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 objective is to seek to preserve the value of your investment and provide some potential for growth while seeking to reduce portfolio volatility by investing primarily, directly or indirectly, in global equities and fixed income securities. The portfolio manager employs a strategic asset allocation strategy and may invest up to 10 of the Fund s assets in securities of exchange traded funds and other mutual funds, including funds that are managed by the Manager or one of its affiliates. The portfolio manager will allocate assets among the underlying mutual funds and/or exchange traded funds based on each underlying fund s investment objectives and strategies, among other factors. 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 $840 million to approximately $848 million. Series A shares of the Fund returned -0.5 versus the Fund s blended benchmark, composed of 7 FTSE TMX Canada Universe Bond Index and 2 Chicago Board Options Exchange S&P 500 Total Return Collar Index (US$), return of 0.93%. Please see the Past Performance section for information on the performance returns of the Fund s other series. During the Period, the outcome of the U.S. presidential election resulted in a stock rally in many countries, including Canada. Investors expected increased fiscal spending, tax reforms and deregulation in the U.S. These changes were expected to result in higher consumer demand in the U.S. and contribute to global growth. However, while improved market sentiment lifted Canadian equities, the rally was short lived as investors were disappointed by the new U.S. administration s lack of progress. While much of the weakness in Canadian stocks can be attributed to external factors, concerns of overheating in the housing market and issues at Home Capital Group Inc. also resulted in weaker investor appetite for Canadian equities. However, as economic expansion continued to show resilience, as demonstrated by employment gains, improving manufacturing activity and widespread improvements in gross domestic product, Canadian stocks became more appealing. In the third quarter, Canadian Financials stocks registered strong performance as interest rates rose in response to two interest rate increases by the Bank of Canada (BoC ). Canadian banks responded by increasing their prime rate, which should support earnings generated from consumer loans. Meanwhile, members of the Organization of the Petroleum Exporting Countries ( OPEC ) and other parties, which agreed to cut oil production, continued to monitor compliance with their quotas. OPEC believes the cuts have already helped reduce global oil supply, which could support oil prices. Overall, Canadian equities, as represented by the S&P/TSX Composite Total Return Index, delivered a 9.2% gain over the Period.

2 The S&P 500 Index ( S&P 500 ), representing the performance of U.S. equities, registered strong performance, posting a 18.6% gain in U.S. dollar terms and 12.8% in Canadian dollar terms. A number of equity sectors delivered doubledigit gains, demonstrating the breadth of the U.S. equity rally. Information Technology and Financials stocks led other sectors, gaining 28.9% and 36.2%, respectively, while Energy and Telecommunication Services were the sector laggards. While the S&P 500 made significant advances after the U.S. presidential election at the end of 2016, it had relatively stable performance over the Period. EAFE equities delivered solid returns over the Period, posting double-digit gains in both local-currency terms and Canadian dollar terms. Global investors continued to expect momentum in both economic activity and capital markets in EAFE regions, particularly Europe. The market-friendly outcome of the French elections in early, coupled with improving economic data, lifted European equities. Meanwhile, Purchasing Managers Index numbers in both Europe and Japan remained above 50, pointing to continued economic expansion. The Fund s fixed income holdings contributed the most to its relative performance. The fixed income holdings protected against the downturn in the broad fixed income market when the BoC unexpectedly raised interest rates. An overweight allocation to equities contributed to performance, as equities outperformed fixed income. The Fund s short duration (i.e., interest rate sensitivity) relative to the benchmark also contributed to performance as interest rates rose. Other contributors included an overweight exposure to corporate bonds. Exposure to low-volatility equities detracted the most from the Fund s relative performance, as these securities underperformed the broader market. As interest rates rose, low-volatility equities were impacted as they tend to be more sensitive to interest rate movements than the broader market. The Fund s protective option overlay also detracted from performance, as equity markets rose. The cost of implementing the protective option overlay will generally weigh on performance during periods of equity market growth. The portfolio manager added to the Fund new exposures to U.S. quality-factor equities, various U.S., Canadian and international equities, and emerging markets equities. These were added to lower the Fund s exposure to lowvolatility equities in a rising interest rate environment, and to reduce the Fund s interest rate sensitivity. Unhedged international equity exposure was increased, but international equities that are hedged to the Canadian dollar were eliminated in favour of unhedged holdings. The portfolio manager also trimmed positions in protected equities. The Fund s exposure to equities with the protective option overlay was reduced in favour of unprotected equity exposure, for more growth potential. 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 The portfolio manager expects U.S. and Canadian interest rates to continue to rise at a moderate pace. As such, the Fund s fixed income holdings have duration shorter than the broader market to protect against any fluctuations in fixed income markets. Continued global economic growth is expected, which should lift consumer spending and business investment. The Fund holds an overweight allocation to international equities and is well positioned to take advantage of continued economic growth globally. The Fund continues to provide exposure to a protective option overlay that will protect the portfolio s equity market exposure from a significant sell-off. Should there be any weakness in the equity market, particularly U.S. equities, the option overlay should provide an element of protection. 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

3 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 Conducting Inter-Fund Trades During the Period, the Manager relied on an approval and standing instruction provided by the Fund s IRC with respect to conducting inter-fund trades (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. 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, Sep. 30, 2016 $000 $000 Total brokerage commissions $ Brokerage commissions paid to BMO Nesbitt Burns Inc. $ 8 8 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 T4 Units Series T6 Units Series F Units Series F4 Units Series F6 Units Series D Units Series I 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 2016 Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Advisor Series Units 2016 Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Series T4 Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ 0.03 From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Series T6 Units 2016 Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $

5 Series F Units 2016 Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Series F4 Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ 0.03 From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Series F6 Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ 0.05 From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Series D Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ 0.12 From dividends $ 0.01 From capital gains $ 0.00 Return of capital $ 0.01 Total Annual Distributions (4) $ 0.14 Net assets, end of period $

6 Series I Units Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ 0.14 From dividends $ 0.00 From capital gains $ 0.02 Return of capital $ 0.01 Total Annual Distributions (4) $ 0.17 Net assets, end of period $ * Initial net assets. (1) This information is derived from the Fund s audited financial statements. (2) Includes commissions and other portfolio transaction costs and withholding taxes. (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 31, the Fund s tax year-end. Accordingly, the actual allocation among income, dividends, capital gains and return of capital may differ from these estimates. The information shown in this column is for the period beginning August 18, 2015 (the series inception date) and ending September 30, The information shown in this column is for the period beginning April 19, 2016 (the series inception date) and ending September 30, Ratios and Supplemental Data Series A Units 2016 Total net asset value (000 s) (1) $ 709, ,817 12,560 outstanding (000 s) (1) 70,117 69,867 1,258 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Advisor Series Units 2016 Total net asset value (000 s) (1) $ 54,157 48, outstanding (000 s) (1) 5,352 4, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series T4 Units Total net asset value (000 s) (1) $ 8,381 5,635 outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series T6 Units 2016 Total net asset value (000 s) (1) $ 21,903 29, outstanding (000 s) (1) 2,437 3, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series F Units 2016 Total net asset value (000 s) (1) $ 51,463 37, outstanding (000 s) (1) 5,005 3, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $

7 Series F4 Units Total net asset value (000 s) (1) $ 1,991 3,436 outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series F6 Units Total net asset value (000 s) (1) $ outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series D Units Total net asset value (000 s) (1) $ outstanding (000 s) (1) 12 1 (2) % 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) $ 0 0 outstanding (000 s) (1) % before waivers or absorptions + % 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) 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 10 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. For the financial period-ended September 30, 2015, no sales of portfolio securities were made by the Fund. As a result, the portfolio turnover rate for this period was zero. The information shown in this column is for the period beginning August 18, 2015 (the series inception date) and ending September 30, The information shown in this column is for the period beginning April 19, 2016 (the series inception date) and ending September 30, 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. 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 - Advisor Series Units (1) (1)

8 Series T4 Units Series F6 Units (2) (2) Series T6 Units Series D Units (1) (2) Series F Units Series I Units (1) (2) Series F4 Units (1) For the period beginning with the performance launch date of August 25, 2015 to September 30, (2) For the period beginning with the performance launch date of April 28, 2016 to September 30, (2)

9 Annual Compound Returns This table compares the historical annual compound returns of the Fund with its blended benchmark (composed of 7 FTSE TMX Canada Universe Bond Index and 2 Chicago Board Options Exchange S&P 500 Total Return Collar Index ( CBOE SP CLL ) (US$)), in addition to the FTSE TMX Canada Universe Bond Index, a broad-based index. The FTSE TMX Canada Universe Bond Index is a broad measure of the total return of Canadian bonds that mature in more than one year. The CBOE SP CLL (US$) reflects the price movements of securities listed on the S&P 500 Index along with price movements from selling index call options at 1 of the index value, and each quarter purchase index put options at 9 of the index value. Series A Units year years years years Inception (1) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Advisor Series Units year years years years Inception (1) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series T4 Units year years years years Inception (2) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series T6 Units year years years years Inception (1) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series F Units year years years years Inception (1) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series F4 Units year years years years Inception (2) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series F6 Units year years years years Inception (2) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series D Units year years years years Inception (2) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % Series I Units year years years years Inception (2) BMO Retirement Income Portfolio % Blended Benchmark % FTSE TMX Canada Universe Bond Index % (1) Return from the performance launch date of August 25, 2015 to September 30,. (2) Return from the performance launch date of April 28, 2016 to September 30,. As noted above, the table shows a comparison of the historical annual compound returns of the Fund with the FTSE TMX Canada Universe Bond 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 blended benchmark is a better reflection of the asset mix of the underlying investments within the Fund s portfolio. 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.

10 SUMMARY OF INVESTMENT PORTFOLIO As at September 30, % of Net Portfolio Allocation Asset Value Fixed Income Fund 72.0 U.S. Equity Funds 24.7 International Equity Funds 1.9 Canadian Equity Funds 0.6 Emerging Market Fund 0.5 Cash/Receivables/Payables 0.3 Total Portfolio Allocation % of Net Holdings*+ Asset Value Issuer BMO Risk Reduction Fixed Income Fund, Series I 72.0 BMO Risk Reduction Equity Fund, Series I 21.5 BMO Low Volatility US Equity ETF 1.7 BMO Low Volatility International Equity ETF 1.4 BMO MSCI USA High Quality Index ETF 1.0 BMO Low Volatility Emerging Markets Equity ETF 0.5 BMO MSCI EAFE Index ETF 0.5 BMO S&P 500 Index ETF 0.5 BMO Low Volatility Canadian Equity ETF 0.4 Cash/Receivables/Payables 0.3 BMO S&P/TSX Capped Composite Index ETF 0.2 Total Holdings as a Percentage of Total Net Asset Value Total Net Asset Value $847,998,090 *Represents entire portfolio. +The prospectus and other information about the underlying investment funds held in the portfolio are available on the internet at and, also at and +The prospectus and other information about the underlying exchange traded funds held in the portfolio are available on the internet at and, also at The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.