2017 Annual Management Report of Fund Performance

Transcription

1 (the Fund ) For the 12-month period ended September 30, (the Period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio manager: BMO Asset Management Inc., Toronto, Ontario (the portfolio manager ) 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 objectives are to preserve the value of your investment and to provide a high level of liquidity and interest income. The Fund invests primarily in high-quality money market instruments issued by governments and corporations in Canada, including treasury bills, bankers acceptances, and commercial paper. The portfolio manager invests only in securities rated R-1 or higher by DBRS, or an equivalent rating as defined by other recognized rating agencies. 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 $562 million to approximately $551 million. Series A units of the Fund returned %. Please see the Past Performance section for information on the performance returns of the Fund s other series. During the Period, geopolitical issues persisted, including escalating North Korean tensions, heightened terrorist acts, the U.K. s ongoing negotiations to exit the European Union ( Brexit ), and political instability in the eurozone. Recent elections in Germany and New Zealand also weighed on markets, resulting in each facing a new coalition government as populism resurfaces. Chancellor Merkel s coalition outcome, in particular, may limit Germany s ability to play a leadership role in European politics and in confronting challenges to the eurozone. Nevertheless, a stronger global growth backdrop and dissipating disinflation fears resulted in some central banks shifting towards eventual interest rate increases. The Bank of Canada ( BoC ) was early in this regards and raised interest rates at its last two meetings. The European Central Bank, although likely to wait until 2018 to raise interest rates, looks set to announce tapering (i.e., monetary stimulus reduction) of asset purchases despite the risks to growth and inflation posed by the sharp appreciation of the euro. The Bank of England is considering an interest rate increase in the coming months despite the currency-driven spike in inflation, which is likely to dissipate soon. The trajectory of any tightening of monetary policy, however, is likely to be subdued as Brexit uncertainties remain as well as the possibility of another general election with Prime Minister May s support recently waning. Elsewhere, anaemic inflation pressures in Japan should keep interest rates exceptionally low, while in Australia, interest rates are unlikely to move higher any time soon with the Royal Bank of Australia unwilling to test highly levered household balance sheets. U.S. second-quarter gross domestic product ( GDP ) was revised higher to 3.1% in its final revision supported by slightly higher inventory accumulation. Confident that the economy is progressing as anticipated, the U.S. Federal Reserve Board announced a pause in interest rate increases at its September 20, meeting, leaving the overnight interest rate at its target range of , while announcing the beginning of its balance sheet tapering plan to begin in October. U.S. GDP growth for was upgraded to 2.4% while 2018 was left unchanged at 2.1%.

2 Canadian GDP was flat in July, missing expectations for a 0.1% gain and breaking Canada s eight-month streak of monthly GDP growth. Goods-producing industries saw a drop in output as declines in manufacturing, oil and gas, agriculture and construction more than offset increases in the Utilities and Mining sectors. Overall, annual growth was still tracking at 3.8%, though the slower start to the third quarter of indicated that the pace of growth over the first half of the year will not be sustained. While recognizing significant progress of the Canadian economy since the decrease in oil prices shock, at its last meeting, BoC governor Stephen Poloz highlighted many unknowns that could affect the pace of interest rate increases and inflation outlook. Stephen Poloz indicated that the BoC would pay close attention to how the economy responds to both higher interest rates and the stronger Canadian dollar. With regards to international trade, Stephen Poloz cautioned that the renegotiation of the North American Free Trade Agreement could have significant implications for the Canadian economy. Following the BoC s two interest rate increases, the Fund s shorter average term-to-maturity contributed to its performance. Higher positioning in banker s acceptance notes, corporate paper and corporate bonds, including floating rate notes, also contributed to performance as they outperformed federal T-bills, provincial and municipal bonds. Corporate exposure was maximized to the 7 allowable, while government exposure was held at or near its minimum of 3, which contributed to the Fund s performance as the portfolio manager looked for additional yield enhancement opportunities. At the end of the Period, provincial bonds were yielding approximately 16 basis points higher than the corresponding T-bills, while municipals, specifically the City of Toronto, yielded approximately 25 basis points higher. The Fund s required 3 minimum government exposure continued to detract from its performance when compared to industry counterparts, many of which have little or no government minimum exposure requirements. Another detractor was the Fund s floating rate note maximum 1 exposure. The portfolio manager added a new position in Canadian Imperial Bank of Commerce asset-backed security commercial paper of Safe Trust series to the Fund s corporate weighting in order to provide diversification and yield enhancement over traditional banker s acceptances. As well, the Fund s existing holding of a Canadian Imperial Bank of Commerce floating rate note maturing February 3, was rolled into the same issuer with a maturity date of February 2, This trade provides significant yield enhancement over traditional banker s acceptance notes. In an effort to ensure a positive yield and preserve the Fund s net asset value, the Manager continues to temporarily waive, in part, the management and administration fees, for certain series, normally charged to the Fund. The Manager confirms that the Fund did not borrow money during the Period. Fund Merger On June 30,, the BMO LifeStage Plus Fund, which reached its target maturity date of June 30,, merged into the Fund on a tax deferred basis. 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 BoC s governor, Stephen Poloz has indicated that future interest rate increases have no predetermined path from here and that monetary policy would be particularly data dependent, lessening expectations somewhat of an additional increase at the BoC s next meeting in October. The BoC laid out several key issues it will be monitoring, including economic capacity, inflation and technology, wage growth and elevated household debt, highlighting that they aim to proceed cautiously with future interest rate increases. The portfolio manager anticipates that the next increase may come at the end of or early in Going forward, the Fund s term-to-maturity will be adjusted in a timely manner in response to the portfolio manager s assessment of the economy and any anticipated changes in interest rates in Canada, while emphasizing high-quality government and corporate holdings to help enhance returns. Subsequent Event Multi-Series Structure Change On November 21,, 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

3 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 Trades in Bank of Montreal Debt Securities in the Secondary Market During the Period, the Manager relied on an approval and standing instruction provided by the Fund s IRC with respect to investments in debt securities of BMO, an affiliate of the Manager, in the secondary market (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 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. 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 M Units Series F Units Series I Units Classic Series Units * 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.

4 FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the periods indicated. The Fund s Net Assets per Unit (1) Series A Units Total expenses $ from operations (2) $ (excluding dividends) $ Total Annual Distributions (3) $ Advisor Series Units Total expenses $ from operations (2) $ (excluding dividends) $ Total Annual Distributions (3) $ Series M Units Total expenses $ from operations (2) $ (excluding dividends) $ Total Annual Distributions (3) $ Series F Units Total expenses $ from operations (2) $ (excluding dividends) $ Total Annual Distributions (3) $

5 Premium Series Units (4) )(5) ) Net assets, beginning of period $ )* Total revenue $ Total expenses $ for the period $ for the period $ from operations (2) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (3) $ Net assets, end of period $ 1.00 Series I Units Total expenses $ from operations (2) $ (excluding dividends) $ Total Annual Distributions (3) $ Classic Series Units Total expenses $ from operations (2) $ (excluding dividends) $ Total Annual Distributions (3) $ * Initial net assets. (1) This information is derived from the Fund s audited financial statements. The financial information presented for the periods ended September 30,, September 30,, September 30, and September 30, is derived from the financial statements determined in accordance with IFRS. Information for periods prior to October 1, is derived from prior period financial statements prepared in accordance with Canadian GAAP. (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 either paid in cash or reinvested in additional units of the Fund, or both. (4) The information shown in this column is for the period beginning February 18, (the series inception date) and ending September 30,. (5) As at the close of business on October 30,, the Premium Series was terminated. Ratios and Supplemental Data Series A Units Total net asset value (000 s) (1) $ 309, , , , ,885 outstanding (000 s) (1) 309, , , , ,885 (2) % before waivers or absorptions %

6 Advisor Series Units Total net asset value (000 s) (1) $ 46,401 49,381 55,731 42,631 58,963 outstanding (000 s) (1) 46,401 49,381 55,731 42,631 58,963 (2) % before waivers or absorptions % Series M Units Total net asset value (000 s) (1) $ 167, , , , ,900 outstanding (000 s) (1) 167, , , , ,900 (2) % before waivers or absorptions % Series F Units Total net asset value (000 s) (1) $ 1, , outstanding (000 s) (1) 1, , (2) % before waivers or absorptions % Premium Series Units (3) )(4) ) Total net asset value (000 s) (1) $ 1 outstanding (000 s) (1) 1 (2) % before waivers or absorptions % 0.13 Net asset value per unit $ 1.00 Series I Units Total net asset value (000 s) (1) $ 24,247 18,957 30,182 12,423 10,398 outstanding (000 s) (1) 24,247 18,957 30,182 12,423 10,398 + % before waivers or absorptions + % Classic Series Units Total net asset value (000 s) (1) $ 1,524 1,850 2,369 2,976 3,695 outstanding (000 s) (1) 1,524 1,850 2,369 2,976 3,695 (2) % before waivers or absorptions % 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) 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 information shown in this column is for the period beginning February 18, (the series inception date) and ending September 30,. (4) As at the close of business on October 30,, the Premium Series was terminated. 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 20, 2009, BMO Guardian Canadian Money Market Fund merged into the Fund. On June 22, 2012, BMO Canadian Money Market Fund, BMO Premium Money Market Fund and BMO T-Bill Fund merged into the Fund. On July 3,, the BMO LifeStage Plus Fund, which reached its target maturity date of June 30,, merged into the Fund on a tax deferred basis. On June 30,, the BMO LifeStage Plus Fund, which reached its target maturity date of June 30,, merged into the Fund on a tax deferred basis. These changes could have affected the performance of the Fund, had they been in effect throughout the performance measurement periods presented.

7 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 F Units Series A Units Series I Units 2010 (1) Advisor Series Units (2) Classic Series Units Series M Units 2010 (1) (1) (1) For the period beginning with the performance launch date of November 11, 2009 to September 30, (2) For the period beginning with the performance launch date of May 10, 2010 to September 30, (3) For the period beginning with the performance launch date of April 16, 2012 to September 30, (3)

8 SUMMARY OF INVESTMENT PORTFOLIO As at September 30, % of Net Portfolio Allocation Asset Value Corporate Bonds 29.5 Commercial Paper 25.9 Treasury Bills Provincial 14.6 Provincial Bonds 7.1 Treasury Bills Federal 5.2 Bearer Deposit Notes 5.0 Bankers Acceptances 3.2 Term Deposit Receipts 3.2 Money Market Provincial 2.1 Asset-Backed Securities 2.0 Treasury Bills Municipal 1.8 Money Market Municipal 0.3 Cash/Receivables/Payables 0.1 Total Portfolio Allocation % of Net Top 25 Holdings Asset Value Issuer Bank of Nova Scotia, Deposit Notes, Senior, Unsecured, 2.37, Jan 11, Royal Bank of Canada, Term Deposit Receipts, 0.95 Oct 2, 3.2 Canadian Imperial Bank of Commerce, Unsecured, Notes, 2.22, Mar 7, Storm King Funding, Commercial Paper, 1.284% Nov 22, 2.7 Province of Ontario, Stripped, Dec 2, 2.7 Ontario Hydro Corporation, Stripped, Oct 15, 2.5 Toronto-Dominion Bank, The, Deposit Notes, Senior, Unsecured, 2.171%, Apr 2, Prime Trust, Commercial Paper, 1.20 Oct 10, 2.5 EPCOR Utilities Inc., Medium Term Notes, Senior, Unsecured, 5.80, Jan 31, Province of Newfoundland and Labrador Canada, Treasury Bills, 0.90 Nov 9, 2.2 Government of Canada, Treasury Bills, 0.953% Dec 14, 2.2 National Bank of Canada, Deposit Notes, Senior, Unsecured, 1.951%, Dec 11, 2.1 Glacier Credit Card Trust, Series , Credit Card Asset-Backed, Senior, Notes, 2.394%, Oct 20, 2.1 Province of Newfoundland and Labrador Canada, Treasury Bills, 0.896% Nov 2, 2.0 Bank of Nova Scotia, Senior, Unsecured, Notes, 2.242%, Mar 22, Canadian Western Bank, Deposit Notes, Senior, Unsecured, 2.531%, Mar 22, Ontario School Boards Financing Corporation, Series O2A1, Unsecured, Debentures, 5.70, Oct 11, 1.9 Canadian Imperial Bank of Commerce, Deposit Notes, Unsecured, Floating Rate, Feb 2, OMERS Finance Trust, Commercial Paper, 1.09 Oct 4, 1.8 Municipal Finance Authority of British Columbia, Commercial Paper, 1.09 Oct 11, 1.8 Government of Canada, Treasury Bills, 0.737% Nov 16, 1.8 Province of Manitoba, Treasury Bills, 1.00 Oct 4, 1.7 Province of Newfoundland and Labrador Canada, Treasury Bills, 0.889% Nov 16, 1.5 Vancouver City Savings Credit Union, Bearer Deposit Notes, 1.049% Oct 4, 1.4 Canadian Imperial Bank of Commerce, Unsecured, Notes, 2.35, Oct 18, 1.3 Top Holdings as a Percentage of Total Net Asset Value 54.3 Total Net Asset Value $550,691,728 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.