BMO High Yield Bond Fund (the Fund )

Transcription

1 (the Fund ) For the period ended June 30, 2014 Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio Manager: Guardian Capital LP (the portfolio manager ) 2014 Semi-Annual Management Report of Fund Performance This semi-annual management report of fund performance contains financial highlights but does not contain either semi-annual or annual financial statements of the Fund. If the semi-annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling , by writing to us at BMO Investments Inc., 1 First Canadian Place, 43rd Floor, 100 King Street West, Toronto, Ontario, M5X 1A1 or by visiting our website at 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 Results of Operations Over the six-month period ended June 30, 2014 (the period ), Advisor Series units of the Fund returned 5.42%. Please see Past Performance for information on the performance returns of the Fund s other series. During the period, it was a strong environment for high yield bonds, as economic data continued to improve, but not so quickly as to trigger interest rate concerns. Corporate credit fundamentals remained supportive and flows into that sector remained positive. Interest rates, which most investors expected to rise during the period, instead fell and credit spreads (i.e., the incremental yield on corporate bonds vs Government of Canada bonds of similar maturity) across the high yield sector tightened. As a result, high yield bonds posted some of the best results among all fixed income assets and only marginally trailed equities for the period. The Canadian dollar fell quickly during the first quarter, but rallied back late in the second quarter to finish the half-year virtually unchanged. Generally speaking, bonds issued by U.S. companies performed better than Canadian issued bonds, as interest rates rallied more and spreads (i.e., difference in yields) tightened further in the U.S. market. In addition, issuers in the Energy sector generally produced the best relative performance, as commodity prices trended higher. Issues in the gaming, retailing and mining sub-sectors were poorer performers, probably due to shorter maturities and lower coupons in those sectors, on average. In addition, longer maturities outperformed shorter maturities as interest rates fell. The Fund benefitted when the portfolio manager added duration early in the year and, when interest rates fell. While the Fund had U.S. dollar positions hedged during part of the period, hedges were removed near the end of the period, as the portfolio manager believed the Canadian dollar had strengthened. While the currency continued to strengthen through quarter end, the portfolio manager expects it to weaken again in the second half of the year and U.S. dollar assets will outperform. Higher quality and slightly shorter average duration caused some lag versus the Fund s benchmark, the FTSE TMX Canada Bond Universe Index, particularly late in the period. Top performers for the period included bonds issued by Trident Exploration Corporation (natural gas), Armstrong Energy, Inc. (coal) and Athabasca Oil Corp. (oil sands), all with returns in the high-teens. All three issuers operate in the Energy sector, which was one of the top performing sectors for the period. The Fund distributes a fixed amount per unit each month, consistent with the Fund s stated objective of providing a stable cash flow to its unitholders. A portion of a distribution may consist of a return of capital, this portion may be significant, and will occur when the income earned by the Fund per unit is less than the fixed amount of the distribution. Distributions are expected to continue to include return of capital until there is a general improvement in the economy, an increase in interest rates, or there is a change in the fixed amount to be distributed. Management Fee Change Effective April 3, 2014, the management fee on Series F units was reduced to 0.60% from 0.75%.

2 Recent Developments Continued improvement in economic data and growing worries about inflation are likely to be among the strongest drivers in the second half of the year. A surprise on the inflation front could bring the prospect for higher interest rates sooner than most investors are anticipating. This, combined with the U.S. Federal Reserve Board s (the Fed ) continued stimulus tapering (i.e., a reduction in the Fed s bond-buying program) could well cause volatility in both interest rates and credit spreads at some point. Commodity prices appear to be showing some upward momentum as we enter the second half of the year. Should it continue, issues by energy and mining companies will perform well. Geopolitical tensions in the Middle East and with Russia and Ukraine continue to have potential to flare up, and could introduce significant volatility at any time. Significant Accounting Changes Resulting from our Adoption of IFRS Effective January 1, 2014, the Fund adopted International Financial Reporting Standards ( IFRS ) as its basis of accounting. The semi-annual financial statements for the period ended June 30, 2014, are the first set of financial statements prepared on an IFRS basis. The adjustments made to reflect the impact of the change from Canadian generally accepted accounting principles ( Canadian GAAP ) to IFRS are presented in note 8 to the financial statements. Key changes to the financial statements as a result of the implementation of IFRS are: Statement of Financial Position replaced the Statement of Net Assets: - The Fund s unitholders investments in the units of the Fund did not qualify for equity classification under IFRS and have been classified as a financial liability for financial reporting purposes. - Classification of financial instruments: derivatives and short positions have been classified as held for trading while all other financial instruments have been designated as fair valued through profit and loss. Following adoption of IFRS by the Fund for financial reporting purposes, the Fund now fair values its investment securities traded on an exchange at close price, which is determined as the price within the bid ask range that represents the best estimate of fair value. Statement of Comprehensive Income replaced Statement of Operations: - The Fund accounts for interest income using the effective interest rate method, rather than the coupon method previously used under Canadian GAAP. Statement of Changes in Net Assets Attributable to Holders of Redeemable Units replaced the Statement of Changes in Net Assets and the Fund now presents a Statement of Cash Flows. Other notable changes to the financial statement notes include additional or enhanced information in the notes to the financial statements, including a more detailed note and reconciliation on the Fund s transition from Canadian GAAP to IFRS. RELATED PARTY TRANSACTIONS BMOII, an indirect, wholly-owned subsidiary of Bank of Montreal, 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. Administration Services The Manager and other members of BMO Financial Group provide the Fund with certain administration services, such as those relating to fund accounting, record keeping, order processing, issuing and distributing account statements and general administrative support. Further details about the Fund s administration fees can be found in the Fund s most recent simplified prospectus. The expenses charged to the Fund in respect of such services during the period amounted to $173,604 (2013 $589,258). Dealer Compensation 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.

3 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 % % % Advisor Series Units Series F Units Series I Units * For Series I Units, separate Series I fees are negotiated and paid by each Series I investor. Because the Manager pays no distribution, service or trailing fees on Series I Units, Series I Units will have lower Series I fees than the management fees for Advisor Series 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) Advisor Series Units Net assets, beginning of period (5) $ 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 $ Return of capital $ Total annual distributions (4) $ Net assets, end of period (5) $ Series F Units Net assets, beginning of period (5) $ 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 $ Return of capital $ Total annual distributions (4) $ Net assets, end of period (5) $ Series I Units Net assets, beginning of period (5) $ 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 $ Return of capital $ Total annual distributions (4) $ Net assets, end of period (5) $ (1) The information is derived from the Fund s audited annual financial statements and unaudited June 30, 2014 semi-annual financial statements. Prior to 2014, the net assets per unit presented in the financial statements differed from the net asset value calculated for fund pricing purposes. An explanation of these differences can be found in the notes to the Fund s financial statements. (2) Includes commissions and portfolio transaction costs. (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 paid in cash or reinvested in additional units of the Fund, or both, where applicable. (5) Net assets prior to 2014 were calculated under Canadian GAAP. Net assets in 2014 were calculated under IFRS.

4 Ratios and Supplemental Data Advisor Series Units Total net asset value (000s) (1) $ 219, , , , , ,957 Number of units outstanding (000s) (1) 32,995 38,555 44,015 47,324 55,904 60,360 Management expense ratio (2) % Management expense ratio before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series F Units Total net asset value (000s) (1) $ 36,240 35,203 43,553 37,187 31,996 34,490 Number of units outstanding (000s) (1) 4,961 4,907 5,892 5,073 4,212 4,751 Management expense ratio (2) % Management expense ratio before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series I Units Total net asset value (000s) (1) $ 36,806 36,803 39,315 33,381 29,465 29,058 Number of units outstanding (000s) (1) 7,004 7,052 7,172 6,040 5,072 5,166 Management expense ratio + % Management expense ratio before waivers or absorptions + % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ PAST PERFORMANCE The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional units or shares 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, 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 fees and expenses allocated and payable by each series. On July 5, 2006, the Fund clarified its investment objective to generate a high level of interest income by investing primarily in high yield bonds and debentures issued by North American governments and corporations denominated in Canadian and U.S. dollars as well as convertible debentures. This change could have affected the performance of the Fund, had it been in effect throughout the performance measurement periods presented. + 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 June 30 or December 31 of the period shown. (2) The management expense ratio of a particular series is calculated based on all expenses allocated to the series, as applicable, including all taxes and interest expenses but excluding brokerage commissions and other portfolio transaction costs, divided by the average daily net asset value of that series, annualized. BMOII may reduce the effective management fees payable by some unitholders by reducing the management fees it charges to the Fund and directing the Fund to make management fees distributions to these unitholders in amounts equal to the amounts of the management fees reduction. The management expense ratio does not take into account the reduction in management fees due to management fees distributions to unitholders. (3) BMOII absorbed certain expenses or waived certain fees otherwise payable by a series. In doing so, BMOII attempts to maintain the overall MER of the Fund at a relatively consistent level. BMOII may discontinue the absorption or waiver at any time. (3) The trading expense ratio represents the total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. For all the financial periods listed, no commissions or portfolio transaction costs were incurred by the Fund. As a result, the trading expense ratio for all the periods is zero. (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.

5 Year-by-Year Returns The following bar charts show the performance for each series of the Fund for each of the financial years shown and for the six-month period ended June 30, 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 the financial year. Advisor Series Units 40% % 0% % % (1) Series F Units 40% % 0% % % (1) Series I Units 40% % 0% % % (1) (1) For the six-month period ended June 30, 2014.

6 SUMMARY OF INVESTMENT PORTFOLIO As at June 30, 2014 % of Net Portfolio Allocation Asset Value Corporate Bonds 91.5 Money Market Investments 4.4 Asset-Backed Securities 2.0 Cash/Receivables/Payables 1.3 Other 0.8 Total Portfolio Allocation % of Net Top 25 Holdings Asset Value Issuer Trident Exploration Corporation, Senior, Unsecured, Notes, Callable, 8.250% Apr 13, Millar Western Forest Products Ltd., Senior, Unsecured, Notes, Callable, 8.500% Apr 1, NOVA Chemicals Corporation, Senior, Unsecured, Notes, Unsubordinated, Callable, 8.625% Nov 1, Sherritt International Corporation, Senior, Unsecured, Notes, Callable, 8.000% Nov 15, Paramount Resources Ltd., Senior, Unsecured, Notes, Callable, 8.250% Dec 13, AK Steel Corporation, Senior, Unsecured, Notes, Callable, 7.625% May 15, IAMGOLD Corporation, Series 144A, Senior, Unsecured, Notes, 6.750% Oct 1, Allied Nevada Gold Corporation, Series 144A, Senior, Unsecured, Notes, Callable, 8.750% Jun 1, Golf Town Canada Inc./Golfsmith International Holdings Inc., Series 144A, Secured, Notes, Callable, % Jul 24, El Paso Corporation, Senior, Unsecured, Notes, 7.250% Jun 1, Connacher Oil and Gas Limited, Series 144A, Secured, Notes, Callable, 8.500% Aug 1, Athabasca Oil Corp., Series 144A, Secured, Notes, Callable, 7.500% Nov 19, Bombardier Inc., Senior, Unsecured, Debentures, 7.350% Dec 22, Sherritt International Corporation, Senior, Unsecured, Notes, Callable, 7.500% Sep 24, Canadian Imperial Bank of Commerce, Unsecured, Notes, 2.220% Mar 7, Miramax LLC, Series A, Class B, Asset-Backed Security, % Oct 20, % of Net Top 25 Holdings Asset Value Issuer Alliance Grain Traders, Inc., Senior, Secured, Notes, Callable, 9.000% Feb 14, Pilgrim s Pride Corporation, Senior, Unsecured, Notes, Callable, 7.875% Dec 15, Newalta Corporation, Series 2, Senior, Unsecured, Notes, Callable, 7.750% Nov 14, Data & Audio-Visual Enterprises Wireless Inc., Senior, Secured, Notes, Callable, 9.500% Apr 29, Fairfax Financial Holdings Limited, Senior, Unsecured, Notes, 7.375% Apr 15, Armstrong Energy, Inc., Secured, Notes, Callable, % Dec 15, EchoStar DBS Corporation, Senior, Unsecured, Notes, 7.750% May 31, Fairfax Financial Holdings Limited, Senior, Unsecured, Notes, 7.750% Jul 15, Province of Ontario, Commercial Paper, 0.081% Jul 14, Top Holdings as a Percentage of Total Net Asset Value 58.1 Total Net Asset Value $292,714,574 The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

7 BMO Investments Inc. First Canadian Place, 43rd Floor, 100 King Street West Toronto, ON M5X 1A1 For more information please call 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. Registered trade-mark of Bank of Montreal, used under licence. Trade-mark of Bank of Montreal, used under licence. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal.