Moneda Latam Corporate

Transcription

1 Moneda Latam Corporate Bond Fund Semi-Annual Report to Unitholders June 30, 2014

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

3 REPORT TO UNITHOLDERS The following presents the financial results of Moneda Latam Corporate Bond Fund (the Fund ) for the six months ended June 30, Fund Structure The Fund is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of Class A Units and Class U Units (collectively, the Units and each, a Unit ) with investment exposure to a diversified portfolio of fixed income securities of companies located in, or with significant operations in Latin America, primarily denominated in U.S. dollars. The Fund s investment objectives are to: (i) preserve and enhance the net asset value (the Net Asset Value or NAV ) of the Fund; and (ii) provide Unitholders with quarterly tax-advantaged distributions consisting primarily of returns of capital, in each case through exposure by virtue of a Forward Agreement (defined below) to the total return performance of the Moneda Deuda Latinoamericana Fondo de Inversion (the Moneda Fund ), a US$961 million (as at June 30, 2014) Chilean listed investment fund established in 2000 which is actively managed by Moneda S.A. Administradora de Fondos de Inversion ( Moneda or the Portfolio Manager ). The NAV for the Class A Units is calculated in Canadian dollars and for the Class U Units, in U.S. dollars. To pursue its investment objectives, the Fund 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 a notional portfolio (the Notional Portfolio ) of units of the Moneda Fund. Substantially all of the value of the Notional Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U units are designed for investors wishing to make their investment in U.S. dollars. As a result of the forgoing, the Net Asset Value of the Units will vary depending on the performance of the Moneda Fund by virtue of the Forward Agreement and will also vary depending on the expenses allocated to, and distributions paid in respect of, the particular class of Units of the Fund. The Fund 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 Fund. The Forward Agreement allows the Fund to leverage its exposure to the Moneda Fund in an amount up to 15% of the total assets of the Fund at the time of borrowing with a maximum leverage to net assets of 18%. As at June 30, 2014 the Fund had leveraged exposure of $4.3 million or 8.8% (December 31, 2013 $4.6 million or 9.6%) to the net assets of the Fund. The Class A Units of the Fund are listed for trading on the Toronto Stock Exchange under the symbol MLD.UN. The Class U Units are not listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes. 1

4 Tax Changes Affecting Forward Agreement Structures In the budget announced March 21, 2013, the government proposed and enacted 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, the distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on October 31, Report from Portfolio Manager The Latin American high yield corporate debt market, as measured by the CEMBI Broad Latin High Yield Index (the Index ), rose 7.6% on a total return basis over the first half of The Moneda Fund lagged this performance posting a total return of 5.9%. This performance can be explained by: (i) On the positive side, a good allocation at the country level, with long positions in Argentina and Peru significantly contributing to the positive performance; and (ii) Good selection at the security level in most countries offset by a single credit event in Mexico that explains a significant portion of the underperformance versus the Index. As of the end of June 2014, the largest country allocations were Brazil, Mexico, Argentina, Dominican Republic and Peru, with the last three countries having the largest over weights versus the Index. Market Outlook As we ended June 2014, the economies of developed markets kept expanding with the support of their central banks. This has brought volatility levels to record lows and asset prices to new highs. In this context, global interest rates have unexpectedly dropped, with the yield on 10 year treasuries falling 50 basis points year-to-date. We are pleased to see how the market has adjusted to the news flow coming from the US Federal Reserve and its tapering program and we are confident that Latin-American debt markets will be able to cope effectively with the normalization of global rates. Latin-American debt funds which had experienced investment outflows since April 2013, started seeing a return of money flows into Latin-American debt securities in late March It is important to mention that dedicated institutional investors kept allocating money into the region even in the worst periods of outflows which were dominated by retail fund outflow. This is a positive sign in our view as it shows the commitment of dedicated investors to the region and the asset class. We expect this support to continue for the time being. 2

5 Latin-American currencies have shown uneven performances. The Brazilian real, Colombian and Mexico pesos have appreciated while all other currencies have depreciated albeit at a moderated pace. Countries in the region are entering a period of change. Chile has a newly elected government with an aggressive social agenda while the Colombian people have chosen to re-elect President Santos, therefore supporting the continuity of his economic agenda. Mexico is approving an aggressive set of economic reforms that should foster growth in the medium term, eliminating significant bottlenecks that have hampered the economy for many years, especially in the labor, energy and telecommunication sectors. Similarly, Brazil is entering an election period which will challenge the economic leadership of President Rousseff and hopefully bring the change and economic reforms that are needed. Argentina is finally dealing with issues that have been long overdue such as utility services pricing and YPF expropriation. Argentina s negotiation with holdouts on their debt restructuring is the last standing issue which we expect to be addressed and hopefully solved. In this context we continue to find value in corporates throughout the region supported by attractive spreads coupled with reasonable leverage ratios. Financial Performance The net assets attributable to Unitholders as at June 30, 2014 increased from $10.38 to $10.61 per Class A Unit or 2.2% and from US$10.34 to US$10.56 per Class U Unit or 2.1% based on the positive performance of the Moneda Fund offset by the Fund s operating expenses including Forward Agreement fees and distributions paid on the Units. Distributions The Fund does not have fixed distributions but intends to pay quarterly distributions through partial pre-settlements of the Forward Agreement based on, among other things, the current yield of the portfolio of the Moneda Fund less the expected expenses of the Fund for the period. The Fund declared and paid cash distributions of $0.375 per Class A Unit and US$0.375 per Class U Unit for the six months ended June 30, It is expected that the quarterly distributions received by Unitholders will be characterized as return of capital. Amounts distributed on the Units that represent returns of capital are generally non-taxable to the Unitholder but reduce the Unitholder s adjusted cost base of the Units for tax purposes. This report, along with the accompanying financial statements of the Fund, is respectfully submitted to you on behalf of the Board of Directors of MLCB Ltd., Trustee for the Moneda Latam Corporate Bond Fund. Toronto, Canada August 7, MAY Brian D. McChesney President and Chief Executive Officer 3

6 STATEMENTS OF FINANCIAL POSITION (unaudited) As at June 30 December 31 January Assets Current assets Forward Agreement, at fair value (note 4) $ 48,563,800 $ 50,185,457 $ 49,438,979 Unrealized gain on foreign exchange contracts (note 5) 1,596,061 Cash 1,901 36,621 1,446,028 50,161,762 50,222,078 50,885,007 Liabilities Current liabilities Distributions payable 867, , ,232 Accrued liabilities (note 8) 215, , ,257 Unrealized loss on foreign exchange contracts (note 5) 1,188,932 1,065,581 1,083,016 2,207,520 2,184,070 Net assets attributable to Unitholders $ 49,078,746 $ 48,014,558 $ 48,700,937 Net assets attributable to Unitholders per class Class A $ 44,675,440 $ 43,659,082 $ 44,819,171 Class U (in equivalent CAD$) $ 4,403,306 $ 4,355,476 $ 3,881,766 Class U USD $ 4,120,623 $ 4,084,481 $ 3,893,127 Number of Units outstanding (note 6) Class A 4,212,522 4,207,043 4,600,224 Class U 390, , ,390 Net assets attributable to Unitholders per Unit Class A $ $ $ 9.74 Class U (in equivalent CAD$) $ $ $ 9.70 Class U USD $ $ $ 9.72 See accompanying notes to the financial statements. 4

7 STATEMENTS OF COMPREHENSIVE INCOME For the six months ended June 30 (unaudited) Income Forward Agreement Realized gain on partial pre-settlements of Forward Agreement $ 1,617,384 $ 516,894 Unrealized appreciation on Forward Agreement 1,457,197 4,906,037 Forward Agreement fees (note 8) (106,468) (112,344) Net gain on Forward Agreement 2,968,113 5,310,587 Foreign exchange contracts Realized loss on foreign exchange contracts (2,761,730) (2,380,965) Unrealized gain on foreign exchange contracts 2,784, ,280 Net gain (loss) on foreign exchange contracts 23,263 (2,202,685) Foreign exchange gain (loss) on cash 11,020 17,515 Total income, net 3,002,396 3,125,417 Expenses Management fee (note 8) 107, ,803 Directors fees 22,935 16,500 Unitholders information costs 15,075 15,200 Insurance premiums 11,951 12,050 Audit fees 11,108 11,200 Filing fees 9,372 2,251 Listing fees 5,752 5,800 Legal fees 5,157 5,200 Transfer agent fees 4,314 4,350 Independent Review Committee fees 3,719 3,750 Other , ,952 Increase in net assets attributable to Unitholders 2,804,206 2,932,465 Increase in net assets attributable to Unitholders per class Class A 2,538,283 2,489,492 Class U 265, ,973 $ 2,804,206 $ 2,932,465 Increase in net assets attributable to Unitholders per Unit Class A $ 0.60 $ 0.54 Class U $ 0.68 $ 1.11 See accompanying notes to the financial statements. 5

8 STATEMENTS OF CASH FLOWS For the six months ended June 30 (unaudited) Operating activities Increase in net assets attributable to Unitholders $ 2,804,206 $ 2,932,465 Adjustments for: Foreign exchange gain on cash (11,020) (17,515) Realized gain on partial pre-settlements of Forward Agreement (1,617,384) (516,894) Proceeds on partial pre-settlements of Forward Agreement 4,696,238 3,172,565 Unrealized appreciation on Forward Agreement (1,457,197) (4,906,037) Unrealized loss on foreign exchange contracts (2,784,993) (178,280) Accrued liabilities 64,149 (13,058) Net cash flow provided by operating activities 1,693, ,246 Financing activities Distributions paid to Unitholders (1,739,739) (1,874,644) Net cash flow used in financing activities (1,739,739) (1,874,644) Foreign exchange gain on cash 11,020 17,515 Net decrease in cash (34,720) (1,383,883) Cash, beginning of period 36,621 1,446,028 Cash, end of period $ 1,901 $ 62,145 See accompanying notes to the financial statements. 6

9 STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS For the six months ended June 30 (unaudited) Net assets attributable to Unitholders, beginning of period Class A $ 43,659,082 $ 44,819,171 Class U 4,355,476 3,881,766 48,014,558 48,700,937 Increase in net assets attributable to Unitholders Class A 2,538,283 2,489,492 Class U 265, ,973 2,804,206 2,932,465 Financing unit transactions: Distributions to Unitholders (return of capital) Class A (1,579,083) (1,725,084) Class U (160,935) (153,832) (1,740,018) (1,878,916) Unit transactions: Conversion of Units Class A 57,158 Class U (57,158) Net assets attributable to Unitholders, end of period Class A 44,675,440 45,583,579 Class U 4,403,306 4,170,907 $ 49,078,746 $ 49,754,486 See accompanying notes to the financial statements. 7

10 NOTES TO FINANCIAL STATEMENTS June 30, 2014 (unaudited) 1. GENERAL INFORMATION Moneda Latam Corporate Bond Fund (the Fund ) is a closed-end investment fund established as a trust under the laws of the Province of Ontario and is governed by a declaration of trust dated October 26, 2011(the Declaration of Trust ). The address of the Fund s registered office is 40 King Street West, Toronto, Ontario M5W 2X6. Pursuant to this Declaration of Trust, MLCB Ltd. acts as the trustee (the Trustee ) and is responsible for managing the affairs of the Fund. Scotia Managed Companies Administration Inc. ( SMCAI or the Manager ), a wholly-owned subsidiary of Scotia Capital Inc. which in turn is a whollyowned subsidiary of the Bank of Nova Scotia, manages the administration of the Fund. The Fund provides holders of units (the Unitholders ) of Class A Units and Class U Units (collectively, the Units and each, a Unit ) with investment exposure, on a tax-advantaged basis, to a diversified portfolio of high yield fixed income securities of companies located in, or with significant operations in, Latin America, primarily denominated in U.S. dollars. The Fund s investment objectives are to: (i) preserve and enhance the net asset value (the Net Asset Value or NAV ) of the Fund; and (ii) provide Unitholders with quarterly tax-advantaged distributions consisting primarily of returns of capital, in each case through exposure by virtue of the Forward Agreement (defined below) to the total return performance of the Moneda Deuda Latinoamericana Fondo de Inversion (the Moneda Fund ), a Chilean listed investment fund which is actively managed by Moneda S.A. Administradora de Fondos de Inversion ( Moneda or the Portfolio Manager ). To pursue its investment objectives, the Fund 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 a notional portfolio (the Notional Portfolio ) of units of the Moneda Fund. The Forward Agreement is scheduled to terminate on October 31, In order to provide this return, the Counterparty purchased U.S. denominated redeemable units of the Moneda Fund. Substantially all of the value of the Notional Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U Units are designed for investors wishing to make their investment in U.S. dollars. The Forward Agreement allows the Fund to leverage its exposure to the Moneda Fund. As a result of the forgoing, the Net Asset Value per Unit of each class of Units will vary depending on the performance of the Moneda Fund by virtue of the Forward Agreement and will also vary depending on the expenses allocated to, and distributions paid in respect of, the particular class of Units of the Fund. These financial statements were authorized for issuance by the Board of Directors of the Trustee on August 7, BASIS OF PRESENTATION Statement of compliance These financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) applicable to the preparation of interim financial statements including, IAS 34, Interim 8

11 Financial Reporting and IFRS 1, First-time Adoption of International Financial Reporting Standards. The Fund adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Fund prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in Part V of the CPA Canada Handbook ( Canadian GAAP ). The comparative information has been restated from Canadian GAAP to comply with IFRS. The Fund has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position at January 1, 2013 and throughout all periods presented, as if these policies had always been in effect. Note 12 discloses the impact of the transition to IFRS on the Fund s reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Fund s financial statements for the year ended December 31, 2013 under Canadian GAAP. The policies applied in these interim financial statements are based on IFRS issued and outstanding as of August 7, Any subsequent changes to IFRS that are given effect in the Fund s annual financial statements for the year ending December 31, 2014 could result in restatement of these interim financial statements including the transition adjustments recognized on transition to IFRS. Basis of measurement The financial statements have been prepared on the historical cost basis except for financial assets and liabilities held at fair value through profit or loss that have been accounted for based on fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. Functional currency and presentation currency These financial statements are presented in Canadian dollars, which is the functional currency of the Fund. Critical accounting estimates and judgments The preparation of the financial statements requires management to to use judgment in applying its accounting policies and to make estimates and assumptions about the future. The following discusses the most significant accounting judgments and estimates that the Fund has made in preparing the financial statements: Classification and measurement of investments and application of the fair value option The Fund invests on a total return basis for the purpose of applying the fair value option for financial assets under IAS 39, Financial Instruments Recognition and Measurement (IAS 39). The most significant judgment made in preparing the financial statements is that certain investments are held-for-trading and that the fair value option could be applied to those which are not. The most significant estimate is the fair value of the Forward Agreement which is based on the fair value of the underlying securities, other assets and liabilities and the credit risk associated with the Counterparty. 9

12 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Foreign currency translation Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing at the end of period. Purchases and sales of investments and income and expenses are translated into Canadian dollars at the exchange prevailing on the transaction date. Foreign exchange gains and losses relating to cash are presented as Foreign exchange gain (loss) on cash. Foreign exchange gains and losses relating financial assets and liabilities are recorded in the Statements of Comprehensive Income in net realized gain (loss) on partial pre-settlements of Forward Agreement and unrealized appreciation (depreciation) on Forward Agreement. Realized gains or losses on foreign exchange contracts arise as a result of the closing of a position on the settlement date. The net realized gain or loss is reported as Net realized gain (loss) on foreign exchange contracts in the Statements of Comprehensive Income. Open foreign exchange contracts are valued at the gain or loss that would arise as a result of closing the position on the valuation date. The unrealized gain or loss, for the reporting period, is reflected in the Statements of Comprehensive Income as Unrealized gain/(loss) on foreign exchange contracts. Financial instruments The Fund recognizes financial assets and liabilities at fair value on the trade date when the Fund becomes a party to the contractual provisions of the instrument. The Fund has designated its investment in the Forward Agreement as held-for-trading as it is managed and its performance is evaluated on a fair value basis. This is consistent with the Fund s investment strategy. The Fund s obligation for net assets attributable to Unitholders is presented at the redemption amount. All other financial assets and liabilities are carried at amortized cost which approximates their fair values due to their short-term nature. The Fund s accounting policies for measuring the fair value of its investments and derivatives are identical to those used in measuring its net asset value for transactions with Unitholders. Cash Cash is comprised of demand deposits. Income Taxes The Fund qualifies as a mutual fund trust under the Income Tax Act (Canada). All of the Fund s net income for tax purposes and net capital gains realized in any period are required to be distributed to Unitholders such that no income tax is payable by the Fund. As a result, the Fund does not record income taxes. Since the Fund does not record income taxes, the tax benefit of capital and non-capital losses has not been reflected in the Statements of Financial Position as a deferred income tax asset. 10

13 Increase (decrease) in net assets attributable to Unitholders per Unit The increase (decrease) in net assets attributable to Unitholders per Unit amounts are calculated by dividing the increase (decrease) in net assets attributable to Unitholders by the weighted average number of units outstanding during the period. Classification of units As the Fund has two classes of units with different features that are equally subordinate and contain multiple contractual obligations, its outstanding Units are classified as financial liabilities in accordance with the requirements of International Accounting Standard 32 Financial Instruments: Presentation. Accounting standards issued but not yet adopted The final version of IFRS 9 Financial instruments, was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however is available for early adoption. In addition, the own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The Fund is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 4. FORWARD AGREEMENT Pursuant to the Forward Agreement, the Counterparty will deliver, on the scheduled settlement date of the Forward Agreement, a specified portfolio of securities of Canadian public issuers with an aggregate value equal to the redemption proceeds that would be received by Unitholders on the redemption of the relevant number of units of the Moneda Fund comprising the Notional Portfolio net of any amount owing by the Fund to the Counterparty including any leveraged exposure. The Fund 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 Fund. 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 the Dominion Bond Rating Service. The Fund 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 Fund 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, 2014, collateral of $49.2 million consisting of liquid securities listed on the Toronto Stock Exchange ( TSX ) with no more than 10% of the value in any one issuer was held in trust for the Fund. 11

14 The Forward Agreement provides exposure to an additional number of units of the Moneda Fund with a cost of $4,311,864 (the Funded Amount ) (December 31, 2013 $4,609,929 and January 1, 2013 $4,937,015). A pro-rata portion of the Funded Amount is reduced on any unwinds that result in the reduction of the number of notional units referred to under the Forward Agreement. Such reduction will be treated as a deduction from the unwind amount. The Fund pays an incremental fee on the Funded Amount under the Forward Agreement which is calculated based on the quarterly London Inter-Bank Offered Rate (LIBOR) plus 135bps, currently 1.588%. For the period ended June 30, 2014, total fees on the Funded Amount of $34,872 (2013 $40,361) were deducted from cash held under the Forward Agreement in favour of the Counterparty. The ratio of the Funded Amount to net assets as of June 30, 2014 was 8.8% (December 31, %). The Manager will instruct the Counterparty to sell Moneda units comprising the Notional Portfolio, if at any time the Funded Amount exceeds 18% of the net assets of the Fund in order to reduce such percentage to no more than 18%. The assets and liabilities as reported by the Moneda Fund as at June 30, 2014, December 31, 2013 and January 1, 2013 are listed below for informational purposes: Moneda Fund (in USD) June 30 December 31 January Assets Bonds $ 1,122,004,202 $ 1,135,130,770 $ 1,098,365,679 Cash 119,046,919 90,878, ,266,915 Equity securities 18,650,594 70,274,149 35,871,263 Other assets 20,083,282 7,931,426 8,154,537 1,279,784,997 1,304,214,820 1,259,658,394 Liabilities Margin loan 194,808, ,827, ,513,899 Bonds short 122,349,526 91,805, ,858,342 Other liabilities 1,775, ,602 1,558,553 Equities short 1,211, ,933, ,657, ,930,794 Net assets for valuation purposes $ 960,851,035 $ 938,557,007 $ 921,727,600 Outstanding units 9,322,357 9,430,904 9,988,378 Net asset value Unit $ $ $

15 The total fair value of the Fund s investment determined with reference to the Notional Portfolio of units of the Moneda Fund is as follows: Number of units attributable to the Fund 470, , ,381 Aggregate value of units of the Moneda Fund comprising the Notional Porfolio $ 48,462,997 $ 50,188,080 $ 53,280,719 Cash held 1,105,816 1,346,039 1,392,018 Funded Amount including interest (4,054,475) (4,349,598) (4,980,326) Fair value of Forward Agreement (USD) $ 45,514,338 $ 47,184,521 $ 49,692,411 Fair value of Forward Agreement (CAD) $ 48,563,800 $ 50,185,457 $ 49,438, FOREIGN EXCHANGE CONTRACTS The foreign exchange contracts have been entered into with The Bank of Nova Scotia whose current credit rating is AA as rated by DBRS. As at June 30, 2014 Canadian Dollars US Dollars Delivery Contract Price Unrealized (Sold) Purchased (Sold) Purchased Date (USD/CAD) Gain (Loss) $ 43,455,160 $ (39,200,000) July 11, $ 1,619,209 (42,198,800) 39,200,000 July 11, (363,219) 40,772,970 (37,800,000) October 10, ,071 $ 1,596,061 As at December 31, 2013 Canadian Dollars US Dollars Delivery Contract Price Unrealized (Sold) Purchased (Sold) Purchased Date (USD/CAD) Gain (Loss) $ 44,233,357 $ (42,700,000) January 13, $ (1,194,234) (45,291,890) 42,700,000 January 13, ,701 41,557,044 (39,100,000) April 11, (130,399) $ (1,188,932) As at January 1, 2013 Canadian Dollars US Dollars Delivery Contract Price Unrealized (Sold) Purchased (Sold) Purchased Date (USD/CAD) Gain (Loss) $ 40,050,675 $ (41,300,000) January 14, $ (1,048,566) (40,713,540) 41,300,000 January 14, ,701 40,948,050 (41,500,000) March 14, (402,716) $ (1,065,581) 13

16 6. NET ASSETS ATTRIBUTABLE TO UNITHOLDERS The Fund is authorized to issue an unlimited number of Units of each class. Each Class A Unit and Class U Unit represents an undivided ownership interest in the assets of that class of Units of the Fund, with all Units of the same class having equal rights and privileges. The Class A Units of the Fund are listed for trading on the TSX under the symbol MLD.UN. The Class U Units are not listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes. The Class A Units and Class U Units both have the same investment objectives and restrictions and differ with respect to certain expenses allocable only to Class A Units including hedging costs and listing fees. Accordingly, the net assets per Unit of each class will not be the same as a result of the different expenses and hedging amounts allocable to each class of Units. The Fund does not have a fixed termination date but may be terminated at any time with the prior approval of the Unitholders that has been obtained by a two-thirds majority vote at a meeting of Unitholders called for that purpose. The Manager may also, in its discretion, terminate the Fund on not less than 21 days prior notice by way of press release to Unitholders without the approval of Unitholders if, in the opinion of the Manager, it is no longer economically feasible to continue the Fund or it would be in the best interest of the Unitholders to terminate the Fund. Retraction of Fund Units Units may be surrendered for retraction, by delivery of a retraction notice to the Fund s registrar, 45 days prior to the last business day of November each year (the Retraction Notice Date ). Units surrendered for retraction by a Unitholder no later than the Retraction Notice Date will be retracted, and the Unitholder will receive payment on the 15th day after the Retraction Notice Date of each year. A holder who surrenders Units for retraction on or before the Retraction Notice Date will receive payment of the retraction price in cash in an amount per Unit equal to 100% of the Net Asset Value per Unit of the applicable class determined on the valuation date being the last business day of November each year less any costs associated with the retraction, including any brokerage costs. Conversion of Class U Units to Class A Units A holder of Class U Units may convert such Class U Units into Class A Units on a weekly basis for liquidity purposes. Class U Units may be converted in any week on the first business day of such week (the Conversion Date ) by delivering a notice to the Manager and surrendering such Class U Units at least 5 business days prior to the applicable Conversion Date. For each Class U Unit so converted, a holder will receive that number of Class A Units equal to the Net Asset Value per Class U Unit as at the close of trading on the business day immediately preceding the Conversion Date divided by the Net Asset Value per Class A Unit as at the close of trading on the business day immediately preceding the Conversion Date. No fraction of a Class A Unit will be issued upon any conversion of Class U Units and any fractional amounts will be rounded down to the nearest whole number of. 14

17 The number of Units issued and outstanding as at June 30, 2014 and December 31, 2013 is summarized as follows: June 30 December Class A Balance, beginning of period/year 4,207,043 4,600,224 Units, retracted for cash (393,416) Units, converted from U Units 5, Balance, end of period/year 4,212,522 4,207,043 Class U Balance, beginning of period/year 395, ,390 Units, retracted for cash (5,000) Units, converted from U Units (5,000) (225) Balance, end of period/year 390, ,165 The market value of the Class A Units on June 30, 2014 was $10.33 per Unit (December 31, 2013 $9.95 and January 1, 2013 $9.86) 7. INCOME TAXES The Fund did not realize any income, gain or loss as a result of entering into the Forward Agreement and no amount is expected to be included in the Fund s income by virtue of the acquisition of the Canadian securities through partial pre-settlements or final settlement of the Forward Agreement subject to the Character Conversion Rules discussed below. The cost to the Fund of such Canadian securities will be that portion of the aggregate amount paid by the Fund under the Forward Agreement attributable to the Canadian securities. The resulting gain or loss realized by the Fund on the sale of Canadian securities acquired pursuant to the Forward Agreement is expected to be taxed as capital gains or capital losses. Given the investment structure, the Fund s net income for tax purposes will be ordinarily comprised of realized gains on partial pre-settlements of the Forward Agreement, offset by expenses and issue costs of the Fund. To the extent the Fund has net income in any year, distributions paid or payable to Unitholders will be characterized for tax purposes as capital gains, with any excess characterized as return of capital. The Federal government has eliminated the tax benefits associated with forward agreements as used by the Fund to achieve capital gains treatment on income that would otherwise be treated as ordinary income (the Character Conversion Rules ). 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. Based on the Fund s legal structure and the Forward Agreement in place, this measure does not immediately affect the Fund as the Character Conversion Rules include grandfathering rules such that the Fund s distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on October 31,

18 The Fund has capital losses of $373,000 and non-capital losses of $1,255,000 to offset future income for tax purposes for which no benefit has been recognized in these financial statements. The capital losses do not have an expiry date and the non-capital loss amounts by year of expiry are as follows: 2031 $ 229, , ,019,300 $ 1,255, RELATED PARTY INFORMATION For its services to the Fund which include the provision of key management personnel, SMCAI is entitled to receive a management fee equal to 0.40% per annum of the Net Asset Value. The total management fee paid or payable to SMCAI for the period ended June 30, 2014 was $107,964 (2013 $115,803). The ongoing management fee is calculated and accrued weekly and is payable quarterly in arrears. Under the Forward Agreement, the Fund pays to the Counterparty an additional purchase amount, calculated weekly and payable monthly in arrears, of up to 0.40% per annum of the notional amount of the Forward Agreement including the cost of providing collateral. The total fees paid or payable to The Bank of Nova Scotia relating to the Forward Agreement for the period ended June 30, 2014 were $106,468 (2013 $112,344). Fees charged on the Funded Amount totaled $34,872 for the period ended June 30, 2014 (2013 $40,361). At June 30, 2014, the Fund had accrued liabilities of $101,965 (December 31, 2013 $52,293 and January 1, 2013 $73,812) payable to SMCAI and SCI, and had cash on deposit with The Bank of Nova Scotia, of $1,178 (December 31, 2013 $35,899 and January 1, 2013 $1,445,306). 9. CAPITAL MANAGEMENT The Fund s capital is represented by net assets attributable to Unitholders. The Manager with oversight from the Trustee, is responsible for providing all administrative services required by the Fund, including the receipt of cash from partial unwinds of the Forward Agreement to fund operating expenses and the payment of distributions to the Unitholders. The Fund makes cash distributions funded from proceeds received from partial unwinds of the Forward Agreement after deduction of operating expenses of the Fund subject to maintaining a minimum level of cash on hand. The Manager will instruct the Counterparty to sell Moneda units comprising the Notional Portfolio, if at any time the Funded Amount exceeds 18% of the net assets of the Fund and reduce such percentage to no more than 18%. 16

19 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table outlines the fair value hierarchy of the financial instruments as at June 30, 2014, December 31, 2013 and January 1, Level 1 Level 2 Level 3 Total As at June 30, 2014 Forward Agreement $ $ 48,563,800 $ $ 48,563,800 Foreign exchange contracts 1,596,061 1,596,061 As at December 31, 2013 Forward Agreement 50,185,457 50,185,457 Foreign exchange contracts (1,188,932) (1,188,932) As at January 1, 2013 Forward Agreement 49,438,979 49,438,979 Foreign exchange contracts (1,065,581) (1,065,581) All fair value measurements above are recurring. The carrying amounts of cash and all current liabilities approximate their fair value due to their short-term nature. 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 value requires the use of significant unobservable inputs, in which case it is classified as Level 3. There were no transfers between levels during the current period or the prior years. Forward Agreement The fair value is based on the Notional Portfolio, the difference between the contract rate and current market rates. The inputs that are significant to the valuation are observable and therefore the Forward Agreement has been classified as Level 2. Foreign exchange contracts The fair value is based on the contract notional amount, the difference between the contract rate and the forward market rate for the same currency, interest rates and credit spreads. Contracts for which the counterparty credit spreads are observable and reliable, or for which the credit-related inputs are determined not to be significant to fair value, are classified as Level RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS In the normal course of business, the Fund is exposed to a variety of financial risks: market risk (including price risk, interest rate risk and currency risk), credit risk and liquidity risk. The Manager seeks to reduce these risks by employing an experienced Portfolio Manager, who invests within the limits as outlined in the 17

20 Fund s investment objectives and strategies. The Fund s overall risk management program focuses on compliance and execution of the Fund s investment objectives and strategies. The Manager meets at least quarterly with the Portfolio Manager to review operations and statistics, including performance and levels of risk. The risks associated with an investment in the Fund s Units are best defined in conjunction with financial risks associated with an investment in the units of the Moneda Fund comprising the Notional Portfolio. Price Risk Price risk is the risk that securities will fluctuate in value because of changes in market prices (other than those arising from interest rate risk or currency risk). All investments present a risk of loss of capital. By virtue of the Forward Agreement, the value of a Unit is dependent on the net asset value of the Moneda Fund, which varies principally because of fluctuations in the value of high yield fixed income securities of companies held by it. The value of the fixed income securities can fluctuate on a daily basis as a result of factors outside of the Moneda Fund s control, including financial performance of the issuers of the fixed income securities, 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. The Portfolio Manager seeks to reduce this risk by following the Moneda Fund s investment strategy including active management and diversification of the Portfolio by country, industry sector, maturity and credit rating. In addition, the Portfolio Manager may, from time to time, hold a portion of the portfolio, in other credit securities in the public and private market in the form of promissory notes, loans and other debt securities. If the prices for the fixed income securities held by the Moneda Fund had increased or decreased by 5% as at June 30, 2014, with all other variables held constant, the Fund s net assets would have increased or decreased, respectively, by approximately $2.4 million or 5.3% of Class A Net Assets and $0.2 million or 5.4% of Class U Net Assets of which $0.3 million or 0.6% of Class A Net Assets and $0.02 million or 0.6% of Class U Net Assets is the result of leverage to which Unitholders are exposed through the Funded Amount (December 31, 2013 $2.4 million or 5.6% of Class A Net Assets and $0.2 million or 5.5% of Class U Net Assets of which $0.3 million or 0.6% of Class A Net Assets and $0.02 million or 0.6% of Class U Net Assets and January 1, 2013 $2.4 million or 5.4% of Class A Net Assets and $0.2 million or 5.7% of Class U Net Assets of which $0.2 million or 0.5% of Class A Net Assets and $0.02 million or 0.5% of Class U Net Assets). 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, which will affect the future cash flows and the fair values of interest bearing financial instruments. By virtue of the Forward Agreement, the Fund s indirect exposure to interest rate risk is concentrated in its investments in fixed income securities held by the Moneda Fund. Short-term investments, and other assets and liabilities are short-term in nature and/or non-interest bearing and not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. 18

21 The table below summarizes the Fund s indirect exposure to interest rate risk as at June 30, 2014, December 31, 2013 and January 1, 2013 by duration of the bonds held by the Moneda Fund. The table also illustrates the potential impact to the Fund s net assets had the prevailing interest rates changed by 1% assuming a parallel shift in the yield curve, with all other variables held constant. The Moneda Fund s sensitivity to interest rate changes was estimated using the weighted average duration of its portfolio. In practice, the actual results may differ materially from this sensitivity analysis. Total Exposure June 30 December 31 January Term to maturity Bonds held by the Moneda Fund 1 : Less than 1 year $ 206,452,275 $ 208,935,992 $ 55,411, years 603,794, ,531, ,055, years 184,359, ,768, ,464,653 > 10 years 5,048,956 4,088,739 (1,423,796) Total $ 999,655,676 $ 1,043,325,227 $ 980,507,337 Impact on Net Assets (000 s) $ 255,311 $ 318,344 $ 566,408 Impact on Net Assets (%) 0.56% 0.71% 1.16% 1 including short positions By virtue of the Forward Agreement, the Fund is exposed to changes in the value of the Funded Amount which pays fees at a floating rate. If interest rates had increased or decreased by 1% at June 30, 2014, with all other variables remaining constant, net assets would have increased or decreased by approximately $39,146 or 0.1% of Class A Net Assets and $3,723 or 0.1% of Class U Net Assets (December 31, 2013 $42,002 or 0.1% of Class A Net Assets and $3,853 or 0.1% of Class U Net Assets and January 1, 2013 $45,246 or 0.1% of Class A Net Assets and $4,146 or 0.1% of Class U Net Assets) as a result of fees charged on the Funded Amount throughout the period. Currency Risk Currency risk arises from financial instruments that are denominated in a currency other than the Canadian dollar, which is the Fund s functional and presentation currency. By virtue of the Forward Agreement, the Fund may be exposed indirectly to fixed income securities denominated in U.S. dollars and other foreign currencies held by the Moneda Fund and is therefore indirectly exposed to currency risk due to changes in the foreign currency rates of those fixed income securities denominated in other currencies (indicated in note 4) in relation to the Canadian dollar. The Manager enters into foreign exchange contracts for hedging purposes to reduce its foreign currency exposure. No U.S. dollar hedging is done on the portion of the Fund attributable to Class U Units as they are denominated in U.S. dollars. 19

22 The table below indicates the foreign currencies to which the Moneda Fund had exposure as at June 30, 2014, December 31, 2013 and January 1, 2013 in Canadian dollar terms. The table also illustrates the potential impact to the Fund s net assets as at June 30, 2014, December 31, 2013 and January 1, 2013 if the Fund s functional currency, the Canadian dollar, had strengthened or weakened by 5% in relation to U.S. dollars, with all other variables held constant. In practice, the actual results may differ materially from this sensitivity analysis. Substantially all of the currency exposure detailed below is attributed to the Class A Unitholders. Total exposure* Impact on Net Assets June 30 December 31 January 1 June 30 December 31 January United States Dollar $ 4,912,947 $ 2,978,595 $ 3,295,822 $ 245,647 $ 148,930 $ 164,546 As a % of Net Assets 11.00% 6.82% 7.35% 0.55% 0.34% 0.37% * includes both monetary and non-monetary instruments * Notional Portfolio exposure to U.S. dollar has been hedged with US$37.8 million (December 31, 2013 US$39.1 million and January 1, 2013 US$41.5 million) notional foreign exchange contract. 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 another party. Through the Forward Agreement, the Fund s main credit risk concentration is in fixed income securities held by the Moneda Fund with exposure to the risk that an issuer of fixed income securities will be unable to pay amounts in full when due. The Portfolio Manager reviews credit positions as part of its investment management process. The table below summarizes the debt securities held by the Moneda Fund as at June 30, 2014, December 31, 2013 and January 1, 2013 by credit ratings: % of Total Bonds % of Total Net Assets of the Moneda Fund June 30 December 31 January 1 June 30 December 31 January 1 Credit Rating* BBB 10.3% 10.2% 10.6% 12.0% 12.3% 12.7% BB 27.6% 31.1% 28.5% 32.3% 37.6% 33.9% B 33.4% 31.2% 37.3% 39.0% 37.7% 44.4% CCC 13.5% 9.3% 5.4% 15.8% 11.3% 6.5% D 5.1% 4.9% 4.3% 5.9% 5.9% 5.1% No rating 10.1% 13.3% 13.9% 11.8% 16.1% 16.5% Total 100.0% 100.0% 100.0% 116.8% 120.9% 119.2% * based on lowest available rating from one of Standard & Poors, Moody s or Finch ratings 20

23 The Fund 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 Fund with an aggregate value equal to 100% of the mark-to-market value of the exposure under the Forward Agreement with the amount of collateral re-set on a weekly basis. As at June 30, 2014, collateral (posted on June 24, 2014) with a fair value of $49.2 million equal to 101.2% (December 31, 2013 collateral of $50.7 million equal to 101.0% and January 1, 2013 collateral of $48.0 million equal to 97.1%) of the Notional Portfolio consisting of liquid TSX-listed securities with no more than 10% of the value in any one issuer was held in trust for the Fund. In the event of a default by the Counterparty, the Fund will have the ability to enforce its security interest and take possession of the collateral. The credit risk from the use of counterparties for foreign exchange contracts is minimized by using counterparties with a minimum credit rating of A by Standard and Poors or an equivalent rating from another recognized credit rating agency and limiting the term of the forward contracts to a maximum of 120 days. The Fund 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 fixed income securities undertaken by the Moneda Fund are settled/paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is made only when the Moneda Fund has received payment. Payment is made on purchases once the securities have been received by the Moneda Fund. Should either party not meet its obligation, the trade will fail. Liquidity Risk Liquidity risk is defined as the risk that the Fund may not be able to settle or meet its obligations. By virtue of the Forward Agreement, the Fund invests its assets in fixed income securities that are traded in an active market and can be readily disposed of. There can be no assurance that an adequate market for the fixed income securities will exist at all times, or that the prices at which the fixed income securities trade, accurately reflect their net asset values. The Fund generally maintains cash, cash equivalents and receivable from sale of investments to offset all of its liabilities with the exception of the Fund s obligation for net assets attributable to Unitholders. 12. TRANSITION TO IFRS The effect of the Fund s transition to IFRS is summarized as follows: Transition elections The only voluntary exemption adopted by the Fund upon transition was the ability to designate a financial asset or financial liability at fair value through profit and loss upon transition to IFRS. All financial assets designated as held-for-trading upon transition were previously carried at fair value under Canadian GAAP as required by Accounting Guideline 18, Investment Companies. 21