CI Canadian Small/Mid Cap Fund

Transcription

1 This semi-annual management report of fund performance contains financial highlights but does not contain the complete semi-annual or annual financial statements of the investment fund. You can get a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling , by writing to us at CI Investments Inc., 2 Queen Street East, Twentieth Floor, Toronto, ON, M5C 3G7 or by visiting our website at or SEDAR at Securityholders may also contact us using one of these methods to request a copy of the investment fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. RESULTS OF OPERATION The net asset value of the Fund decreased by $15.1 million to $448.3 million from March 31, 17 to September, 17. The Fund had net redemptions of $13.0 million during the period. The portfolio s performance decreased assets by $2.1 million. Class A units returned -0.9% after fees and expenses for the six-month period ended September, 17. Over the same time period, the Fund s benchmark returned -0.9%. The benchmark is a combination of the S&P/TSX Completion Total Return Index - % and the S&P/TSX SmallCap Total Return Index - %. The performance of the Fund s other Classes is substantially similar to that of Class A units, except for differences in fees and expenses structure. For the returns of the Fund s other Classes, please refer to the Past performance section. Picton Mahoney Asset While there has been no shortage of headline risks, a generally benign environment has supported risk assets and implied and realized volatility remain curiously subdued. Smaller cap Canadian equities underperformed their large cap peers at the index level, but began to close the relative performance gap in the last month of the reporting period. Sentiment toward deeper cyclical sectors like energy has been a pivot for the asset class. The Canadian dollar exhibited strength for much of the period, limiting in foreign holdings for Canadian investors unhedged to such currency movement. We do not believe this strength to be sustainable and toward the end of the period, some mean reversion was experienced. We continue to believe the Canadian economy is structurally challenged. Security selection added more value than sector allocation, but both contributed to the Fund s performance during the period. Positive sector contributors at the allocation level were our underweight position in energy and an overweight in industrials. Stock selection effects in materials and consumer discretionary added value relative to the benchmark. Detracting from performance at the sector allocation level were our underweight position in real estate and overweight position in health care. Stock selection effects in real estate also hampered relative performance. On an individual security basis, Take-Two Interactive Software Inc. was a standout contributor. Kirkland Lake Gold Ltd. detracted from relative performance as the position was significantly underweight the benchmark and thus represented an opportunity cost at an almost 62% return for the stock in the period. In general terms, the small and mid-cap domain offers more security-specific alpha opportunity. The call to significantly over- or underweight a sector should not be a primary decision to add value in portfolio construction. With that in mind, given resource sectors comprise almost % of the index; any significant sector weighting decision does weigh more heavily at the benchmark. There were no material changes to the portfolio during the period. QV Investors Inc. While the global economic backdrop is firming, the key driver of markets remains abnormally low interest rates. Although rates are starting to move up, they remain extremely low by historical standards, providing little alternative to equities. Canadian equity markets continue to underperform the U.S., as they have since the market bottomed in 09. This has been a function of monetary policy measures, the resulting improvement in the U.S. economy, as well as weakness in commodity-related sectors to which Canada is highly exposed. Equity market valuations remain elevated, particularly for high-quality dividend payers and for high growth stocks. While markets are broadly expensive, cyclical companies and those that have been negatively impacted by low interest rates continue to offer value. We continue to position the Fund in value-oriented investments, avoiding the businesses investors have pushed to unsustainable valuation multiples. The energy and materials sectors drove the decline in the benchmark with weak commodity prices over the period. The Fund s energy exposure was also affected by declining oil prices, but to a lesser degree than the benchmark. A lack of direct gold exposure and strong performance from the portfolio s diversified materials holdings contributed to outperformance in that sector. Overall, relative underperformance during the period was primarily attributable to negative currency effects. Stock-specific weakness in the Fund s financials and industrials sectors also negatively impacted returns. U.S.-based investments represented approximately 21% of the total portfolio at the end of the reporting period. The largest individual contributors to performance were Canadian Western Bank, Hyster-Yale Materials Handling Inc. and Ampco-Pittsburgh Corp. The largest individual detractors from performance were Home Capital Group Inc., Alleghany Corp. and Shawcor Ltd. CIG

2 Investments were initiated in Cominar REIT and Williams-Sonoma Inc. Cominar REIT is the largest owner and manager of commercial real estate in Quebec. The investment enhances the yield of the portfolio and improves industry diversification. Williams-Sonoma has attractive growth, value, balance sheet and dividend metrics. The company has had a very good track record of building shareholder value and being forward-thinking in building its franchise The Fund sold out of investments in Home Capital Group, Finning International Inc., Jean Coutu Group, Miller Industries Inc., Telephone and Data Systems Inc. and Staples Inc. Home Capital is a lending business with a large presence in the Canadian mortgage market. For years, the company maintained a resilient record of strong credit performance, stable funding access and attractive returns on equity. In late April, Ontario s securities regulator released allegations that the company misled investors about an internal mortgage investigation several years ago. Investor and depositor confidence quickly began to erode. The outflow of deposits that ensued was far worse than anticipated. Home Capital was forced to reach an agreement for emergency liquidity at exorbitant rates, wiping out a large portion of its earnings power. The valuation of heavy equipment dealer Finning International Inc. began to reflect a rebound in mining activity that exceeded our expectations. The positions in Jean Coutu, Miller Industries and Telephone and Data Systems were sold to fund other opportunities with better risk/reward profiles. Staples Inc. was trading close to the buyout price from private equity firm Sycamore Partners. Manulife Asset Over the past several months, Canadian economic data has been stronger than expected as growth rebounded in gross domestic product, business confidence improved and job growth numbers accelerated. As a result of the economic strength and other factors, Bank of Canada Governor Stephen Poloz shifted the tone on the bank s interest rate policy. The Bank of Canada raised interest rates at both its July and September meetings, with the latter increase not expected by the market. Over the six-month period ended September, 17, the strategy s overweight position in the information technology sector and underweight position in the materials sector contributed to performance. On a relative basis, individual security selections in the consumer discretionary and materials sectors also contributed. One of the strategy s top relative contributors was a zero position in loyalty company Aimia Inc., which was down 69% over the period. The stock price fell when Air Canada announced it would discontinue its Aeroplan program, which was operated by Aimia. Another top contributor was the strategy s overweight position in Richelieu Hardware Ltd. Richelieu, a non-index holding, is a specialty hardware supplier with a long history of strong organic growth and a recent increase in its margins. Underweight positions in the real estate and industrials sectors detracted from the strategy s performance. One of the top individual detractors over the period was the strategy s overweight position in AGT Food and Ingredients Inc. AGT is a crop and pulse processor and distributor that posted weak first-quarter results. Although the stock price has been volatile, it remains a holding in the strategy because of its ability to move into higher-margin businesses, the potential for pulse and crop prices to rebound and the significant ownership stake held by the company s management. Over the period, there were no significant sector changes to the strategy. The strategy maintained a near market-weight position in the energy sector with the view that the fundamentals in this sector are improving. Other notable sector holdings included overweight allocations in information technology, consumer discretionary and consumer staples. Underweight sector positions in the strategy included materials, financials and real estate. RECENT DEVELOPMENTS Picton Mahoney Asset Central banks in the developed world appear unified in their desire to normalize interest rates and the first steps in quantitative tightening are being telegraphed well in advance. Market participants seem keen to assume that the unwinding of central bank balance sheets will result in a market unwind. Rather than turn bearish dogmatically, we believe this is the opportunity for active management to shine (after a prolonged era of simply owning the market has worked for so many). Despite the positive economic momentum, the Canadian equity market was one of the worst-performing markets this year. Weakness in Canadian equities was primarily the result of a decline in commodity prices and the S&P/TSX Small Cap Total Return Index s heavy weighting in the energy and materials sectors. The rally in the Canadian small-capitalization equity market reversed course during the period, as investors became concerned about geopolitical tensions, supply and demand imbalances in the energy sector and rising interest rates in the U.S. and Canada. Over the period, seven of the eleven sectors in the index generated negative returns. The top-performing sectors were real estate, industrials and utilities, which returned 6.9%, 4.9% and 0.1%, respectively. The bottom-performing sectors during the period were health care, telecommunication services and energy, which returned 14.1%, 12.0% and 8.3%, respectively. Given our view, we believe astute forward risk management presents a significant opportunity for nimble managers with a rigorous and objective process to adapt to changing market regimes. QV Investors Inc. With capital readily available at a low cost and investors hungry for yield, the market s willingness to accept balance sheet and valuation risks remains elevated. Moving further into the cycle, it is important to focus on risk management by ensuring balance sheet and profitability advantages of the portfolio over the benchmark. An emphasis on diversification and growing dividend income should provide support in various market environments.

3 An above-average cash weight provides flexibility to participate in attractive opportunities as they arise. By adhering to the investment and risk management process, we continue to ensure the Fund receives adequate compensation for business, valuation and balance sheet risks. Annual management fee rate (%) Annual fixed administration fee rate (%) Class O Paid directly by investor 0.15 Class P Paid directly by investor 0. Manulife Asset We believe that the combination of a high level of negative sentiment regarding commodities and the potential for continued strength in the global economy will create a backdrop for a reversion trade into Canadian equities for the remainder of 17. We do not believe the Canadian equity market will continue to underperform other equity markets and, if investor sentiment towards Canadian equities improves, the reversion trade could lead to a significant rally. The strategy is positioned to benefit from this reversion trade and it also holds many dividend-paying stock positions as investors continue to demonstrate a strong demand for cash-flow-generating investments. On a global basis, the Purchasing Managers Index numbers of many foreign markets remain high, which supports the view that there could be a synchronized global economic recovery as the year continues. Effective April 3, 17, William Harding ceased to be a member of the Independent Review Committee. RELATED PARTY TRANSACTIONS Manager, Portfolio Advisor, Trustee and Registrar CI Investments Inc. is the Manager, Portfolio Advisor, Trustee and Registrar of the Fund. CI Investments Inc. is a subsidiary of CI Financial Corp. The Manager, in consideration for management fees, provides management services required in the day-to-day operations of the Fund. The Manager bears all of the operating expenses of the Fund (other than taxes, borrowing costs and new governmental fees) in return for a fixed administration fee. fee and fixed administration fee rates as at September, 17, for each of the classes are shown below: Annual management fee rate (%) Annual fixed administration fee rate (%) Class A Class A Class A The Fund paid the Manager $2.6 million in management fees and $0.3 million in administration fees for the period ended September, 17. Fees Approximately 26% of total management fees were used to pay for sales and trailing commissions. The remaining 74% of management fees were used for investment management and other general administration. Independent Review Committee The Fund received standing instructions from the Fund s Independent Review Committee ( IRC ) with respect to the following related party transactions: a) trades in securities of CI Financial Corp.; b) purchases or sales of securities of an issuer from or to another investment fund managed by the Manager; c) purchases or sales of other investment funds managed by the Manager or their affiliates; and d) mergers involving the Fund and another fund managed by the Manager that is subject to National Instrument Investment Funds. The applicable standing instructions require that related party transactions be conducted in accordance with the Manager s policies and procedures and that the Manager advise the IRC of any material breach of a condition of the standing instructions. The standing instructions require, among other things, that investment decisions in respect of related party transactions (a) are free from any influence by an entity related to the Manager and without taking into account any consideration relevant to an entity related to the Manager; (b) represent the business judgment of the Manager uninfluenced by considerations other than the best interests of the Fund; (c) are made in compliance with the Manager s policies and procedures; and (d) achieve a fair and reasonable result for the Fund. Transactions made by the Manager under the standing instructions are subsequently reviewed by the IRC on a quarterly basis to monitor compliance. The Fund relied on the IRC s standing instructions regarding related party transactions during this reporting period. Class A Class E Class EF Class F Class F Class F Class F Class I Paid directly by investor -

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 past six periods, as applicable. Net Assets per Unit ($) (1) (2) (5) * Increase (decrease) from operations: Distributions: Total Realized Unrealized Total increase From net investment Net assets Net assets at the beginning Total expenses (excluding (decrease) from income (excluding From From capital Total at the end of the period of period (2) revenue distributions) the period the period operations (2) dividends) dividends (2, 3) Return of capital distributions shown (2) $ $ $ $ $ $ $ $ $ $ $ $ Class A Commencement of operations December 31, 1994 Sept., (0.34) 0.42 (0.63) (0.) Mar. 31, (0.66) (0.48) - (0.48) Mar. 31, (0.61) 0.07 (1.75) (1.83) Mar. 31, (0.69) 3.35 (2.43) (3.42) - (3.42) Mar. 31, (0.67) (2.31) - (2.31) Mar. 31, 13^ (0.) (0.25) - (0.25) Class A1 Sept., (0.09) Class A2 Sept., (0.09) Class A3 Sept., (0.09) Class E Commencement of operations July 29, 15 Sept., (0.12) Mar. 31, (0.24) (0.19) - (0.19) Mar. 31, (0.14) (0.22) Class EF Commencement of operations July 29, 15 Sept., (0.07) 0.16 (0.22) (0.03) Mar. 31, (0.13) (0.32) - (0.32) Mar. 31, (0.08) (0.11) (0.11) (0.17) *Footnotes for the tables are found at the end of the Net Assets per Unit section of the Financial Highlights. ^Historical figures are based on Canadian GAAP, for more details refer to footnote 6.

5 FINANCIAL HIGHLIGHTS (cont d) Net Assets per Unit ($) (1) (2) (5) * Increase (decrease) from operations: Distributions: Total Realized Unrealized Total increase From net investment Net assets Net assets at the beginning Total expenses (excluding (decrease) from income (excluding From From capital Total at the end of the period of period (2) revenue distributions) the period the period operations (2) dividends) dividends (2, 3) Return of capital distributions shown (2) $ $ $ $ $ $ $ $ $ $ $ $ Class F Commencement of operations June, 05 Sept., (0.09) 0. (0.) (0.07) Mar. 31, (0.18) (0.39) - (0.39) Mar. 31, (0.16) - (0.79) (0.73) Mar. 31, (0.18) 1.58 (1.25) (1.82) - (1.82) Mar. 31, (0.18) (1.27) - (1.27) Mar. 31, 13^ (0.16) (0.25) - (0.25) Class F1 Sept., (0.05) 0.10 (0.05) Class F2 Sept., (0.05) 0.11 (0.18) (0.04) Class F3 Sept., (0.05) 0.11 (0.18) (0.04) Class I Commencement of operations June, 05 Sept., (0.) Mar. 31, (0.) - (0.) Mar. 31, (0.87) (0.62) Mar. 31, (1.27) (2.03) - (2.03) Mar. 31, (1.51) - (1.51) Mar. 31, 13^ (0.43) - (0.43) Class O Commencement of operations July 26, 13 Sept., (0.01) 0.15 (0.16) Mar. 31, (0.02) (0.43) - (0.43) Mar. 31, (0.02) (0.11) (0.19) (0.14) Mar. 31, (0.02) 1.06 (0.52) (1.45) - (1.45) 9.83 Mar. 31, (0.01) 1.28 (0.44) (1.11) - (1.11) *Footnotes for the tables are found at the end of the Net Assets per Unit section of the Financial Highlights. ^Historical figures are based on Canadian GAAP, for more details refer to footnote 6.

6 FINANCIAL HIGHLIGHTS (cont d) Net Assets per Unit ($) (1) (2) (5) Increase (decrease) from operations: Distributions: Total Realized Unrealized Total increase From net investment Net assets Net assets at the beginning Total expenses (excluding (decrease) from income (excluding From From capital Total at the end of the period of period (2) revenue distributions) the period the period operations (2) dividends) dividends (2, 3) Return of capital distributions shown (2) $ $ $ $ $ $ $ $ $ $ $ $ Class P Sept., (0.01) (1) This information is derived from the Fund s semi-annual and annual financial statements. (2) Net assets per unit and distributions per unit are based on the actual number of units outstanding for the relevant class at the relevant time. The increase (decrease) in net assets from operations per unit is based on the weighted average number of units outstanding for the relevant class over the fiscal period. (3) Distributions are automatically reinvested in additional units of the Fund.

7 FINANCIAL HIGHLIGHTS (cont d) Ratios and Supplemental Data (1) (5) * Number of units outstanding (5) before taxes (2) after taxes (2) Effective HST rate for the period (%) (2) Total net Harmonized Trading Portfolio assets (5) sales tax (2) (3) turnover rate (4) $000 s 000 s % % % % % % Class A Commencement of operations December 31, 1994 Sept., ,698 8, Mar. 31, ,0 9, Mar. 31, ,909 13, Mar. 31, ,674 13, Mar. 31, ,084 14, Mar. 31, 13^ 385,727 14, Class A1 Sept., 17 5, Class A2 Sept., 17 1, Class A3 Sept., Class E Commencement of operations July 29, 15 Sept., 17 5, Mar. 31, 17 2, Mar. 31, 16 1, Class EF Commencement of operations July 29, 15 Sept., Mar. 31, Mar. 31, *Footnotes for the tables are found at the end of the Financial Highlights section. ^Historical figures are based on Canadian GAAP, for more details refer to footnote 6.

8 FINANCIAL HIGHLIGHTS (cont d) Ratios and Supplemental Data (1) (5) * Total net assets (5) Number of units outstanding (5) before taxes (2) Harmonized sales tax (2) after taxes (2) Effective HST rate for the period (%) (2) Trading (3) Portfolio turnover rate (4) $000 s 000 s % % % % % % Class F Commencement of operations June, 05 Sept., 17 2, Mar. 31, 17 2, Mar. 31, 16 1, Mar. 31, 15 1, Mar. 31, 14 1, Mar. 31, 13^ Class F1 Sept., Class F2 Sept., Class F3 Sept., Class I Commencement of operations June, 05 Sept., ,452 12, Mar. 31, ,981 12, Mar. 31, ,844 8, Mar. 31, ,293 8, Mar. 31, ,773 7, Mar. 31, 13^ 91,262 7, Class O Commencement of operations July 26, 13 Sept., 17 9, Mar. 31, 17 7, Mar. 31, 16 4, Mar. 31, 15 1, Mar. 31, *Footnotes for the tables are found at the end of the Financial Highlights section. ^Historical figures are based on Canadian GAAP, for more details refer to footnote 6.

9 FINANCIAL HIGHLIGHTS (cont d) Ratios and Supplemental Data (1) (5) Number of units outstanding (5) before taxes (2) after taxes (2) Effective HST rate for the period (%) (2) Total net Harmonized Trading Portfolio assets (5) sales tax (2) (3) turnover rate (4) $000 s 000 s % % % % % % Class P Sept., (1) This information is derived from the Fund s semi-annual and annual financial statements. (2) is calculated based on expenses charged to the Fund (excluding commissions and other portfolio transaction costs) and is expressed as an annualized percentage of daily average net assets for the period, including the Fund s proportionate share of any underlying fund(s) expenses, if applicable. The Effective HST tax rate is calculated using the attribution percentage for each province based on unitholder residency and can be different from 13%. (3) The trading represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net assets during the period, including the Fund s proportionate share of such expenses of any underlying fund(s), if applicable. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the fiscal period. The higher a Fund s portfolio turnover rate in a period, the greater the trading costs payable by the Fund in the period, and the greater the chance of an investor receiving taxable capital in the period. There is not necessarily a relationship between a higher turnover rate and the performance of a Fund. Portfolio turnover rate is calculated by dividing the lesser of the cost of purchases and the proceeds of sales of portfolio securities for the period, and excluding cash and short-term investments maturing in less than one year, and before assets acquired from a merger, if applicable, by the average of the monthly fair value of investments during the period. (5) This information is provided for the period ended September, 17 and the years ended March 31. (6) For financial periods beginning on or after April 1, 13 the financial highlights are derived from the financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS allows net assets to be calculated based on the last traded market price for financial assets and financial liabilities where the last traded price falls within the day s bid-ask spread. There are no differences between the net assets calculated for purpose of processing unitholders transactions and the net assets attributable to holders of redeemable units used for financial statement reporting purposes. For financial years before April 1, 13, the financial highlights are derived from the financial statements prepared in accordance with Canadian GAAP. Under Canadian GAAP net assets for financial statement purposes were calculated based on bid/ask price while for purpose of processing unitholder transactions net assets were calculated based on the closing market price.

10 PAST PERFORMANCE This section describes how the Fund has performed in the past. Remember, past returns do not indicate how the Fund will perform in the future. The information shown assumes that distributions made by the Fund in the periods shown were reinvested in additional units of the relevant classes of the Fund. In addition, the information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. Year-by-Year Returns The following charts show the Fund s semi-annual and annual performance for each of the periods shown and illustrate how the Fund s performance has changed from period to period. In percentage terms, the charts show how much an investment made on the first day of each financial period would have grown or decreased by the last day of each financial period, except where noted. Class A Class E Class EF Class F Mar. 08 Mar. 09 Mar. 10 Mar. 11 Mar. 12 Mar. 13 Mar. 14 Mar. 15 Mar. 08 Mar. 09 Mar. 10 Mar. 11 Mar. 12 Mar. 13 Mar. 14 Mar. 15 Class I Class O Mar. 08 Mar. 09 Mar. 10 Mar. 11 Mar. 12 Mar. 13 Mar. 14 Mar. 15 Mar. 14 Mar return is for the period from July 29, 15 to March 31, return is for the period from July 26, 13 to March 31, 14.

11 Summary of Investment Portfolio as at September, 17 Portfolio Breakdown Percentage of Portfolio Breakdown (cont d) Percentage of Top 25 Holdings Percentage of Category Net Assets (%) Category Net Assets (%) Security Name Net Assets (%) Country allocation Canada U.S.A Cash & Equivalents Cayman Islands Ireland Short-Term Investments Australia Bermuda Foreign Currency Forward Contracts British Virgin Islands Guernsey Other Net Assets (Liabilities)... (0.1) Sector allocation Energy Industrials Materials Financials Consumer Discretionary Information Technology Health Care Cash & Equivalents Consumer Staples Real Estate Utilities Short-Term Investments Telecommunication Services Private Placements Exchange-Traded Funds Foreign Currency Forward Contracts Corporate Bonds Warrants Other Net Assets (Liabilities)... (0.1) Cash & Equivalents Parkland Fuel Corp Richelieu Hardware Ltd Canadian Western Bank Chemtrade Logistics Income Fund Secure Energy Services Inc E-L Financial Corp., Ltd AltaGas Ltd Superior Plus Corp Kirkland Lake Gold Ltd Spin Master Corp Atco Ltd., Class I SNC-Lavalin Group Inc Boyd Group Income Fund Trust Take-Two Interactive Software Inc Interfor Corp Alleghany Corp Parex Resources Inc Freehold Royalties Ltd Cargojet Inc Great Canadian Gaming Corp Aecon Group Inc Mullen Group Ltd Knight Therapeutics Inc Leon s Furniture Ltd Total Net Assets (in $000 s) $448,272 The summary of investment portfolio may change due to ongoing portfolio transactions of the Fund and updates will be available on a quarterly basis. A NOTE ON FORWARD-LOOKING STATEMENTS This report may contain forward-looking statements about the Fund, its future performance, strategies or prospects, and possible future Fund action. The words may, could, should, would, suspect, outlook, believe, plan, anticipate, estimate, expect, intend, forecast, objective, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties, both about the Fund and general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made by the Fund. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchanges rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.