Franklin ETF. Annual Management Report of Fund Performance. September 30, 2017

Transcription

1 Franklin ETF Annual Management Report of Fund Performance September 30, 2017 This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the investment fund. If you have not received a copy of the annual financial statements with this report, you can get a copy of the annual financial statements at your request, and at no cost, by calling , by writing to us at 5000 Yonge Street, Suite 900, Toronto ON M2N 0A7, 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.

2 Co-Lead Manager Darcy Briggs, CFA, CGA Franklin Bissett Investment Management, part of Franklin Templeton Investments Corp. Industry Experience: 24 years Location: Calgary, AB Co-Lead Manager Adrienne Marvi Young Franklin Bissett Investment Management, part of Franklin Templeton Investments Corp. Industry Experience: 24 years Location: Calgary, AB INVESTMENT OBJECTIVES AND STRATEGIES Franklin Liberty Canadian Investment Grade Corporate ETF (the Fund ) seeks to provide long-term capital growth and current income by investing primarily in investment-grade corporate debt issued by Canadian corporations. The Fund invests primarily in debt securities with an investment-grade rating from at least one credit-rating agency. These debt securities include all varieties of fixed income and floating-rate securities issued by Canadian corporates, and the Fund s duration exposure will be actively managed. The Fund is an exchange-traded fund that trades on the Toronto Stock Exchange (TSX). The Fund s TSX ticker symbol is FLCI. RISK The risks of investing in the Fund remain as stated in the prospectus. The Fund is suitable for investors who are willing to accept low investment risk, and who are seeking current income and long-term capital growth through investment in investment-grade Canadian corporate debt. RESULTS OF OPERATIONS As at September 30, 2017, total net asset value of the Fund was $9.7 million. For the performance period starting at its inception date of May 30, 2017, to September 30, 2017, the Fund generated total returns of 2.3%, net of fees, in Canadian-dollar terms. Over the same time period, the Fund s benchmark index, the FTSE TMX Canada All Corporate Bond Index (the Index ), returned 2.2%. For the period under review, the Fund underperformed the Index. Pricing and residual effects were the most significant detractors from relative performance. It is important to note that the Fund s return reflects the effect of fees and expenses for professional management, while the Index does not have such costs. Gross of fees, the Fund returned 2.2%. Security selection was the primary contributor to performance, contributing nine basis points (bps), largely due to outperformance from holdings in investment-grade financials. Asset allocation detracted one bp from relative performance. Yield curve and duration positioning contributed five bps to relative performance during this period. The Fund s shorter-than-index duration positioning, combined with an underweighted exposure to the short and long ends of the Canadian curve, contributed to performance as yields rose. RECENT DEVELOPMENTS Despite global geopolitical issues, North American risk markets performed well throughout the period as economic data improved. Oil prices firmed, with the West Texas Intermediate (WTI) price reaching $52 per barrel by the end of the period. Canadian second-quarter gross domestic product (GDP) came in at a 4.5% annualized rate, taking year-over-year GDP growth to 3.7%, significantly outpacing the 2.2% year-on-year second-quarter growth rate of the United States. Nevertheless, Canadian equity markets were less exuberant than those in the United States, in local-currency terms. Against this backdrop, the Bank of Canada (BOC) increased its overnight interest rates twice in July and early September for a cumulative total of 50 bps. As a consequence of central bank activity over the Spring and Autumn, the 10-year Government of Canada bond yield increased by 69 bps between May 30 and September 29, Corporate credit markets performed slightly better than the overall Canadian bond market: within credit markets, we estimate that the corporate Index s average spread to government bonds tightened by seven bps since inception, owing in part to investors searching for yield, as well as broad investor complacency with respect to risk spreads. The portfolio managers saw similar complacency in other financial markets: in the United States, the Merrill Lynch Option Volatility Estimate (MOVE) index, a measure of interest-rate volatility, retested record lows established in 2014, while the Chicago Board Options Exchange Volatility Index (VIX) established a new low of 9.51 at the end of the period, aside from a few spikes associated with headline news about North Korea. Canadian rate volatility was slightly more elevated, given the change in position from the BOC as yields rose across the Canadian curve, flattening the curve slightly. The Canadian government 2 10 year spread compressed from 71 bps on May 30 to 58 bps on September 29, as short-term yields rose more than longer-term yields. The short-term segment of the broad FTSE TMX Canada Universe Bond Index posted a decline of approximately 1.4% during this period, while the mid-term segment lost 3.8%, and the long segment lost 4.8%. For the FTSE TMX Canada All Corporate Bond Index, the short-term segment posted a smaller decline of 1.1%, while the mid-term segment lost 3.2%, and the long segment lost 3.9% as corporate spread compression offset some of the increase in government yields.

3 In the portfolio managers opinion, economic tailwinds associated with recovery from the 2016 Alberta wildfire (which had shut in Canadian oil production for two months), a weaker Canadian dollar earlier in 2017 and a long period of loose financial conditions have largely run their course. Given the economic drag from recent increases in the Canadian policy rate and new mortgage regulations, as well as low inflation rates, the potential for higher taxes and the recent strength of the Canadian dollar, the portfolio managers do not expect the BOC will increase rates again in The portfolio managers see some areas of promise against a backdrop of reasonably supportive economic conditions. After a multi-quarter rally, however, valuations are beginning to appear expensive in some cases. The portfolio managers will therefore seek to capitalize on trading opportunities arising from periods of market volatility, with an investment bias toward shorter-than-index duration positioning. The portfolio managers will also look for opportunities to upgrade the Fund s overall credit quality. FORWARD-LOOKING STATEMENTS Investors should take note that certain statements in this report about a fund, including its strategy and expected future performance, are forward-looking. Forward-looking statements are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as may, will, should, could, expect, anticipate, intend, plan, believe, or estimate or other similar expressions. Any statement that is made concerning future strategies or performance is also a forward-looking statement. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the forward-looking statements. The forward-looking statements are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and has sufficient capital under management to effect its investment strategies, (ii) the investment strategies will produce the results intended by the portfolio manager, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the forward-looking statements contained herein are based upon what the portfolio manager believes to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these forward-looking statements. RELATED PARTY TRANSACTIONS The Manager is an indirect wholly-owned subsidiary of Franklin Resources, Inc., a global investment management organization known as. The Manager provides or arranges for the day-to-day Fund operations, including the marketing, promotion and distribution of the Fund and portfolio advisory services. In consideration of these management and portfolio advisory services, the Fund pays the Manager a monthly management fee based on the average net asset value of the series of the Fund, calculated daily, as set out under Management Fees below. During the period ended September 30, 2017, the Fund paid management fees of $15,000. The Manager pays the operating expenses of the Fund, other than certain fund costs which include, but are not limited to, the cost of compliance with new governmental and regulatory requirements, fees and expenses of the Fund s Independent Review Committee (IRC), borrowing and interest costs and investor meeting costs (as permitted by Canadian securities regulation). Standing Instructions from the Independent Review Committee The Manager relied on standing instructions from the IRC with respect to the allocation of any operating expenses not covered by the Administration Fee. The Manager relied, or may rely, on standing instructions from the IRC in respect of securities trades amongst mutual funds, investment funds or managed accounts managed by the Manager or an affiliate of the Manager. In both cases, the standing instructions require the Manager to comply with the policies and procedures presented to the IRC with respect to the above matters and to provide periodic reports to the IRC in accordance with NI MANAGEMENT FEES The Franklin ETF pays an aggregate monthly fee for management and investment advisory services to the Manager. The monthly fee is calculated and accrued daily and paid monthly. The Management Fee is calculated on the annual rate of 0.40% applied against the monthly average net assets plus applicable taxes. Forward-looking statements are not guarantees of future performance. Any number of factors could contribute to differing results, including, among other things, general economic, political and market factors, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings and catastrophic events. This list of factors is not exhaustive. Investors should not place undue reliance on forward-looking information and should be aware that the Fund may not update any forward-looking statements, whether as a result of new information, future events or otherwise.

4 Summary of Investment Portfolio (SEPTEMBER 30, 2017) REGIONAL WEIGHTINGS (%)* North America Europe 3.91 Australia & New Zealand 0.15 ASSET CLASS WEIGHTINGS (%) Canadian Corporate Bonds Foreign Corporate Bonds 8.03 Short-term securities and all other assets, net 1.21 TOP 25 HOLDINGS (%) Industrial Alliance Insurance & Financial Services Inc., Subordinated Note, 2.80% to 5/16/19, Floating Rate Note thereafter, 5/16/ BMO Capital Trust II, Junior Subordinated Bond, 10.22% to 12/31/18, Floating Rate Note thereafter, 12/31/ CIBC Capital Trust, Junior Subordinated Bond, 9.98% to 6/30/19, Floating Rate Note thereafter, 6/30/ TELUS Corp., Senior Note, 2.35%, 3/28/ Bank of Montreal, Subordinated Bond, 2.57% to 5/31/17, Floating Rate Note thereafter, 6/1/ Scotiabank Tier I Trust, Junior Subordinated Bond, 7.80% to 6/30/19, Floating Rate Note thereafter, 6/30/ Junior Subordinated Bond, 9.52% to 6/30/19, Floating Rate Note thereafter, 6/30/ Royal Bank of Canada, Subordinated Note, 3.31% to 1/20/21, Floating Rate Note thereafter, 1/20/ International Inc., Subordinated Secured Note, 06-D1, 5.75%, 2/14/ Inter Pipeline Ltd., Senior Bond, 4.97%, 2/2/ Enbridge Pipelines Inc., Senior Bond, 3.45%, 9/29/ Wells Fargo & Co., Subordinated Note, 3.87%, 5/21/ Hydro One Inc., Senior Bond, 4.89%, 3/13/ HSBC Holdings PLC, Senior Note, 3.20%, 12/5/ TransCanada PipeLines Ltd., Senior Note, 7.90%, 4/15/ Smart Real Estate Investment Trust, Senior Note, I, 3.99%, 5/30/ Eagle Credit Card Trust, 2.15%, 9/17/ Canadian Natural Resources Ltd., Senior Note, 3.31%, 2/11/ General Motors Financial of Canada Ltd., Senior Note, 3.08%, 5/22/ TransCanada Trust, Junior Subordinated Bond, 4.65% to 5/18/27, Floating Rate Note thereafter, 5/18/ Union Gas Ltd., Senior Note, 8.65%, 11/10/ Bell Canada Inc., Senior Bond, 7.30%, 2/23/ Greater Toronto Airports Authority, Senior Secured Bond, First Lien, 7.05%, 6/12/ Bell Canada Inc., Senior Bond, 7.85%, 4/2/ First Capital Realty Inc., Senior Note, 3.95%, 12/5/ TOTAL NET ASSET VALUE: $9,703,612 * Excluding short-term securities and all other assets, net. Above is an outline of the investments held in the Fund as a percentage of its net assets. Due to ongoing portfolio transactions, the investments and percentages may have changed by the time you purchase units of the Fund. The Summary of Investment Portfolio is made available quarterly, 60 days after the quarter-end. To obtain a copy, please contact a member of our client services team at or visit

5 (AS AT SEPTEMBER 30, 2017) FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the ETF and are intended to help you understand the ETF s financial performance for the fiscal periods ended September 30, Net assets per unit (1) 2017 Net assets initial offering price* $20.00 Increase (decrease) from operations: Total revenue 0.30 Total expenses (0.03) Realized gains (losses) for the period (0.11) Unrealized gains (losses) for the period (0.59) Total increase (decrease) from operations (2) (0.43) Distributions: From income (excluding dividends) (0.21) From dividends From capital gains Returns of capital Total annual distributions (3) (0.21) Net assets end of period $19.41 Ratios and supplemental data: 2017 Total net asset value ($ millions) (1) $9,704 Number of units outstanding 500,000 Management expense ratio (2) 0.45% Management expense ratio before waivers or absorptions 0.45% Trading expense ratio (3) Portfolio turnover rate (4) 34.76% Net asset value per unit $19.41 For explanatory notes, please refer to Explanatory Notes to Financial Highlights at the end of the section. Total revenue includes total investment income net of any provision for or recoverable from income taxes. * The Series was launched on April 18, PAST PERFORMANCE The following information assumes that all distributions made by the Fund in the periods shown were reinvested in additional securities of the Fund and does not take into account sales, redemption, distribution or other optional charges that would have reduced returns. Past performance does not necessarily indicate how the Fund will perform in the future. Year-by-Year Returns The bar chart shows the Fund s annual performance for each of the years shown, and illustrates how the investment Fund s performance has changed from year to year. In percentage terms, the bar chart indicates how much an investment made on October 1 would have grown or decreased by the September 30 of each year shown. 40% 20% 0% * -2.3% Annual Compound Returns The table shows the annual compound total returns for each of the periods shown ended September 30, The returns are compared against the benchmark(s) over the same period. 1 Year 3 Years 5 Years 10 Years Since Inception ETF Units N/A N/A N/A N/A 2.3% FTSE TMX Canada All Corporate Bond Index N/A N/A N/A N/A 2.2% For a definition of the benchmark(s), please refer to Benchmark(s) Information at the end of the section. -20% -40% * 2017 ETF return: May 30 to September 30

6 EXPLANATORY NOTES TO FINANCIAL HIGHLIGHTS NOTES TO FINANCIAL HIGHLIGHTS Net Assets per Share: (1) This information is derived from the Fund s audited annual financial statements. In the period a fund or series is established, the financial information is provided from the date of inception to the end of the period. In cases where the net assets per share presented in the financial statements differ from the net asset value calculated for Fund pricing purposes, an explanation of these differences can be found in the notes to the financial statements. (2) Net assets and distributions are based on the actual number of shares outstanding at the relevant time. The increase/decrease in net assets from operations is based on the weighted average number of shares outstanding over the fiscal period. This table is not intended to be a reconciliation of opening and closing net assets per share. OTHER FUND INFORMATION Reported year-by-year returns for past years may be revised, based on the results of recalculations, audits and/or other historical review processes. Such revisions are considered immaterial to performance disclosure unless otherwise stated. BENCHMARK(S) INFORMATION FTSE TMX Canada All Corporate Bond Index consists of primarily semiannual-payment fixed rate corporate bonds issued domestically in Canada and denominated in Canadian dollars with an investment-grade rating and a remaining effective term to maturity of at least one year. (3) Dividends were paid in cash or reinvested in additional shares of the Fund or both, and exclude distributions of management fee reductions to shareholders. Ratios and Supplemental Data: (1) This information is provided as at the period-end of the year shown. (2) Management expense ratio is based on total expenses 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 net asset value during the period. For funds that invest in multiple Underlying Funds, the trading expense ratio represents the Fund s proportionate share of total commissions and other portfolio costs of the Underlying Fund as an annualized percentage of its daily average net assets during the period. For funds that invest substantially all of its assets in an Underlying Fund, the trading expense ratio shown is that of the Underlying Fund. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling each security in its portfolio once in the course of the relevant period. The higher the portfolio turnover rate in the period, the greater the trading costs payable by the Fund 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 the Fund. Where a fund has invested substantially all its assets in an Underlying Fund for the entire period, the portfolio turnover rate is zero. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute.