2017 Annual Management Report of Fund Performance

Transcription

1 (the Fund ) For the 12-month period ended September 30, 2017 (the Period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio manager: BMO Asset Management Inc., Toronto, Ontario (the portfolio manager ) 2017 Annual Management Report of Fund Performance This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the Fund. If the annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the annual financial statements at your request, and at no cost, by calling and , by writing to us at BMO Investments Inc., First Canadian Place, 100 King Street West, 43rd Floor, Toronto, Ontario, M5X 1A1 or by visiting our website at and or SEDAR at You may also contact us using one of these methods to request a copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Investment Objective and Strategies The Fund s objective is to increase the value of your invest - ment over the long term by investing in Canadian natural resource companies. The Fund invests primarily in companies that are listed on Canadian stock exchanges and that operate in the precious metals, base metals, oil and gas, or forest products industries. It may also buy precious metals directly. The portfolio manager employs a systematic model based on fundamental equity analysis to identify and select equities that trade below their intrinsic value, demonstrate superior earnings growth and positive price momentum. The portfolio manager reviews company operations and research and development to assess the company s potential for growth. Risk No changes affecting the overall level of risk associated with investing in the Fund were made during the Period. The risks of the Fund remain as discussed in the Fund s most recent simplified prospectus or any amendments and fund facts. Results of Operations During the Period, the Fund s total net asset value changed from approximately $189 million to approximately $152 million. Series A units of the Fund returned -9.40% versus the Fund s blended benchmark, composed of 50% Materials GICS and 50% Energy GICS, both sectors of the S&P/TSX Composite Total Return Index, return of -0.62%. Please see the Past Performance section for information on the performance returns of the Fund s other series. During the Period, Donald Trump won the U.S. presidential election. The new administration s pro-growth, pro-business, anti-tax stance increased growth and inflation expectations in the U.S. and globally. Crude oil prices were volatile but rebounded nearly 8% in the fourth quarter of 2016 following the Organization of the Petroleum Exporting Countries ( OPEC ) announcement of production cuts. Oil prices fell in early March, but rebounded from its lowest level in more than a year to close the third quarter of 2017 at just under US$52 per barrel. After falling during the fourth quarter, gold prices rallied more than 8% in the first quarter of 2017, but weakened to below US$1,300 per ounce at the end of the Period. Base metals performed well, posting doubledigit returns in some cases, on continued strengthening in global economic growth. In late 2016, European markets were positive, but in the low single digits except for Italy, which rebounded sharply following the failure of the referendum on constitutional reform in early December. Emerging markets, particularly in Asia, were significantly weaker than their developed market counterparts as the new U.S. administration appeared more domestically focused. South Korean equities and currency fell sharply after its president was impeached on issues surrounding potential abuses of influence. During the first quarter of 2017, the NASDAQ Composite Index rose more than 10% as U.S. large-capitalization growth securities were particularly strong while small-capitalization value stocks had a negative return. European markets rose on improved macroeconomic data. In particular, Spain saw a rebound in economic strength, which resulted in a rise of nearly 13% for the quarter. South Korean equities rebounded after weakness in the prior quarter as the result of a robust

2 export market. The rest of Asia, excluding Japan, which tends to be cyclical in nature, rose more than 10% as investors branched out of U.S. equities and put capital to work in the region. In the U.K., Prime Minister Theresa May formally invoked Article 50 at March month-end to initiate its departure from the European Union ( EU ). During the last half of the Period, global equity markets continued to move higher. Even with a Republican majority in the U.S. Congress, it proved unable to enact policy or tax reform. Despite this, the U.S. economy continued to improve as large-capitalization equities, particularly in the Information Technology sector, posted higher returns. Led by the Information Technology sector, growth-style stocks significantly outperformed value-based stocks. The U.K. market lagged the rest of Europe after Prime Minister May called a snap election, but failed to increase support for her party, leading to some concern over how the country s withdrawal from the EU would progress. During the third quarter of 2017, European markets were particularly strong as global economic data continued to improve, and political risk subsided following the French and German elections. Emerging markets returns were driven higher as global growth expectations improved. Contributing to the Fund s performance was stock selection in the Materials sector, particularly in precious metals, and an overweight allocation to the small-capitalization precious metals and base metals sub-sectors. Stock selection in Canada also contributed to performance. Top individual contributors included holdings in Canada-based precious metals producing and exploration company, Wesdome Gold Mines Ltd., and Ivanhoe Mines Ltd., which controls three of the world s highest-grade pre-production mining assets. Wesdome Gold Mines Ltd. stock has greatly appreciated as its management team has begun to unlock the value in the company s Kiena complex, located in Val D Or, Quebec. The deposit had previously been closed because of high production costs, but recent drilling results have demonstrated significantly higher-grade zones that may improve its future economics. Ivanhoe Mines Ltd., with its strong balance sheet, lack of debt and approximately $400 million in cash, is in a good position to develop one of the assets in which it holds a majority stake. Other contributors included holdings in Kirkland Lake Gold Inc. and Goldcorp Inc., which benefited from general strength in the price of gold and strength in the Canadian market. Extreme volatility in the oil and gas sectors, combined with stock selections in the Energy and Materials sectors detracted from the Fund s performance. Stock selection in the Energy sector was another detractor. The price of gold depreciated by 5% over the Period as a result of U.S. interest rate increases and seasonal weakness at 2016 year-end. The price of gold rebounded after the U.S. Federal Reserve Board s ( Fed ) interest rate increase, gaining approximately 10% by period-end relative to its lows in December An underweight position in Suncor Energy Inc. also detracted from performance as the company performed well. Other detractors included holdings in Klondex Mines Ltd., which underperformed after it made two acquisitions given the uncertainty surrounding the costs associated with integration. Centamin PLC was another detractor, amid weaker results upon some softening in metals prices. Shares of Osisko Mining Inc. were introduced to the Fund for the stock s attractive valuation and growth potential. The company has delivered impressive results from the exploration and drilling program at its Windfall Lake property in Northern Ontario that highlight the possibility of a very large gold deposit. The portfolio manager also added to the Fund s existing position in Wesdome Gold Mines Ltd. for its prospects and attractive valuation after it announced significant exploration results from its suspended Kiena underground mine. The portfolio manager eliminated the Fund s holdings in Nevsun Resources Ltd. after the company had acquired a large undeveloped deposit. The long timeline to growth from the new acquisition led the portfolio manager to sell the position. An underweight allocation to Cenovus Energy Inc. was further trimmed amid concerns regarding its growth prospects of the company. Advantage Oil & Gas Ltd. was also reduced in light of its high natural gas-weighted production. Weak natural gas prices were expected to negatively impact margins and cash flows after an unseasonably warm winter and a significant amount of gas in storage. During the latter half of the Period, the portfolio manager reduced the Fund s allocation to Canadian resources stocks in order to add to its global exposure. The Manager confirms that the Fund did not borrow money during the Period. For information on the Fund s performance and composition, please refer to the Past Performance section and Summary of Investment Portfolio section of this report. Recent Developments Crude oil prices are expected to be volatile and gradually recover over the next 12 to 18 months. Members of OPEC reached an agreement in late 2016 to cut production and early indications point to compliance by major OPEC

3 members. The portfolio manager expects that oil prices will hit a ceiling in the range of US$55 to US$60 per barrel as U.S. shale production has already started to accelerate, given that oil prices have recovered from earlier lows. Natural gas prices came under significant pressure in late 2016 and early 2017 as lower heating demand, and built-in natural gas storage levels made an impact. The portfolio manager has a cautious outlook on the price of gold over the short term as the Fed will likely continue to increase interest rates, while the U.S. dollar is expected to remain strong in response. Over the longer term, however, there are positive drivers that will lead to a higher gold price as negative real interest rates are persistent across most of the world, excluding the U.S. In addition, President Trump s administration s policies are likely to lead to larger U.S. deficits and inflation, which is positive for gold. The price of gold has declined more recently on lessening geopolitical concerns and rising interest rates, and is expected to stay in a price range of US$1,250 to US$1,350 per ounce. The Fund is invested in companies with financial strength that are positioned to weather a period of uncertain commodity prices and to capitalize on opportunities within the current market. The portfolio manager believes that the Fund should continue to perform well in a stable price environment. Subsequent Event Multi-Series Structure Change On November 21, 2017, in addition to the types of units currently available for sale to investors, the Manager launched Series D units. Series D units may only be purchased through discount brokers. RELATED PARTY TRANSACTIONS BMO Investments Inc., an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ), is the Manager of the Fund. From time to time, the Manager may, on behalf of the Fund, enter into transactions or arrangements with or involving other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Manager (each a Related Party ). The purpose of this section is to provide a brief description of any transaction involving the Fund and a Related Party. Portfolio Manager The Fund s portfolio manager is BMO Asset Management Inc. ( BMOAM ), an affiliate of the Manager. BMOAM provides portfolio management services to the Fund. BMOAM receives from the Fund a management fee based on assets under management, calculated daily and payable monthly. Administration Fee and Operating Expenses The Fund pays a fixed administration fee to the Manager in respect of each series other than Series I. The Manager in return pays the operating expenses of these series of the Fund, other than certain specified expenses that are paid directly by the Fund ( Fund Expenses ). Fund Expenses, include expenses incurred in respect of preparing and distributing fund facts, interest or other borrowing expenses, all reasonable costs and expenses incurred in relation to compliance with NI , including compensation and expenses payable to the Fund s Independent Review Committee ( IRC ) members, taxes to which the Fund is or might be subject, and costs associated with compliance with any new governmental or regulatory requirement introduced after December 1, Fund Expenses are allocated proportionately among the relevant series. If the Fund Expenses are specific to a series, the Fund Expenses are allocated to that series. The fixed administration fee is calculated as a fixed annual percentage of the average net asset value of each relevant series of the Fund. Separate fees and expenses are negotiated and paid by each Series I investor. Further details about the fixed administration fee and/or Fund Expenses can be found in the Fund s most recent simplified prospectus at and or Buying and Selling Securities Related-Party Underwritings During the Period, the Manager relied on an approval and standing instruction provided by the IRC with respect to investments in a class of non-government debt securities and/or equity securities of an issuer during the period of distribution of those securities to the public and/or the 60-day period following the distribution period where BMO Nesbitt Burns Inc., an affiliate of the Manager, acted as an underwriter in the distribution (each, a Related Party Transaction ). In accordance with the IRC s approval and standing instruction, in making a decision to cause the Fund to make a Related Party Transaction, the Manager and portfolio manager of the Fund, are required to comply with the Manager s written policies and procedures governing the Related Party Transaction and report periodically to the IRC, describing each instance that the Manager relied on the approval and standing instruction and its compliance or non-compliance with the governing policies and procedures. The governing policies and procedures are designed to ensure the Related Party Transaction (i) is made free from any influence of BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of BMO and/or BMO Nesbitt Burns Inc. and without taking into account any considerations relevant

4 to BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of BMO and/or BMO Nesbitt Burns Inc., (ii) represents the business judgment of the Manager, uninfluenced by considerations other than the best interests of the Fund, and (iii) achieves a fair and reasonable result for the Fund. Brokerage Commissions The Fund pays standard brokerage commissions at market rates to BMO Nesbitt Burns Inc., an affiliate of the Manager, for executing a portion of its trades. The brokerage commissions charged to the Fund (excluding exchange and other fees) during the periods indicated, were as follows: Period ended Period ended Sep. 30, 2017 Sep. 30, 2016 $000 $000 Total brokerage commissions $ Brokerage commissions paid to BMO Nesbitt Burns Inc. $ 8 30 Distribution Services The Manager markets and distributes the Fund through Bank of Montreal branches and/or (depending on the series) through registered dealers and brokers, including BMO InvestorLine Inc. and BMO Nesbitt Burns Inc., both affiliates of the Manager. The Manager pays to these affiliates a service fee called a trailing commission based on the average daily value of the units and/or shares that are held in investor accounts. This service fee is paid monthly or quarterly and varies by purchase option and by series. Management Fees The Manager is responsible for the day-to-day management of the business and operations of the Fund. The Manager monitors and evaluates the Fund s performance, pays for the investment advice provided by the Fund s portfolio manager and provides certain administrative services required by the Fund. As compensation for its services, the Manager is entitled to receive a management fee payable monthly, calculated based on the daily net asset value of each series of the Fund at the maximum annual rate set out in the table below. As a Percentage of Management Fees General Maximum Annual Administration, Management Dealer Investment Fee Rate* Compensation Advice and Profit % % % Series A Units Advisor Series Units Series F Units Series I Units FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the periods indicated. The Fund s Net Assets per Unit (1) Series A Units Net assets, beginning of period $ Increase (decrease) from operations: Total revenue $ Total expenses (2) $ Realized gains (losses) for the period $ Unrealized gains (losses) for the period $ Total increase (decrease) from operations (3) $ Distributions: From income (excluding dividends) $ From dividends $ From capital gains $ 2.40 Return of capital $ Total Annual Distributions (4) $ 2.40 Net assets, end of period $ Advisor Series Units Net assets, beginning of period $ Increase (decrease) from operations: Total revenue $ Total expenses (2) $ Realized gains (losses) for the period $ Unrealized gains (losses) for the period $ Total increase (decrease) from operations (3) $ Distributions: From income (excluding dividends) $ From dividends $ From capital gains $ 1.03 Return of capital $ Total Annual Distributions (4) $ 1.03 Net assets, end of period $ * For Series I Units, separate Series I fees are negotiated and paid by each Series I investor. Since the Manager pays no distribution, service or trailing fees on Series I Units, the combined management and administrative fees for Series I Units will not exceed the management fee charged for Advisor Series or Series A Units.

5 Series F Units Net assets, beginning of period $ Increase (decrease) from operations: Total revenue $ Total expenses (2) $ Realized gains (losses) for the period $ Unrealized gains (losses) for the period $ Total increase (decrease) from operations (3) $ Distributions: From income (excluding dividends) $ From dividends $ From capital gains $ 1.28 Return of capital $ Total Annual Distributions (4) $ 1.28 Net assets, end of period $ Series I Units Net assets, beginning of period $ Increase (decrease) from operations: Total revenue $ Total expenses (2) $ Realized gains (losses) for the period $ Unrealized gains (losses) for the period $ Total increase (decrease) from operations (3) $ Distributions: From income (excluding dividends) $ From dividends $ From capital gains $ 0.62 Return of capital $ Total Annual Distributions (4) $ 0.62 Net assets, end of period $ (1) This information is derived from the Fund s audited financial statements. The financial information presented for the periods ended September 30, 2017, September 30, 2016, September 30, 2015 and September 30, 2014 is derived from the financial statements determined in accordance with IFRS. Information for periods prior to October 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. (2) Includes commissions and other portfolio transaction costs. Prior to October 1, 2013, withholding taxes were not included in expenses as they were included in revenue. (3) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (4) Distributions were either paid in cash or reinvested in additional units of the Fund, or both. The allocation of the distributions from each of income, dividends, capital gains and return of capital is based on the Manager s estimate as at September 30 of the period shown, which is the Fund s financial year-end. However, the actual allocation of distributions is determined as at December 15, the Fund s tax year-end. Accordingly, the actual allocation among income, dividends, capital gains and return of capital may differ from these estimates. Ratios and Supplemental Data Series A Units Total net asset value (000 s) (1) $ 140, , , , ,648 Number of units outstanding (000 s) (1) 3,981 4,530 4,970 5,041 6,025 Management expense ratio (2) % Management expense ratio before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Advisor Series Units Total net asset value (000 s) (1) $ 8,637 10,710 6,597 11,461 13,586 Number of units outstanding (000 s) (1) Management expense ratio (2) % Management expense ratio before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series F Units Total net asset value (000 s) (1) $ 2,023 1, Number of units outstanding (000 s) (1) Management expense ratio (2) % Management expense ratio before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series I Units Total net asset value (000 s) (1) $ Number of units outstanding (000 s) (1) Management expense ratio + % Management expense ratio before waivers or absorptions + % 0.00 Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Operating expenses are paid by BMOII and management fees are paid directly to BMOII as negotiated with the investor. (1) This information is provided as at September 30 of the period shown, as applicable. (2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (4) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher a fund s portfolio turnover rate in a year, the greater the trading costs payable by the fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund.

6 PAST PERFORMANCE The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional securities of the Fund and is based on the net asset value of the Fund. The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember that how the Fund has performed in the past does not indicate how it will perform in the future. The returns of each series may differ from one another for a number of reasons, including if the series was not issued and outstanding for the entire reporting period and because of the different levels of management fees and expenses allocated and payable by each series. On November 27, 2009, BMO Guardian Canadian Resource Fund merged into the Fund. This change could have affected the performance of the Fund, had it been in effect throughout the performance measurement periods presented. Year-by-Year Returns The following bar charts show the performance of each series of the Fund for each of the financial years shown. The charts show in percentage terms how an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year. Series A Units 75% 50% 25% 0% -25% -50% Advisor Series Units 75% 50% 25% 0% -25% -50% Series F Units 75% 50% 25% 0% -25% -50% Series I Units 75% 50% 25% 0% -25% -50% (1) (2) (2) (1) For the period beginning with the performance launch date of March 5, 2008 to September 30, (2) For the period beginning with the performance launch date of November 3, 2008 to September 30,

7 Annual Compound Returns This table compares the historical annual compound returns of the Fund with its blended benchmark (composed of 50% Materials GICS and 50% Energy GICS, both sectors of the S&P/TSX Composite Total Return Index ( S&P/TSX )), in addition to the S&P/TSX, a broad-based index. The constituent securities of the Materials and Energy GICS sectors are subsets of the S&P/TSX that have been classified according to the Global Industry Classification Standard. The S&P/TSX reflects the price movements of selected securities listed on the Toronto Stock Exchange and weighted by market capitalization. Series A Units Since year years years years Inception BMO Resource Fund % Blended Benchmark % S&P/TSX % Advisor Series Units Since year years years years Inception (2) BMO Resource Fund % Blended Benchmark % S&P/TSX % Series F Units Since year years years years Inception (2) BMO Resource Fund % Blended Benchmark % S&P/TSX % Series I Units Since year years years years Inception (1) BMO Resource Fund % Blended Benchmark % S&P/TSX % (1) Return from the performance launch date of March 5, 2008 to September 30, (2) Return from the performance launch date of November 3, 2008 to September 30, As noted above, the table shows a comparison of the historical annual compound returns of the Fund with the S&P/TSX Index, a broad-based index. The Fund, however, uses a blended benchmark to compare its overall relative performance. The reason for this is that the Fund s portfolio invests in primarily Canadian Materials and Energy securities and accordingly, the blended benchmark is a more accurate and useful comparison. A commentary on the market and/or information regarding the relative performance of the Fund as compared to its benchmark can be found under the Results of Operations section of this report.

8 SUMMARY OF INVESTMENT PORTFOLIO As at September 30, 2017 % of Net Portfolio Allocation Asset Value Energy 48.8 Materials 48.3 Cash/Receivables/Payables 2.1 Bonds and Debentures 0.8 Total Portfolio Allocation % of Net Top 25 Holdings Asset Value Issuer Centerra Gold Inc. 5.0 Franco-Nevada Corporation 4.9 Kirkland Lake Gold Ltd. 4.6 IAMGOLD Corporation 3.7 Centamin plc 3.3 Gaztransport Et Technigaz S.A. 3.0 Kinross Gold Corporation 3.0 Tallgrass Energy GP, LP 3.0 Canadian Natural Resources Limited 3.0 OMV Aktiengesellschaft 2.8 Veresen Inc. 2.8 Agnico Eagle Mines Limited 2.8 Pan American Silver Corporation 2.7 TGS Nopec Geophysical Company ASA 2.7 Enbridge Inc. 2.4 Premier Gold Mines Limited 2.4 Parex Resources Inc. 2.3 St Barbara Limited 2.2 SSR Mining Inc. 2.2 Barrick Gold Corporation 2.2 Vermilion Energy Inc. 2.1 Enerplus Corporation 2.1 Cash/Receivables/Payables 2.1 Suncor Energy Inc. 2.1 Exterran Corp. 1.7 Top Holdings as a Percentage of Total Net Asset Value 71.1 Total Net Asset Value $151,531,151 The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

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