2016 Annual Management Report of Fund Performance

Transcription

1 (the Fund ) For the 12-month period ended September 30, 2016 (the Period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio manager: BMO Asset Management Inc., Toronto, Ontario (the portfolio manager ) 2016 Annual Management Report of Fund Performance This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the Fund. If the annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the annual financial statements at your request, and at no cost, by calling and , by writing to us at BMO Investments Inc., First Canadian Place, 100 King Street West, 43rd Floor, Toronto, Ontario, M5X 1A1 or by visiting our website at and or SEDAR at You may also contact us using one of these methods to request a copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Investment Objective and Strategies The Fund s objective is to seek to preserve the value of your investment and provide some potential for growth while seeking to reduce portfolio volatility by investing primarily, directly or indirectly, in global equities and fixed income securities. The portfolio manager employs a strategic asset allocation strategy and may invest up to 10 of the Fund s assets in securities of exchange traded funds and/or other mutual funds, including funds that are managed by the Manager or one of its affiliates. The portfolio manager will allocate assets among the underlying mutual funds and/or exchange traded funds based on each underlying fund s investment objectives and strategies, among other factors. Risk No changes affecting the overall level of risk associated with investing in the Fund were made during the Period. The risks of the Fund remain as discussed in the Fund s most recent simplified prospectus or any amendments and fund facts. Results of Operations During the Period, the Fund s total net asset value changed from approximately $14 million to approximately $840 million. Series A shares of the Fund returned 2.89% versus the Fund s blended benchmark, composed of 7 FTSE TMX Canada Universe Bond Index and 2 MSCI World Index (C$), return of 5.91%. Please see the Past Performance section for information on the performance returns of the Fund s other series. During the Period, the Fund s overweight allocation to the Canadian dollar, as well as the hedging of foreign currency exposure to the Canadian dollar, contributed to performance as the dollar rose, aided by the rebound in oil prices. Overweight exposure to U.S. equities also contributed to performance as a result of continued strength in the U.S. economy. An overweight exposure to Canadian low-volatility stocks detracted from the Fund s performance as sectors such as Energy outperformed. In addition, the Fund s exposure to international equities also detracted from relative performance as they did not perform as strongly as U.S. equities. In the risk-reduction fixed income portion of the Fund, lower interest rate sensitivity positioning detracted as yields declined. The risk-reduction fixed income portion held an overweight allocation to corporate bonds, which contributed to performance. In the risk-reduction equity portion, the portfolio manager used an option overlay strategy, which was a large detractor from the Fund s performance. When equity markets are up, as was experienced during the Period, the cost of providing protection tends to have a negative impact on relative performance. Conversely, when equity markets are down, it can provide some protection and relative outperformance. While the S&P/TSX Composite Total Return Index ( S&P/TSX ) had negative returns in the last quarter of 2015, it rose 15.8% in The Materials sector was the primary driver

2 of the S&P/TSX performance. After a multi-year decline, gold prices were up sharply, rising 18. as longer-term interest rates declined amid lower expectations for an interest rate increase by the U.S. Federal Reserve Board ( Fed ) in The Energy sector was the second-best performer in the S&P/TSX. While crude oil prices fell in the fourth quarter of 2015 and continued to decline early in the first quarter of 2016, they rebounded later, driven primarily by production outages. In the third quarter of 2016, crude production increased, particularly in the Middle East. However, the potential for an agreement to a production freeze by the Organization of the Petroleum Exporting Countries supported oil prices. The Financials sector gained 13.1% as key earnings drivers showed Canadian banks resilience. In addition, Canadian banks management continued to stress that credit losses related to the Energy sector remained manageable. However, the Health Care sector posted high double-digit losses. Nevertheless, given the relatively small size of this sector in the S&P/TSX, its performance made a modest impact on the broader equity market s performance. After a challenging first quarter in 2016, the S&P 500 Index representing U.S. equities, rebounded, rising 15.4% in U.S. dollar terms and 13. in Canadian dollar terms. The Materials, Telecommunication Services and Information Technology sectors had the highest returns. Meanwhile, positive results in the Consumer Staples and Consumer Discretionary sectors highlighted continued consumer demand, one of key factors in U.S. economic growth. At the same time, the Financials sector underperformed all other sectors. The MCSI EAFE Index, which captures equity performance in developed economies, excluding North America, had uneven performance during the Period. Global equity markets were weak in late 2015 and early While the MSCI EAFE Index recovered by mid-2016, the unexpected U.K. Brexit referendum vote to exit the European Union resulted in a sharp sell-off of equities. Meanwhile, the European Central Bank, Bank of Japan and Bank of England continued to offer markets accommodative monetary policy, supporting economic growth. Overall, the MSCI EAFE Index registered a 6. gain in U.S. dollar terms and a 4.3% gain in Canadian dollar terms. The Canadian bond market, as measured by the FTSE TMX Canada Universe Bond Index (the Index ), remained on an upward trajectory. The Index added 6.3% as the 10-year Canadian government bond yield fell 44 basis points to 1., while its U.S. equivalent also fell 44 basis points. Meanwhile, the Canadian yield curve flattened as some short-term interest rates rose, while mid- and long-term interest rates declined. As a result, longer-term bonds were the beneficiaries of these changes in interest rates. At the beginning of the Period, investors anticipated a low probability of an interest rate increase by the Fed during the remainder of 2015, but did expect an interest rate increase in The Fed, however, increased the target range of the federal funds rate in December 2015, but did not withdraw monetary stimulus during the remainder of the Period as it was looking for confirmation of a strengthening economy. As a result, longer-term interest rates declined in both the U.S. and Canada, supporting bond prices. Meanwhile, the Bank of Canada ( BoC ) kept its overnight interest rate unchanged as low oil prices continued to be a challenge for economic expansion. Another supporting factor for the Index was a narrowing of corporate credit spreads (i.e., difference in yields) which lifted corporate credit. The Manager confirms that the Fund did not borrow money during the period. For information on the Fund s performance and composition, please refer to the Past Performance section and Summary of Investment Portfolio section of this report. Recent Developments The portfolio manager expects continued monetary policy stimulus and, in some cases, fiscal policy support, across the developed world. Interest rates are likely to rise, albeit modestly, while equities should continue to see gains as a result of improving economic data. The portfolio manager remains confident that the U.S. economy will likely continue to be supported by stable gains in employment and strengthening consumer sentiment. The Fed will likely increase interest rates over the next 12-months as inflation should rise closer to the Fed s target. The wider monetary policy divergence between the U.S. and Canada will likely put pressure on the Canadian dollar. However, the Canadian economy should benefit from a strengthening U.S. economy, modestly higher oil prices and a weaker Canadian dollar. The portfolio manager continues to be cautious about Europe as some market volatility is expected in light of political uncertainty. At the same time, Japan s equity market performance should continue to be heavily dependent on policy support.

3 RELATED PARTY TRANSACTIONS BMO Investments Inc., an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ), is the Manager of the Fund. From time to time, the Manager may, on behalf of the Fund, enter into transactions or arrangements with or involving other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Manager (each a Related Party ). The purpose of this section is to provide a brief description of any transaction involving the Fund and a Related Party. Portfolio Manager The Fund s portfolio manager is BMO Asset Management Inc. ( BMOAM ), an affiliate of the Manager. BMOAM provides portfolio management services to the Fund. BMOAM receives from the Fund a management fee based on assets under management, calculated daily and payable monthly. Administration Fees and Operating Expenses The Fund pays a fixed administration fee to the Manager in respect of each series other than Series I. The Manager in return pays the operating expenses of these series of the Fund, other than certain specified expenses that are paid directly by the Fund ( Fund Expenses ). Fund Expenses include interest or other borrowing expenses, costs and expenses related to the operation of the Fund s Independent Review Committee ( IRC ), including fees and expenses of IRC members, taxes to which the Fund is or might be subject, and costs associated with compliance with any new governmental or regulatory requirement introduced after December 1, 2007 (e.g., cost associated with the production of fund facts, filed in compliance with the relevant amendments to NI ). Fund Expenses are allocated proportionately among the relevant series. If the Fund Expenses are specific to a series, the Fund Expenses are allocated to that series. The fixed administration fee is calculated as a fixed annual percentage of the average net asset value of each relevant series of the Fund. Separate fees and expenses are negotiated and paid by each Series I investor. Further details about the fixed administration fee and/or Fund Expenses can be found in the Fund s most recent simplified prospectus at and or Brokerage Commissions The Fund pays standard brokerage commissions at market rates to BMO Nesbitt Burns Inc., an affiliate of the Manager, for executing a portion of its trades. The brokerage commissions charged to the Fund (excluding exchange and other fees) during the periods indicated, were as follows: Period ended Period ended Sep. 30, 2016 Sep. 30, 2015 $000 $000 Total brokerage commissions $ 33 0 Brokerage commissions paid to BMO Nesbitt Burns Inc. $ 8 0 Distribution Services The Manager markets and distributes the Fund through Bank of Montreal branches and/or (depending on the series) through registered dealers and brokers, including BMO InvestorLine Inc. and BMO Nesbitt Burns Inc., both affiliates of the Manager. The Manager pays to these affiliates a service fee called a trailing commission based on the average daily value of the units and/or shares that are held in investor accounts. This service fee is paid monthly or quarterly and varies by purchase option and by series. Management Fees The Manager is responsible for the day-to-day management of the business and operations of the Fund. The Manager monitors and evaluates the Fund s performance, pays for the investment advice provided by the Fund s portfolio manager and provides certain administrative services required by the Fund. As compensation for its services, the Manager is entitled to receive a management fee payable monthly, calculated based on the daily net asset value of each series of the Fund at the maximum annual rate set out in the table below. As a Percentage of Management Fees General Maximum Annual Administration, Management Dealer Investment Fee Rate* Compensation Advice and Profit % % % Series A Units Advisor Series Units Series T4 Units Series T6 Units Series F Units Series F4 Units Series F6 Units Series D Units Series I Units * For Series I Units, separate Series I fees are negotiated and paid by each Series I investor. Since the Manager pays no distribution, service or trailing fees on Series I Units, the combined management and administrative fees for Series I Units will not exceed the management fee charged for Series A Units.

4 FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the periods indicated. The Fund s Net Assets per Unit (1) Series A Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ 0.01 for the period $ from operations (3) $ (excluding dividends) $ 0.02 From dividends $ 0.00 From capital gains $ 0.01 Return of capital $ 0.00 Total Annual Distributions (4) $ 0.03 Net assets, end of period $ Advisor Series Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ 0.01 for the period $ from operations (3) $ (excluding dividends) $ 0.02 From dividends $ 0.00 From capital gains $ 0.01 Return of capital $ 0.00 Total Annual Distributions (4) $ 0.03 Net assets, end of period $ Series T4 Units Net assets, beginning of period $ 10.00)* Total revenue $ 0.01 Total expenses (2) $ for the period $ 0.01 for the period $ 0.18 from operations (3) $ 0.12 (excluding dividends) $ From dividends $ 0.00 From capital gains $ 0.00 Return of capital $ 0.17 Total Annual Distributions (4) $ 0.17 Net assets, end of period $ 9.97 Series T6 Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ 0.01 for the period $ from operations (3) $ (excluding dividends) $ From dividends $ 0.00 From capital gains $ 0.00 Return of capital $ 0.53 Total Annual Distributions (4) $ Net assets, end of period $

5 Series F Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ 0.01 for the period $ from operations (3) $ (excluding dividends) $ 0.03 From dividends $ 0.00 From capital gains $ 0.00 Return of capital $ 0.00 Total Annual Distributions (4) $ 0.03 Net assets, end of period $ Series F4 Units Net assets, beginning of period $ 10.00)* Total revenue $ 0.01 Total expenses (2) $ for the period $ 0.01 for the period $ 0.19 from operations (3) $ 0.18 (excluding dividends) $ From dividends $ 0.00 From capital gains $ 0.00 Return of capital $ 0.17 Total Annual Distributions (4) $ 0.17 Net assets, end of period $ Series F6 Units Net assets, beginning of period $ 10.00)* Total revenue $ 0.01 Total expenses (2) $ for the period $ 0.00 for the period $ 0.17 from operations (3) $ 0.15 (excluding dividends) $ From dividends $ 0.00 From capital gains $ 0.00 Return of capital $ 0.25 Total Annual Distributions (4) $ 0.25 Net assets, end of period $ 9.94 Series D Units Net assets, beginning of period $ 10.00)* Total revenue $ 0.02 Total expenses (2) $ for the period $ 0.01 for the period $ 0.05 from operations (3) $ 0.04 (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ 10.18

6 Series I Units Net assets, beginning of period $ 10.00)* Total revenue $ 0.01 Total expenses (2) $ for the period $ 0.01 for the period $ 0.20 from operations (3) $ 0.22 (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ * Initial net assets. (1) This information is derived from the Fund s audited financial statements. (2) Includes commissions and other portfolio transaction costs and withholding taxes. (3) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (4) Distributions were either paid in cash or reinvested in additional units of the Fund, or both. The allocation of the distributions from each of income, dividends, capital gains and return of capital is based on the Manager s estimate as at September 30 of the period shown, which is the Fund s financial year-end. However, the actual allocation of distributions is determined as at December 31, the Fund s tax year-end. Accordingly, the actual allocation among income, dividends, capital gains and return of capital may differ from these estimates. The information shown in this column is for the period beginning August 25, 2015 (the series launch date) and ending September 30, Ratios and Supplemental Data Series A Units Total net asset value (000 s) (1) $ 715,817 12,560 outstanding (000 s) (1) 69,867 1,258 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % 6.60 Net asset value per unit $ Advisor Series Units Total net asset value (000 s) (1) $ 48, outstanding (000 s) (1) 4, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % 6.60 Net asset value per unit $ Series T4 Units Total net asset value (000 s) (1) $ 5,635 outstanding (000 s) (1) 565 (2) % 1.74 before waivers or absorptions % 1.74 Trading expense ratio (3) % 0.02 Portfolio turnover rate (4) % 6.60 Net asset value per unit $ 9.97 Series T6 Units Total net asset value (000 s) (1) $ 29, outstanding (000 s) (1) 3, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % 6.60 Net asset value per unit $ Series F Units Total net asset value (000 s) (1) $ 37, outstanding (000 s) (1) 3, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % 6.60 Net asset value per unit $ Series F4 Units Total net asset value (000 s) (1) $ 3,436 outstanding (000 s) (1) 343 (2) % 0.61 before waivers or absorptions % 0.61 Trading expense ratio (3) % 0.02 Portfolio turnover rate (4) % 6.60 Net asset value per unit $ Series F6 Units Total net asset value (000 s) (1) $ 408 outstanding (000 s) (1) 41 (2) % 0.62 before waivers or absorptions % 0.65 Trading expense ratio (3) % 0.02 Portfolio turnover rate (4) % 6.60 Net asset value per unit $ 9.94

7 Series D Units Total net asset value (000 s) (1) $ 11 outstanding (000 s) (1) 1 (2) % 0.90 before waivers or absorptions % 7.34 Trading expense ratio (3) % 0.02 Portfolio turnover rate (4) % 6.60 Net asset value per unit $ Year-by-Year Returns The following bar charts show the performance of each series of the Fund for each of the financial years shown. The charts show in percentage terms how an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year. Series A Units 1 Series I Units Total net asset value (000 s) (1) $ 0 outstanding (000 s) (1) 0 + % before waivers or absorptions + % Trading expense ratio (3) % 0.02 Portfolio turnover rate (4) % 6.60 Net asset value per unit $ Operating expenses are paid by BMOII and management fees are paid directly to BMOII as negotiated with the investor. (1) This information is provided as at September 30 of the period shown, as applicable. (2) is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 10 is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher a fund s portfolio turnover rate in a year, the greater the trading costs payable by the fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. For the financial period-ended September 30, 2015, no sales of portfolio securities were made by the Fund. As a result, the portfolio turnover rate for this period was zero. The information shown in this column is for the period beginning August 25, 2015 (the series launch date) and ending September 30, Advisor Series Units 1 - Series T4 Units (1) (1) PAST PERFORMANCE 1.63 The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional securities of the Fund and is based on the net asset value of the Fund. - The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember that how the Fund has performed in the past does not indicate how it will perform in the future. The returns of each series may differ from one another for a number of reasons, including if the series was not issued and outstanding for the entire reporting period and because of the different levels of management fees and expenses allocated and payable by each series. Series T6 Units (1) 2016 (2)

8 Series F Units Series I Units (1) (2) Series F4 Units 1 (1) For the period beginning August 25, 2015 to September 30, (2) For the period beginning April 28, 2016 to September 30, Series F6 Units 1 - Series D Units (2) (2) (2) Annual Compound Returns This table compares the historical annual compound returns of the Fund with its blended benchmark (compose of 7 FTSE TMX Canada Universe Bond Index and 2 MSCI World Index (C$), in addition to the FTSE TMX Canada Universe Bond Index, a broad-based index. The FTSE TMX Canada Universe Bond Index is a broad measure of the total return of Canadian bonds that mature in more than one year. The MSCI World Index (C$) measures the total return of equity securities available in developed markets globally. Series A Units year years years years Inception (1) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Advisor Series Units year years years years Inception (1) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series T4 Units year years years years Inception (2) BMO Retirement Income Portfolio % 1.63 Blended Benchmark % 3.23 FTSE TMX Canada Universe Bond Index % 3.90 Series T6 Units year years years years Inception (1) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index %

9 Series F Units year years years years Inception (1) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series F4 Units year years years years Inception (2) BMO Retirement Income Portfolio % 2.10 Blended Benchmark % 3.23 FTSE TMX Canada Universe Bond Index % 3.90 Series F6 Units year years years years Inception (2) BMO Retirement Income Portfolio % 2.09 Blended Benchmark % 3.23 FTSE TMX Canada Universe Bond Index % 3.90 Series D Units year years years years Inception (2) BMO Retirement Income Portfolio % 1.97 Blended Benchmark % 3.23 FTSE TMX Canada Universe Bond Index % 3.90 Series I Units year years years years Inception (2) BMO Retirement Income Portfolio % 2.34 Blended Benchmark % 3.23 FTSE TMX Canada Universe Bond Index % 3.90 (1) Return from August 25, 2015 to September 30, (1) Return from April 28, 2016 to September 30, As noted above, the table shows a comparison of the historical annual compound returns of the Fund with the FTSE TMX Canada Universe Bond Index, a broad-based index. The Fund, however, uses a blended benchmark to compare its overall relative performance. The reason for this is that the blended benchmark is a better reflection of the asset mix of the underlying investments within the Fund s portfolio. Accordingly, the blended benchmark is a more accurate and useful comparison. SUMMARY OF INVESTMENT PORTFOLIO As at September 30, 2016 % of Net Portfolio Allocation Asset Value Fixed Income Fund 71.3 U.S. Equity Fund 22.4 Canadian Equity Fund 2.9 International Equity Fund 2.4 Cash/Receivables/Payables 1.0 Total Portfolio Allocation % of Net Holdings*+ Asset Value Issuer BMO Risk Reduction Fixed Income Fund, Series I 71.3 BMO Risk Reduction Equity Fund, Series I 22.4 BMO Low Volatility Canadian Equity ETF 2.9 BMO Low Volatility International Equity Hedged to CAD ETF 2.4 Cash/Receivables/Payables 1.0 Total Holdings as a Percentage of Total Net Asset Value Total Net Asset Value $839,829,549 *Represents entire portfolio. +The prospectus and other information about the underlying investment funds held in the portfolio are available on the internet at and, also at and +The prospectus and other information about the underlying exchange traded funds held in the portfolio are available on the internet at and, also at The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly. A commentary on the market and/or information regarding the relative performance of the Fund as compared to its benchmark can be found under the Results of Operations section of this report.

10 and BMO Investments Inc. First Canadian Place, 43rd Floor, 100 King Street West Toronto, ON M5X 1A1 For more information please call BMO Investment Centre at (investors who purchased BMO Mutual Funds through a BMO Bank of Montreal branch or BMO Online Banking) or call Client Services toll-free at (investors who purchased BMO Mutual Funds through a full-service or discount broker) or at (investors who purchased Series NBA and NBF through a full-service or discount broker). This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, the effects of competition in the geographic and business areas in which the Fund may invest in and the risks detailed from time to time in BMO Mutual Funds simplified prospectus. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, BMO Investments Inc. does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. / Trademarks of Bank of Montreal, used under license. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal.