Insurance premiums 7,748 Audit fees 6,800 Transfer agent fees 6,000 Independent Review Committee fees 1,876 Other 4, ,313 Net investment loss for the year (105,960) Net realized gain on partial pre-settlements of the Forward Agreement 58,417 Forward Agreement fees (note 3) (59,102) Unrealized appreciation on Forward Agreement 528,514 Total results of investment operations $ 421,869 Total results of investment operations per Unit* $ 0.14 * Based upon the weighted average number of Units outstanding during the period. See accompanying notes to financial statements. 8

11 26OCT STATEMENT OF CASH FLOWS For the six months ended June 30, 2013 (unaudited) 2013 Operating activities Total results of investment operations $ 421,869 Add (deduct): Net realized gain on partial pre-settlements of the Forward Agreement (58,417) Unrealized appreciation on Forward Agreement (528,514) Changes in non-cash working capital Increase in receivable from Counterparty (685,364) Increase in accrued liabilities 85,095 Net cash flow used in operating activities (765,331) Investing activities Proceeds on partial pre-settlements of the Forward Agreement 1,310,514 Net cash flow provided by investing activities 1,310,514 Financing activities Proceeds from issuance of Units 1,000,000 Issue costs paid (450,657) Purchases under Forward Agreement (947,500) Distributions paid to Unitholders (563,270) Units purchased for cancellation (33,630) Net cash flow used in financing activities (995,057) Net decrease in cash (449,874) Cash, beginning of period 450,000 Cash, end of period $ 126 See accompanying notes to the financial statements. 9

12 26OCT STATEMENT OF CHANGES IN NET ASSETS For the six months ended June 30, 2013 (unaudited) 2013 Total results of investment operations Net investment loss for the period $ (105,960) Net realized gain on partial pre-settlements of the Forward Agreement 58,417 Forward Agreement fees (note 3) (59,102) Unrealized appreciation on Forward Agreement 528, ,869 Distributions to Unitholders (note 8) (1,066,424) Unit transactions Units issued 1,000,000 Related issue costs (67,500) Units purchased for cancellation (33,630) 898,870 Changes in net assets during the period 254,315 Net assets, beginning of period 27,824,943 Net assets, end of period $ 28,079,258 See accompanying notes to the financial statements. 10

13 26OCT NOTES TO FINANCIAL STATEMENTS June 30, 2013 (unaudited) 1. TRUST ACTIVITIES Top 20 Europe Dividend Trust (the Trust ) 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 Novmber 27, 2012 (the Declaration of Trust ). Pursuant to this Declaration of Trust, TTE Ltd. acts as the trustee (the Trustee ) and is responsible for managing the affairs of the Trust. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides 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. Scotia Managed Companies Administration Inc. ( SMCAI or the Manager ), a wholly-owned subsidiary of Scotia Capital Inc., provides all administrative services for the Trust. The Trust was created 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). To pursue its investment objectives, the Trust used the net proceeds of its initial public offering 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. 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 the TTE Trust by virtue of the Forward Agreement. The Units are scheduled to be redeemed by the Trust on January 31, 2018 (the Termination Date ). 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 11

14 26OCT 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The accounting policies followed in preparing these financial statements are consistent with those used for the December 31, 2012 audited financial statements of the Trust. These interim financial statements should be read in conjunction with the 2012 Annual Report. 3. FORWARD AGREEMENT Pursuant to the Forward Agreement, the Counterparty will acquire, on or before the Termination Date, securities of Canadian public issuers ( Canadian Securities ) having a value based on the economic return provided by the Portfolio from inception to the Termination Date. Under the Forward Agreement, the Counterparty will deliver, on the Termination Date, a specified portfolio of Canadian Securities with an aggregate value equal to the redemption proceeds of all of the corresponding Units of TTE Trust, net of any amount then owing by the Trust to the Counterparty. The Trust partially settles the Forward Agreement prior to the Termination Date in order to fund (i) quarterly distributions on the Units; (ii) redemptions of Units; and (iii) operating expenses and other liabilities of the Trust. Settlement of the Forward Agreement is unconditionally guaranteed by The Bank of Nova Scotia, a company with a current credit rating of AA as rated by DBRS. As at June 30, 2013, the Counterparty had received a confirmation notice to pre-settle the Forward Agreement and on July 15, 2013, the Counterparty delivered securities of a Canadian public issuer that were sold by the Trust for proceeds of $685,364. As a result of the pre-settlement, the Trust has recorded a gain of $15,012 equal to the proceeds less the allocable cost of the Forward Agreement and is included in total net realized gain on partial pre-settlements of $58,417. The Trust is fully exposed to the credit risk associated with the Counterparty. To secure obligations of the Counterparty under the Forward Agreement, the Counterparty pledges collateral in favour of the Trust with an aggregate value equal to the exposure under the Forward Agreement with the amount of collateral re-set on a weekly basis. As at June 30, 2013 collateral of $28.4 million (December 31, 2012 $27.9 million) consisting of liquid TSX-listed securities with no more than 10% of the value in any one issuer was held in trust for the Trust. 12

15 26OCT The fair value of the Trust s Forward Agreement is equal to the net asset value of TTE Trust calculated at closing sale prices. As at June 30, 2013, the net asset value of TTE Trust was $28,113,345 (December 31, 2012 $27,889,428). For financial statement reporting purposes, the net assets of TTE Trust includes the Portfolio Securities measured in accordance with Section 3855 of the CICA Handbook Financial Instruments, which for publicly listed securities is based on closing bid prices on a recognized stock exchange on which the investments are listed or principally traded. The following reconciles the net assets of TTE Trust to the fair value of the Forward Agreement: June 30, December 31, * Net assets of TTE Trust based on closing bid prices $28,060,719 $27,763,072 Valuation adjustment to Portfolio Securities to closing sale prices 52, ,356 Forward Agreement, at fair value $28,113,345 $27,889,428 * Extracted from audited financial statements. For purposes of understanding the combined operations of the Trust and TTE Trust, significant financial statement line items are provided below on a consolidated basis along with their current presentation. There is no impact on the Trust s net assets and the total results of investment operations as a result of not consolidating TTE Trust. In addition, the financial statements of TTE Trust for the period ended June 30, 2013 are appended to these financial statements as an integral part hereof. As at June 30, 2013 Consolidated Non-Consolidated Forward Agreement $ $28,113,345 Portfolio Securities (1) 27,378,506 Total assets 29,001,900 28,798,835 Unrealized loss on foreign exchange contracts 186,860 Other liabilities 735, ,577 Total liabilities 922, ,577 Net assets $28,079,258 $28,079,258 For the period ended June 30, 2013 Net investment income (loss) $ 679,163 $(105,960) Net gain (loss) on investments (257,294) 527,829 Total results of investment operations $ 421,869 $ 421,869 (1) Represents the Portfolio Securities valued using closing sale prices. 13

16 26OCT In addition to the revenue and expenses detailed in the Trust s Statement of Investment Operations, the following shows total revenue and expenses of the combined operations of the Trust and TTE Trust for the six months ended June 30, 2013: Top 20 Europe TTE Total Dividend Trust Trust 2013 Revenue Dividends $ $1,117,612 $1,117,612 Interest and other income Withholding taxes (254,715) (254,715) $ 353 $ 863,349 $ 863,702 Expenses Administration fees $ 43,292 $ 44,383 $ 87,675 Unitholders information costs 9,750 9,750 Filing fees 9,450 1,000 10,450 Directors fees 8,250 8,250 16,500 Insurance premiums 7,748 5,368 13,116 Audit fees 6,800 6,800 13,600 Legal fees 5,200 5,200 Listing fees 3,800 3,800 Transfer agent fees 6,000 6,000 Independent Review Committee fees 1,876 1,877 3,753 Index fees 6,250 6,250 Custodial fees Other 4,147 4,172 8, ,313 78, ,539 Net investment income (loss) for the period (105,960) 785, ,163 Less: Forward Agreement fees (59,102) (59,102) $(165,062) $ 785,123 $ 620,061 Amounts available for distribution to Trust Unitholders consist of: Total 2013 Net investment income after deduction of Forward Agreement fees $ 620,061 Plus: option premiums received 898,348 Amounts available for distribution to Trust Unitholders $1,518, UNITHOLDERS CAPITAL The Trust is authorized to issue an unlimited number of transferable, redeemable Trust Units of one class each of which represents an equal, undivided ownership interest in the net assets of the Trust. All Units have equal rights and privileges. 14

17 26OCT The Trust may purchase any Units offered in the market at a price that is less than 98% of the latest NAV per Unit. Pursuant to the mandatory market purchase program, the Trust 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 pre-settlements of the Forward Agreement up to an amount equal to the yield on the Portfolio. For greater certainty, the yield on the Portfolio includes dividends and premiums generated from writing covered calls options less all expenses and any realized or unrealized capital gains on the Portfolio. 3,667 Unit purchases were made under this program at an average price of $9.17 per Unit for a total purchase amount of $33,690 for the six months ended June 30, 2013 (December 31, 2012 nil). The number of Units issued during the period ended June 30, 2013 is summarized below: Balance, beginning of period 3,000,000 Units, issued for cash 100,000 Units purchased under mandatory market purchase program (3,667) Balance, end of period 3,096, CAPITAL MANAGEMENT The Trust s capital consists of the Unitholders equity. The Manager, with oversight from the Trustee, is responsible for providing all administrative services required by the Trust, including the receipt of cash from partial unwinds of the Forward Agreement and the payment of distributions to the Unitholders. The Trust makes cash distributions funded from proceeds received from partial unwinds of the Forward Agreement after deduction of operating expenses of the Trust subject to maintaining a minimum level of cash on hand. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of receivables from Counterparty, cash and all liabilities approximate their fair value because of the short-term nature of these items. The following table outlines the fair value hierarchy of the remaining financial instruments. Level 1 Level 2 Level 3 Total 30-Jun Dec Jun Dec Jun Dec Jun Dec-12 Forward Agreement $ $ 28,113,345 $ 27,889,428 $ $ 28,113,345 $ 27,889,428 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 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 15

18 26OCT value requires the use of significant unobservable inputs, in which case it is classified as Level 3. There were no transfers between levels during each of the periods. 7. FINANCIAL INSTRUMENT RISK MANAGEMENT In the normal course of business, the Trust 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 Trust s mandate, through the Forward Agreement, to be fully invested in a defined portfolio and pay distributions from cash flows to the maximum extent possible, the Trust s overall risk management program focuses on compliance and execution of the Trust s investment objectives and strategies. Price Risk By virtue of the Forward Agreement, the value of a Unit is dependent on the value of the Portfolio Securities held by TTE Trust. The value of the Portfolio Securities can fluctuate on a daily basis as a result of factors outside of TTE Trust 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. If the prices for the Portfolio Securities held by TTE Trust had increased or decreased by 5% as at June 30, 2013, with all other variables held constant, the Trust s net assets would have increased or decreased, respectively, by approximately $1.0 million or 3.5% per Unit (December 31, 2012 $1.4 million or 5.0% per Unit). In practice, the actual results may differ materially from this sensitivity analysis. 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. By virtue of the Forward Agreement, the majority of the Trust s assets are equities that do not pay a fixed rate of interest; however, the Trust 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 Trust s functional currency. By virtue of the Forward Agreement, the Trust 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 16

19 26OCT relation to the Canadian dollar. The Manager enters into foreign exchange contracts in TTE Trust for hedging purposes to reduce its foreign currency exposure. The table below indicates the foreign currencies to which TTE Trust had exposure at as June 30, 2013 and December 31, 2012, in Canadian dollar terms. The table also illustrates the potential impact to TTE Trust s net assets as at June 30, 2013 and December 31, 2012 if TTE Trust 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 Net Impact on Exposure Net Assets Exposure Net Assets British Pound $ (288,620) $ (14,431) $ 91,525 $ 4,576 Euro (331,537) (16,577) 282,151 14,108 Swedish Krona 1,354,964 67,748 1,408,284 70,414 Swiss Franc 1,310,650 65,532 1,350,136 67,507 $2,045,457 $102,272 $2,384,744 $119,237 As a % of Net Assets 7.29% 0.36% 8.59% 0.43% 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 Trust. The Trust maintains all of its cash and cash equivalents in bankers acceptances or term deposits with financial institutions having a minimum debt rating of A. All transactions in listed securities undertaken by TTE Trust 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 TTE Trust has received payment. Payment is made on purchases once the securities have been received by TTE Trust. Should either party not meet its obligation, the trade will fail. Credit risk pertaining to the Forward Agreement is detailed in note 3. Liquidity Risk Liquidity risk is defined as the risk that the Trust and TTE Trust may not be able to settle or meet its obligations on time or at a reasonable price. The Trust is only exposed to annual cash redemptions and receives notification 30 days prior to payment. By virtue of the Forward Agreement, the Trust invests its assets in investments that are traded in an active market and can 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. The Trust and TTE Trust maintain cash and cash equivalents to offset all of its liabilities. 17

20 26OCT CORPORATE INFORMATION PRINCIPAL OFFICE PORTFOLIO MANAGER AND OPTIONS ADVISOR Scotia Plaza, 26th Floor Highstreet Asset Management Inc. 40 King Street West 244 Pall Mall Street, Suite 350 Station A, P.O. Box 4085 London, Ontario Toronto, Ontario M5W 2X6 N6A 5P6 Telephone: (416) Facsimile: (416) REGISTRAR & TRANSFER AGENT Web site: Computershare Investor Services Inc. 100 University Avenue Toronto, Ontario TRUSTEE M5J 2Y1 TTE Ltd. Toronto, Ontario DIRECTORS AND OFFICERS James P. Bowland CPA, CA* Director Thomas C. Dawson CPA, CA* Director and Chairman of the Board LEGAL COUNSEL Stikeman Elliot LLP Toronto, Ontario AUDITOR PricewaterhouseCoopers LLP Toronto, Ontario Brian D. McChesney Director, President and Chief Executive Officer Farooq N.P. Moosa Director and Secretary SYMBOL TTE.UN Stephen D. Pearce CPA, CA Director and Chief Financial Officer Thomas A. Pippy CPA, CA* Director and Chairman of the Audit Committee * Audit Committee Member INDEPENDENT REVIEW COMMITTEE James P. Bowland CPA, CA (Chairman) Thomas C. Dawson CPA, CA Thomas A. Pippy CPA, CA 18

21 TOP 20 EUROPE DIVIDEND TRUST 40 KING STREET WEST, SCOTIA PLAZA, 26TH FLOOR TORONTO, ONTARIO M5W 2X6 19

22 TTE TRUST Semi-Annual Report to Unitholders June 30,

23 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. 21

24 TTE Trust REPORT TO UNITHOLDERS The following presents the financial results of TTE Trust (the Fund ) for the six months ended June 30, It is recommended that this report be read in conjunction with the 2013 Interim Management Report of Fund Performance. Trust Structure TTE Trust is an investment trust created to invest in 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 Fund commenced operations on December 20, 2012 with the Bank of Nova Scotia as its sole holder of units (the Counterparty and Unitholder ). Substantially all of the foreign exchange exposure of the Portfolio is hedged back to the Canadian dollar. The Counterparty entered into a forward purchase and sale agreement (the Forward Agreement ) with Top 20 Europe Dividend Trust (the Trust ) under which the Counterparty has agreed to pay the economic return provided by the Portfolio. 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. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides 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 Manager and Options Advisor determines the Portfolio Securities on which the Fund 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. Financial Performance The Fund s Net Assets decreased over the six month period ended June 30, 2013 from $9.25 to $9.05 per Unit based on a decrease in the fair value of the Portfolio Securities, the Fund s operating expenses and distributions paid on the Units. 22

25 TTE Trust Distributions For the period ended June 30, 2013, the Fund declared distributions on the Units aggregating $1.23 million. The distributions were funded through dividends received on the Portfolio net of operating expenses together with premiums received on writing covered call options on a portion of the Portfolio. For the period ended June 30, 2013, funding totaled $1.7 million comprised of net investment income of $0.8 million and option premiums received of $0.9 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 TTE Ltd., Trustee for TTE Trust. Toronto, Canada August 7, MAY Brian D. McChesney President and Chief Executive Officer 23

26 TTE Trust STATEMENTS OF NET ASSETS As at (unaudited) June 30, December 31, * Assets Investments, at fair value $27,325,880 $27,562,244 Cash 1,480, ,528 Dividends receivable 142,402 28,949,148 27,849,772 Liabilities Unrealized loss on open foreign exchange contracts (Schedule 1) 186,860 63,065 Accrued liabilities 16,205 23,635 Distribution payable to Unitholder 685, ,429 86,700 Net assets representing Unitholder s equity $28,060,719 $27,763,072 Number of Units outstanding (note 4) 3,100,000 3,000,000 Net assets per Unit (note 3) $ 9.05 $ 9.25 * Extracted from audited financial statements. See accompanying notes to financial statements. 24

27 TTE Trust STATEMENT OF INVESTMENT OPERATIONS For the six months ended June 30, 2013 (unaudited) 2013 Revenue Dividends $ 1,117,612 Interest and other income 452 Withholding taxes (254,715) 863,349 Expenses Administration fees 44,383 Directors fees 8,250 Audit fees 6,800 Index fees 6,250 Insurance premiums 5,368 Independent Review Committee fees 1,877 Filing fees 1,000 Custodial fees 126 Other 4,172 78,226 Net investment income for the period 785,123 Net realized loss on investments and options (138,495) Trading commissions (7,248) Unrealized gain on investments and options 643,092 Realized loss on foreign exchange (74,684) Realized loss on foreign exchange contracts (416,585) Unrealized loss on foreign exchange contracts (123,795) Total results of investment operations $ 667,408 Total results of investment operations per Unit* $ 0.22 * Based upon the weighted average number of Units outstanding during the period. See accompanying notes to financial statements. 25

28 TTE Trust STATEMENT OF CASH FLOWS For the six months ended June 30, 2013 (unaudited) 2013 Operating activities Total results of investment operations $ 667,408 Add (deduct): Net realized loss on investments and options 138,495 Unrealized gain on investments and options (643,092) Unrealized loss on foreign exchange contracts 123,795 Changes in non-cash working capital Increase in dividends receivable (142,402) Decrease in accrued liabilities (7,430) Net cash flow provided by operating activities 136,774 Investing activities Purchase of investments and options (2,904,128) Proceeds on sale of investments and options 3,645,089 Net cash flow provided by investing activities 740,961 Financing activities Proceeds from issuance of units 947,500 Distributions paid to the Unitholder (631,897) Net cash flow provided by financing activities 315,603 Net increase in cash 1,193,338 Cash, beginning of period 287,528 Cash, end of period $ 1,480,866 See accompanying notes to financial statements. 26

29 TTE Trust STATEMENT OF CHANGES IN NET ASSETS For the six months ended June 30, 2013 (unaudited) 2013 Total results of investment operations Net investment income for the period $ 785,123 Net realized loss on disposition of investments and options (138,495) Realized loss on foreign exchange contracts (416,585) Trading commissions (7,248) Realized loss on foreign exchange (74,684) Unrealized gain on investments and options 643,092 Unrealized loss on foreign exchange contracts (123,795) 667,408 Distributions to the Unitholder (1,317,261) Unit transactions Units issued 947, ,500 Changes in net assets during the period 297,647 Net assets, beginning of period 27,763,072 Net assets, end of period $ 28,060,719 See accompanying notes to financial statements. 27

30 TTE Trust STATEMENT OF INVESTMENTS As at June 30, 2013 (unaudited) Number Average % of Portfolio Symbol of Shares Securities Cost Base Fair Value at Fair Value BASIC MATERIALS BAS GR 13,860 BASF SE $ 1,313,067 $ 1,301, RIO LN 31,700 Rio Tinto PLC 1,707,757 1,361, ,020,824 2,663, COMMUNICATIONS VIV FP 69,070 Vivendi S.A. 1,513,529 1,374, VOD LN 479,800 Vodafone Group PLC 1,211,097 1,443, ERICB SS 115,620 L.M. Ericsson Telephone Co. 1,144,459 1,372, ,869,085 4,189, CONSUMER DAI GR 21,600 Daimler AG 1,169,450 1,368, HMB SS 40,270 H&M Hannes & Mauritz AB 1,377,338 1,387, NOVN VX 19,200 Vovartis AG 1,207,589 1,433, GSK LN 52,900 GlaxoSmithKline PLC 1,158,191 1,395, TSCO LN 264,200 Tesco PLC 1,446,189 1,401, ,358,757 6,986, ENERGY FP FP 26,600 Total S.A. 1,360,374 1,364, BP LN 192,700 BP PLC 1,344,327 1,404, RDSA LN 40,500 Royal Dutch Shell PLC A 1,393,319 1,361, ,098,020 4,130, FINANCIAL SAN SM 196,500 Banco Santander S.A. 1,546,644 1,318, ALV GR 8,860 Allianz SE 1,222,375 1,362, HSBA LN 132,430 HSBC Holdings PLC 1,393,988 1,445, ,163,007 4,126, INDUSTRIAL DG FP 26,600 Vinci S.A. 1,259,073 1,404, SIE GR 12,680 Siemens AG 1,376,840 1,307, ABBN VX 62,110 ABB Ltd 1,278,373 1,417, ,914,286 4,129,

31 TTE Trust STATEMENT OF INVESTMENTS (continued) Number Average % of Portfolio Symbol of Shares Securities Cost Base Fair Value at Fair Value UTILITIES EOAN GR 79,755 E. ON. AG 1,485,907 1,375, ,485,907 1,375, Adjustment for trading commissions (19,769) Total Common Shares $ 26,890,117 $27,601, OPTIONS As at June 30 Maturity Number Premium % of Portfolio Options Date of Contracts Strike Price Received Fair Value at Fair Value Written Call Options (100 shares per contract) ABB Ltd 7/19/ , (7,975) (17,008) Allianz SE 7/19/2013 2, (7,873) (17,499) Banco Santander S.A. 7/19/ , (5,506) (11,389) BASF SE 7/19/2013 4, (7,573) (6,300) BP PLC 7/19/ , (4,907) (8,253) Daimler AG 7/19/2013 6, (9,442) (22,111) E. ON. AG 7/19/ , (6,983) (13,226) GlaxoSmithKline PLC 7/19/ , (5,080) (13,676) H&M Hannes & Mauritz AB 7/19/ , (5,157) (9,262) HSBC Holdings PLC 7/19/ , (8,248) (15,223) L.M. Ericsson Telephone Co. 7/19/ , (9,824) (18,265) Rio Tinto PLC 7/19/2013 9, (11,370) (15,615) Royal Dutch Shell PLC A 7/19/ , (3,993) (6,103) Siemens AG 7/19/2013 3, (5,061) (7,207) Tesco PLC 7/19/ , (6,312) (8,193) Total S.A. 7/19/2013 7, (5,909) (13,101) Vinci S.A. 7/19/2013 7, (7,678) (19,975) Vivendi S.A. 7/19/ , (8,303) (11,206) Vodafone Group PLC 7/19/ , (6,984) (23,395) Vovartis AG 7/19/2013 5, (6,153) (18,440) (140,330) (275,449) (1.0) 29

32 TTE Trust STATEMENT OF INVESTMENTS (continued) Average % of Portfolio Summary Cost Base Fair Value at Fair Value Total Common shares $ 26,890,117 $ 27,601, Total Options (140,330) (275,449) (1.0) Total Investments and options $ 26,749,787 $ 27,325, FOREIGN EXCHANGE CONTRACTS (SCHEDULE 1) As at June 30, 2013 Settlement Contract Unrealized Date Purchased Sold Price Loss July 17, 2013 $13,870,120 CAD $ 10,234,626 Euro $ (147,748) July 17, ,741,322 CAD 5,473,932 BRITISH POUND (18,083) July 17, ,539,862 CAD 1,396,455 SWISS FRANC (15,971) July 17, ,404,518 CAD 8,989,617 SWEDISH KRONA (5,058) $ (186,860) As at December 31, 2012 Settlement Contract Unrealized Date Purchased Sold Price Loss January 15, 2013 $ 8,392,500 CAD 5,211,956 BRITISH POUND $ (41,336) January 15, ,987,500 CAD 10,668,685 EURO (12,773) January 15, ,398,750 CAD 9,204,544 SWEDISH KRONA (7,676) January 15, ,398,750 CAD 1,287,717 SWISS FRANC (1,279) $ (63,065) See accompanying notes to financial statements. 30

33 TTE Trust NOTES TO FINANCIAL STATEMENTS June 30, 2013 (unaudited) 1. FUND ACTIVITIES TTE Trust (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 November 27, 2012 (the Declaration of Trust ). Pursuant to this Declaration of Trust, TTE Ltd. acts as the trustee (the Trustee ) and is responsible for managing the affairs of TTE Trust. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides 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. Scotia Managed Companies Administration Inc. ( SMCAI or the Manager ), a wholly-owned subsidiary of Scotia Capital Inc., provides all administrative services for the Fund. The Fund is an investment trust created to invest in 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 Fund commenced operations on December 20, 2012 with the Bank of Nova Scotia as its sole holder of units (the Counterparty and Unitholder ). The Fund issued 3,100,000 Units at a price of $9.33 per Unit, including 3,000,000 Units from its initial offering for proceeds of $28.0 million. On January 8, 2013, the Fund completed the issuance of 100,000 Units under the over-allotment option for proceeds of $947,500. Substantially all of the foreign exchange exposure of the Portfolio is hedged back to the Canadian dollar. The Counterparty entered into a forward purchase and sale agreement (the Forward Agreement ) with Top 20 Europe Dividend Trust (the Trust ) under which the Counterparty has agreed to pay the economic return provided by the Portfolio. 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. 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. 31

34 TTE Trust 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The accounting policies followed in preparing these financial statements are consistent with those used for the December 31, 2012 audited financial statements of TTE Trust. These interim financial statements should be read in conjunction with the 2012 Annual Report. 3. NET ASSETS PER UNIT Under Section 3855 of the Canadian Institute of Chartered Accountants Handbook Accounting, the Fund is required to prepare its financial statements using the closing bid prices on the principal exchange on which the Portfolio Securities are listed or principally traded. Pursuant to National Instrument , the Fund continues to calculate and report the net asset value using closing sale prices (the Transaction NAV ) for purposes other than the financial statements and provides a reconciliation to net assets per Unit calculated in accordance with Section 3855 below. As at: June 30, December 31, * Transaction NAV $ 9.07 $ 9.30 Valuation adjustment to Portfolio Securities (0.02) (0.05) Net assets per Unit $ 9.05 $ 9.25 * Extracted from audited financial statements. 4. UNITHOLDER S CAPITAL TTE Trust is authorized to issue an unlimited number of Units each of which represents an equal, undivided ownership interest in the net assets of that class of Units of TTE Trust. The sole Unitholder of TTE Trust is the Counterparty, The Bank of Nova Scotia. The issued and outstanding Units as at June 30, 2013 and December 31, 2012 consist of: Balance, beginning of period 3,000,000 Units, issued for cash 100,000 Balance, end of period 3,100, CAPITAL MANAGEMENT TTE Trust s capital consists of the Unitholder s equity. The Manager, with oversight from the Trustee, is responsible for providing all administrative services required by TTE Trust, including the receipt of revenues 32