Management Discussion of Fund Performance

Transcription

1 Income Solutions Trust ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE FOR THE PERIOD ENDED DECEMBER 3, 207 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 , by writing to us at 20 Yonge Street, 7th Floor, Toronto, ON MB 2M8 Attention: DoubleLine Income Solutions Trust C/O BMO Investment Funds Group Investor Relations or by visiting our website located at com/investorsolutions under Investment Funds or SEDAR at You may also contact us using one of these methods to request a copy of the Fund s annual financial report, proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. Management Discussion of Fund Performance Investment Objectives and Strategies DoubleLine Income Solutions Trust (the Fund ) was established to provide unitholders of the Fund ( Unitholders ) with an investment in a diversified portfolio (the Portfolio ) of investments selected for their potential to provide high current income, growth of capital, or both. The Fund s primary investment objective is to seek current income; its secondary objective is to seek capital appreciation, in each case by investing in the Portfolio. The Fund may invest in debt securities and other incomeproducing investments based on the assessment of DoubleLine Capital LP ( DoubleLine or the Portfolio Manager ) of the potential returns and risks of different sectors of the debt security markets and of particular securities. Such securities may include, by way of example, U.S. Government securities; debt securities issued by U.S. or non-u.s. corporate or other issuers; obligations of non-u.s. sovereigns or their agencies or instrumentalities; equity, mortgage, or hybrid REIT securities that trade on an exchange; bank loans; municipal securities and other debt securities issued by U.S. local governments and their agencies, authorities and other government sponsored enterprises; structured credit notes; payment in kind securities; zero coupon bonds; inflation indexed bonds; convertible securities; preferred securities; commercial paper; and cash and cash equivalents. The rate of interest on the debt and other income-producing investments that the Fund may purchase may be fixed, floating, or variable. The Fund may utilize various forms of leverage including borrowings under loan facilities. The aggregate leverage obtained, through borrowings and derivatives, based on the mark to market value of the notional exposure determined on the date of each incurrence of indebtedness, shall not exceed 33.3% of Total Assets. Total Assets means the aggregate value of the assets of the Fund. The Fund offers two classes of units. Class A units (the Class A Units ) are listed on the Toronto Stock Exchange ( TSX ) under the symbol DSL.UN. In respect of the Class A Units only, the Fund currently hedges substantially all of the value of the Portfolio that is denominated in U.S. dollars back to Canadian dollars. Although the Portfolio Manager may, from time to time, hedge back to the Canadian dollar all or a portion of the value of the non-u.s. dollar denominated portion of the Portfolio attributable to the Class A Units, it currently does not intend to hedge such foreign currency exposure; however this intention may change from time to time based on the Portfolio Manager s ongoing assessment of market conditions.

2 Class U units (the Class U Units ) are intended for investors wishing to make their investment in U.S. dollars and are not listed on any exchange. The Fund does not and will not hedge foreign currency exposure in respect of the value of the Portfolio attributable to Class U Units. As outlined in the Fund s Annual Information Form for the year ended December 3, 207 (the AIF ), where it is permissible, the Fund maintains a mandatory market purchase program pursuant to which the Fund will offer to purchase any Class A Units offered in the market at a price that is less than 98% of the latest NAV per Class A Unit (subject to criteria outlined in the AIF). The Fund intends to pay monthly distributions to Unitholders, which commenced in December 203. The Fund does not have a fixed distribution but intends to pay monthly cash distributions based on, among other things, the actual and expected returns on the Portfolio. BMO Nesbitt Burns Inc. (the Manager ), in consultation with the Portfolio Manager, will annually determine in November an indicative distribution amount for the year based upon the prevailing market conditions and an estimate of distributable cash flow from the Portfolio. Particular investment objectives, strategies, and restrictions of the Fund are set out in greater detail in the Fund s AIF. Risk The risks of investing in this Fund are described in the AIF. There have been no material changes in the overall level of risk associated with an investment in the Fund during the period from January, 207 to December 3, 207 (the Period ). Results of Operations The net asset value ( NAV ) of the Fund as at the beginning of the Period was $36,773,032 for Class A Units and US$3,60,777 for Class U Units. During the Period, the Fund paid or committed to pay $2,474,62 and US$26,693 of monthly distributions. There were no repurchases under the mandatory market purchase program during the Period. During the Period, US$38,080 of Class U Units were converted to Class A Units, and in addition, $7,07,22 of Class A Units and US$244,330 of Class U Units were surrendered for redemptions. As at the end of the Period, the Fund s NAV was $3,02,69 for Class A Units and US$3,2,343 for Class U Units. At the end of the Period, the Fund employed 23.63% of leverage for the purpose of purchasing additional securities for the Portfolio. During the Period, the leverage employed by the Fund ranged from 2.76% to 28.49%. During the Period, the total return of the Class A Units and Class U Units were 2.89% and 3.98%, respectively. Contributing factors include changes in the value of the Fund s investments and payments for investment fees. The Portfolio Manager provided the following commentary with regard to the Fund s performance over the Period : During the Period, riskier assets performed well, as supportive economic data, accommodative fiscal policy, and synchronized global growth drove performance to new highs. As riskier assets continued to rebound, lower-credit-quality sectors were the biggest outperformers. A significant overweight allocation to credit-sensitive sectors significantly contributed to the Fund s performance. Emerging markets debt was the best-performing asset class for the year, contributing significantly to performance. Allocation to emerging markets debt, the largest allocation in the Fund, was up almost 8%. Holdings in mortgage-backed securities and collateralized loan obligations, which were some of the Fund s smaller weightings, were up over 0% for the year. Information and commentary has been provided by the Portfolio Manager and has not been independently verified by the Fund, BMO Nesbitt Burns Inc., or any other person. Any views or opinions expressed herein do not necessarily reflect the views of, and may differ significantly from the views of, Bank of Montreal, BMO Nesbitt Burns Inc. and any of their affiliates and from the views of other professionals within the BMO Financial Group. 2

3 All sectors generated a positive total return for Fund during Period. Commercial mortgage-backed securities ( CMBS ), which accounted for just over 8% of the Portfolio, was the worst-performing sector in 207. However, the Fund s CMBS holdings were up over 9% for the year, significantly outperforming the Bloomberg Barclays CMBS Index for the same period. Outlook The Portfolio Manager does not anticipate a recessionary environment over the short-to-intermediate term and believes that now is a better time than ever to seek active managers who remain diversified across their fixed income portfolios. The Portfolio Manager continues to position the Fund for a high level of income and total return for investors. The Fund is designed to be an income solution and, therefore, has more aggressive allocations to credit than traditional core fixed income holdings. The Portfolio Manager will continue to manage the Fund for income first and total return second. 3

4 Recent Developments Unitholder Activity At the beginning of the Period, 4,26,977 Class A Units and 49,80 Class U Units were outstanding. During the Period, 4,260 Class U Units were converted to Class A Units. 830,078 Class A Units and 28,70 Class U Units were surrendered for monthly and annual redemptions. At the end of the Period, 3,392,487 Class A Units and 386,70 Class U Units were outstanding. Distributions Based on prevailing market conditions and the estimate by the Portfolio Manager of the distributable cash flow, the current annual indicative distribution amount is $0.6 per Class A Unit and US$0.6 per Class U Unit. Related Party Transactions The Manager, an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ), is responsible for the management and administration of the Fund. The Manager is a member of BMO Financial Group. Fund Administration Services BMO Asset Management Inc., an indirect subsidiary of BMO and an affiliate of the Manager, has been retained by the Manager to provide certain services to the Fund including, among others, fund accounting and valuation services, Unitholder communications and Unitholders services. The fees charged to the Fund for such services for the Period were $6,42. Prime Brokerage Services The Manager has been retained by the Fund to provide leverage loan facilities to the Fund. The interest amount charged to the Fund on the leverage loan facilities for the Period was $222,74. Currency Hedging Transactions The Portfolio Manager may effect currency hedging transactions with BMO. The terms of such transactions (including any fees paid to BMO) will be on market terms at the relevant time. Management Fee The Manager is responsible for providing, or arranging for the provision of, managerial, administrative and compliance services to the Fund. As compensation for management and administrative services, the Manager is paid an annual management fee by the Fund of.30% of the managed assets of the Fund (the Management Fee ), accrued and calculated daily and payable monthly in arrears, together with applicable taxes. The Portfolio Manager is compensated for its services to the Fund by the Manager or an affiliate of the Manager out of the Management Fee. 4

5 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 period indicated. The Fund s Net Assets Per Unit Periods ended December 3 CLASS A ($) ($) ($) ($) ($) Net assets, beginning of period Increase (decrease) from operations: Total revenue Total expenses (0.26) (0.23) (0.23) (0.22) (0.03) Realized gains (losses) for the period (0.20).44 (.09) (0.26) 0.04 Unrealized gains (losses) for the period 0.67 (0.4) (0.3) 0.7 (0.0) Total increase (decrease) from operations (0.47) 0. (0.04) Distributions: Income Dividends Capital gains 0.02 Return of capital Total annual distributions Net assets, end of period Periods ended December 3 CLASS U ($) ($) ($) ($) ($) Net assets, beginning of period Increase (decrease) from operations: Total revenue Total expenses (0.27) (0.23) (0.23) (0.22) (0.03) Realized gains (losses) for the period (0.63) (0.24) 0.04 Unrealized gains (losses) for the period 0.86 (0.84) (0.0) 0.36 (0.03) Total increase (decrease) from operations Distributions: Income Dividends Capital gains 0.02 Return of capital Total annual distributions Net assets, end of period The information is derived from the Fund s audited financial statements. 2 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. 3 Distributions were paid or are payable in cash. 4 Amounts stated in U.S. dollars. Information shown in this column is for the period beginning October 24, 203 (the date the Fund was created) and ending December 3, 203.

6 Financial Highlights (cont.) Ratios and Supplemental Data Periods ended December 3 CLASS A Total net asset value $3,02,69 $36,773,032 $42,427,728 $70,334,37 $70,99,279 Number of units outstanding 3,392,487 4,26,977,37,079 7,699,423 7,7,32 Management expense ratio % 2.8% 2.8% 2.32%.47% Management expense ratio before waivers or absorptions % 2.8% 2.8% 2.32%.47% Trading expense ratio Portfolio turnover rate % 43.22% 36.23% 62.49%.46% Net asset value per unit $9.7 $8.72 $7.66 $9.4 $9.27 Closing market price $8.99 $8.40 $7.40 $9.0 $9.90 Periods ended December 3 CLASS U Total net asset value, $3,2,343 $3,60,777 $3,808,938 $,4,060 $7,067,36 Number of units outstanding 386,70 49,80 3,040 6, ,40 Management expense ratio % 2.88% 2.63% 2.3%.46% Management expense ratio before waivers or absorptions % 2.88% 2.63% 2.3%.46% Trading expense ratio Portfolio turnover rate % 43.22% 36.23% 62.49%.46% Net asset value per unit $9.3 $8.60 $7.42 $8.92 $9.26 This information is provided as at December 3 of the periods shown. 2 The management expense ratio of a particular class is calculated based on all expenses allocated to such a class, as applicable, including interest expenses, but 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. For the periods ended December 3, 206, December 3, 20, December 3, 204 and December 3, 203, no commissions or other portfolio transaction costs were incurred by the 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 00% 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. Amounts stated in U.S. dollars. 6 The information shown in this column is for the period beginning October 24, 203 (the date the Fund was created) and ending December 3,

7 Past Performance This section sets out the year-by-year returns of the Fund for the periods shown. The NAV returns are calculated using the published NAV per Unit and assume distributions, if any, are reinvested in additional Units at the nearest subsequent NAV valuation date. For calculation purposes, the initial NAV is set at the initial offering price of $0.00 per Class A Unit or US$0.00 per Class U Unit, as applicable, less applicable issuance expenses. Market returns are calculated using market prices and assume that distributions, if any, are reinvested in additional Class A Units of the Fund at the ex-date closing price on the TSX (if applicable). For calculation purposes, the inception price is set at the initial offering price of $0.00 per Class A Unit. The returns shown do not take into account sales, redemptions, distribution or optional charges or income taxes that would have reduced returns. Past performance may not be indicative of future returns. Year-by-Year Returns Figure A shows the performance of the Units calculated by published NAV. Figure B shows market price, in respect of Class A Units, for the financial year shown. The rates of return indicate, in percentage terms, how much an investment made for the Period and other periods indicated. Annual Compound Returns Figure C sets out the Fund s annual compound return for each period indicated. The return of Barclays Global-Aggregate Total Return Index (the Index ) is also provided to give an indication of performance of the market on an overall basis for the same period. The Index is a flagship measure of global investment grade debt from twenty-four different local currency markets. This multi-currency benchmark includes fixed-rate treasury, government-related, corporate and securitized bonds from both developed and emerging markets issuers. The Index is largely comprised of three major regional aggregate components: the US Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Index. In addition to securities from these three benchmarks, the Index also includes investment grade Eurodollar, Euro-Yen, Canadian, and 44A Index-eligible securities not already in the three regional aggregate indices. The Fund does not invest in the same securities or in the same proportions as the Index and there are various costs associated with the Fund. Therefore, the performance of the Fund is not expected to reflect the performance of the Index. FIGURE A: PERFORMANCE - NET ASSET VALUE PER UNIT (0.3%).42% (9.67%) % 206 Return from November 22, 203 to December 3, 203. Return from November 22, 203 to December 3, % 207 FIGURE B: PERFORMANCE - MARKET VALUE PER UNIT (CLASS A) % (0.48%) (0.%) % (2.06%) (.73%) % % FIGURE C: ANNUAL COMPOUND RETURN % % 207 year 3 Year Year 0 Year CLASS A CLASS U Since Inception Class A Units 2.89% 7.93% 7.0% Class U Units 3.98% 8.8% 7.02% Barclays Global-Aggregate Total Return Index % 2.02%.2 3 Return from November 22, 203 to December 3, Source: Bloomberg, in U.S. dollars. 3 Annualized. 7

8 Summary of Investment Portfolio Portfolio Allocation As at December 3, 207 % of Net Asset Value Corporate Bonds 9.0 Cash/Receivables/Payables (23.7) Collateral Mortgage Obligations 0. Mortgage-Backed Securities 8.6 Collateral Loan Obligation 7. Municipal Bonds.6 Government Bonds. Other 0.2 Total 00.0 Geographic Allocation As at December 3, 207 % of Net Asset Value United States 6.9 Cash/Receivables/Payables (23.7) Brazil 2. Mexico.7 Argentina 0. Peru 3.6 Guatemala 2.9 Hong Kong 2.7 South Africa 2.6 Colombia 2.4 Jamaica.7 Costa Rica.7 Spain.6 Dominican Republic. Chile. El Salvador.0 Other. Total 00.0 The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly. 8

9 Summary of Investment Portfolio Top 2 Holdings As at December 3, 207 % of Net Asset Value Cash/Receivables/Payables (23.7) Fannie Mae, Series , Class YS, Guaranteed Single-Family REMIC, Pass-Through Certificates, Floating Rate, Jul 2, CFG Investment S.A.C., Senior, Unsecured, Notes, Callable, 9.70% Jul 30, Wachovia Bank Commercial Mortgage Trust, Series 2007-C33, Class AJ, Collateral Strip Interest, Floating Rate, Feb, Sappi Papier Holding GmbH, Series 44A, Senior, Unsecured, Notes, 7.00% Jun, Octagon Investment Partners XV Ltd., Series 203-A, Class ER, Collateral Loan Obligation, Floating Rate, Jul 9, Whitehorse Ltd., Series 202-A, Class BL, Collateral Loan Obligation, Floating Rate, Feb 3, Cent CLO LP, Series 203-8A, Class D, Collateral Loan Obligation, Floating Rate, Jul 23, Magnesita Finance Ltd., Senior, Unsecured, Notes, Perpetual, Callable, 8.62% Apr, Digicel Group Ltd., Senior, Unsecured, Notes, Callable, 8.20% Sep 30, CIM Trust, Series 6-2RR, Class B2, Floating Rate, Feb 27, CIM Trust, Series 6-3RR, Class B2, Floating Rate, Feb 27, Provincia de Buenos Aires, Series 44A, Sinking Funds, Senior, Unsecured, 7.87% Jun, Ajecorp BV, Senior, Unsecured, Notes, Callable, 6.00% May 4, Petrobras Argentina S.A., Series 44A, Senior, Unsecured, Notes, Callable, 7.37% Jul 2, Aeropuertos Argentina 2000 S.A., Sinking Funds, Senior, Secured, Notes, Callable, 6.87% Feb, Banco de Reservas de la Republica Dominicana, Notes, Subordinated, 7.000% Feb, Grupo Posadas S.A.B. de C.V., Senior, Unsecured, Notes, Callable, 7.87% Jun 30, Cosan Overseas Ltd., Senior, Unsecured, Notes, Perpetual, Callable, 8.20% Nov, 266. Bantrab Senior Trust, Series 44A, Senior, Unsecured, Notes, 9.000% Nov 4, Pesquera Exalmar S.A.A., Senior, Unsecured, Notes, Callable, 7.37% Jan 3, Ensemble S Merger Sub Inc., Series 44A, Senior, Unsecured, Notes, Callable, 9.000% Sep 30, Petrobras International Finance Company S.A., Senior, Unsecured, Notes, 6.70% Jan 27, Republic of Argentina, Senior, Unsecured, 7.2% Jul 6, Banco do Brasil S.A., (Cayman), Fixed to Floating, Junior, Notes, Subordinated, Perpetual, Callable, 9.20% Apr, GTL Trade Finance, Inc., Senior, Unsecured, Notes, Callable, 7.20% Apr 6, Top 2 holdings as a percentage of total net asset value 6.8 Total Net Asset Value $3. million This list contains the top 2 issuers calculated by consolidating the Fund s securities holdings at the issuer level; however, this list is reported at the securities level and may contain more than 2 entries due to having duplicate entries of different classes or series of securities of the same issuer. The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly. 9

10 Income Solutions Trust 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, forwardlooking statements require assumptions to be made 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 in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forwardlooking 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 and the risks detailed from time to time in the Fund s AIF. 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, none of the Fund, the Portfolio Manager, the Manager, or any other person undertakes, and each 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. All capitalized terms that are not defined herein have the meanings given to them in the Fund s AIF. Administrative Office, 20 Yonge Street, 7th Floor Toronto, ON MB 2M under Investment Funds