2018 Semi-Annual Management Report of Fund Performance

Transcription

1 (the Fund ) For the six-month period ended March 31, 2018 (the Period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio manager: BMO Asset Management Inc., Toronto, Ontario (the portfolio manager ) Sub-advisor: F&C Management Limited, London, England 2018 Semi-Annual Management Report of Fund Performance This semi-annual management report of fund performance contains financial highlights but does not contain the complete 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 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 Results of Operations During the Period, the Fund s total net asset value changed from approximately $141 million to approximately $144 million. Series A units of the Fund returned -1.21%. Please see the Past Performance section for information on the performance returns of the Fund s other series. During the Period, emerging market bonds, as measured by the JPMorgan EMBI Global Diversified Index ( Index ), returned Emerging market bond spreads (the difference in yield between bonds in the Index and U.S. Treasury bonds of similar maturity) ended 2017 marginally tighter, despite the rise in U.S. Treasury rates, but widened by 19 basis points during the first quarter of Bond spread widening was fuelled by equity market volatility, driven by fears of a trade war between China and the U.S. The 10-year U.S. Treasury yield began the Period at 2.33%, climbing to 2.9 in mid-february, and then falling to 2.74% at the end of March. The increase in core rates can be explained by a number of factors. These include solid inflation and wage data reports, a more optimistic outlook for the U.S. economy and the appointment of Jerome Powell as Chair of the U.S. Federal Reserve Board. In addition, there were concerns surrounding the implications of U.S. President Trump s fiscal plans and their potential impact on inflation and U.S. Treasury issuance. Commodity prices remained robust, particularly oil, the price of which increased by over 2 during the Period. Generally speaking, the oil price rebound had a positive impact on the performance of commodity exporters. Overall, regional allocation contributed to the Fund s performance, which included an underweight allocation to Asia as the region underperformed, an overweight exposure to the Middle East, North Africa and Europe early in the Period as these regions outperformed. The overweight position in Europe was later significantly reduced, and a lack of exposure to Venezuela early in the Period, and a slightly underweight allocation to the country from February onwards, also contributed to the Fund s performance. Venezuela defaulted on its debt payments in the fourth quarter of Early in the Period, the Fund held an underweight allocation to the Philippines, and later in the Period, an overweight exposure to Brazil, both of which contributed to performance. Top individual contributors to performance were Ecopetrol S.A., 5.87 due May 28, 2045, Republic of Côte d Ivoire, 6.13 due June 15, 2033, Federal Democratic Republic of Ethiopia 6.63 due December 11, 2024, Petroleos de Venezuela S.A., 6.00 due May 16, 2024, Petroleos de Venezuela S.A., due November 15, 2026 and Sri Lanka, 6.00 due January 14, In Venezuela, the Fund was positioned in the more defensive, lowest-price bonds. These outperformed in the first quarter of 2018 as a result of higher oil prices and the possibility of elections later this year. The positions in these bonds maturing in 2024 were reduced following this price increase. Sri Lanka underperformed after local election results went against the government, undermining commitment to the International Monetary Fund s reform program.

2 Early in the Period, overweight allocations to Mexico and Turkey detracted from performance as those countries underperformed. Later in the period, an overweight exposure and security selection in the Ivory Coast had a negative impact on performance as the country underperformed. Early in the period, the Fund s quality profile versus the benchmark detracted from relative performance. The Fund had a higher-quality profile than the benchmark, but noninvestment-grade bonds, in particular B-rated issuers, outperformed investment-grade bonds in the fourth quarter of The largest individual detractors from performance were Alfa S.A.B., 6.87 due March 25, 2044, Mexico City Airport Trust, 5.50 due July 31, 2047 and Kingdom of Saudi Arabia, 4.50 due October 26, 2046, Republic of Ecuador, 7.87 due January 23, 2028, Republic of Côte d Ivoire, 6.12 due June 15, 2033 and Kazakhstan Temir Zholy, 6.95 due July 10, The Fund s underweight allocation to the Ecuador bond detracted from performance as the country generally outperformed as oil prices rose. An overweight exposure to the Ivory Coast detracted from performance as general risk sentiment turned negative. As the Ivory Coast had outperformed in the final months of 2017, this year saw some profit taking. The portfolio manager made two notable trades. A new position in Mexico City Airport Trust, 5.50 due July 31, 2047 was introduced. The company has very strong links with the country s sovereign debt because of its indirect ownership by the Mexican government. This much-needed airport build project s finance has been secured on airport passenger taxes. Furthermore, the company s debt servicing takes seniority over cash flow for operating costs. In addition, the portfolio manager also purchased Nigerian Treasury bills that mature in 2018 and are denominated in the Nigerian currency. Nigerian local currency rates offer an annual yield-to-maturity of 14%, which is attractive in real terms, especially as inflation is expected to remain on a declining trajectory. Saudi Arabian government bonds maturing in 2021 were also purchased. Although there seems to be little political will to plug the country s fiscal gap, budget assumptions versus actual oil prices are supportive of the bonds. The portfolio manager has a positive outlook for the country s external balance with the current account in surplus, and over US$530 billion in reserves. New Peruvian bonds, maturing in 2027, were purchased. The resignation of President Pedro Pablo Kuczynski was swiftly followed by appointment of a new president, thus reducing the political uncertainty that has negatively impacted the country s credit in recent months. The portfolio manager decided to take profit on the Fund s underweight position. Mexican quasi-sovereign Petroleos Mexicanos ( PEMEX ) bond maturities in 2045 were eliminated from the Fund in order to reduce exposure to Mexico. As uncertainty regarding the North American Free Trade Agreement ( NAFTA ) continues, the potential for an election win by Andrés Manuel López Obrador adds to the demand for a higher spread, not least for PEMEX. In February, exposure to Brazil was reduced via the sale of Brazilian sovereign bonds maturing in 2026 and The reduction is based on the portfolio manager s assessment of the economic recovery in the country, which was seen as less strong than previously thought. In addition, there is increased political risk in the run-up to the country s election. The Manager confirms that the Fund did not borrow money during the Period. Sub-Advisor Change Effective January 31, 2018, F&C Management Limited, an affiliate of the Manager, replaced Taplin, Canida & Habacth, LLC as sub-advisor for the Fund. For information on the Fund s performance and composition, please refer to the Past Performance section and Summary of Investment Portfolio section of this report. Recent Developments Crude oil prices are expected to be supported by the Organization of the Petroleum Exporting Countries agreement to cap global production, at least for the first half of Based on this outlook, the portfolio manager has increased the Fund s exposure to Saudi Arabia, the country with the world s highest oil exports. Saudi Arabia also has other positive developments, and attractive bond valuations. Emerging market sovereign debt issuance is running at record volumes, having reached US$175 billion in The portfolio manager has been cautious about increasing exposure to countries which are due to issue, including Pakistan and Sri Lanka. Since the U.S. administration has adopted an aggressive approach to unwinding free trade, including NAFTA renegotiations, the portfolio manager will maintain an underweight exposure to Mexico, while the Fund s exposure to lower-rated bonds in general has been trimmed as the threat to global trade escalates.

3 Subsequent Event Risk Rating Change The risks associated with an investment in the Fund remain as disclosed in the Fund s most recent simplified prospectus or any amendments and fund facts document. During the Period there were no changes to the Fund that materially affected the overall risk level associated with an investment in the Fund. However, beginning in May 2018 the Fund s investment risk level is being determined by calculating the Fund s ten-year standard deviation in accordance with the investment risk classification methodology under National Instrument Investment Funds, which came into force effective September 1, If the Fund does not have at least ten years of performance history, a reference index that is expected to reasonably approximate the Fund s standard deviation is used as a proxy for the remainder of the ten year period. In May 2018, the Manager reviewed the Fund using the new standardized investment risk classification methodology and determined that the risk rating of the Fund had not changed. The Manager reviews the Fund s investment risk level and reference index, if any, at least annually. 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 and F&C Management Limited, also an affiliate of the Manager, is a sub-advisor to BMOAM. 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 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 annual rate set out in the table below. As a Percentage of Management Fees General Annual Administration, Management Dealer Investment Fee Rate* Compensation Advice and Profit % % % Series A Units Advisor Series Units Series F 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 ) 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 $ Advisor Series Units ) 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 $ Series F Units ) 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 $ Series D Units 2014) 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 $

5 Series I Units ) 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 $ * Initial net assets. (1) This information is derived from the Fund s unaudited and audited financial statements. The financial information presented for the periods ended March 31, 2018, September 30, 2017, September 30, 2016, September 30, 2015 and September 30, 2014 is derived from the financial statements determined in accordance with IFRS. Information for periods prior to October 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. (2) 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. 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 March 31 or September 30 of the period shown, as applicable, 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 7, 2013 (the series inception date) and ending September 30, The information shown in this column is for the period beginning April 7, 2014 (the series inception date) and ending September 30, Ratios and Supplemental Data Series A Units ) Total net asset value (000 s) (1) $ 1,960 1,722 1,772 3,562 3,807 3,372 outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate % Net asset value per unit $ Advisor Series Units ) Total net asset value (000 s) (1) $ 1,713 1,907 2,212 2, outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate % Net asset value per unit $ Series F Units ) Total net asset value (000 s) (1) $ outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate % Net asset value per unit $

6 Series D Units (6) 2014) Total net asset value (000 s) (1) $ outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate % Net asset value per unit $ Series I Units ) Total net asset value (000 s) (1) $ 139, , , , ,855 7,866 outstanding (000 s) (1) 13,864 13,223 20,366 22,001 13, % before waivers or absorptions + % 0.00 Trading expense ratio (3) % Portfolio turnover rate % 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 March 31 or 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. For all financial periods listed, no commissions or portfolio transaction costs were incurred by the Fund. As a result, the trading expense ratio for all periods was zero. 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. The information shown in this column is for the period beginning August 7, 2013 (the series inception date) and ending September 30, (6) The information shown in this column is for the period beginning April 7, 2014 (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. On January 31, 2018, F&C Management Limited, an affiliate of the Manager, replaced Taplin, Canida & Habacht, LLC as sub-advisor for the Fund. This change could have affected the performance of the Fund had it been in effect throughout the performance measurement periods presented. Year-by-Year Returns The following bar charts show the performance of each series of the Fund for each of the financial years shown and for the six-month period ended March 31, 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 (1) (3)

7 Advisor Series Units (1) (3) Series F Units (1) (3) Series D Units (2) (3) Series I Units (1) (3) (1) For the period beginning with the performance launch date of August 12, 2013 to September 30, (2) For the period beginning with the performance launch date of April 8, 2014 to September 30, (3) For the six-month period ended March 31, 2018.

8 SUMMARY OF INVESTMENT PORTFOLIO As at March 31, 2018 % of Net Portfolio Allocation Asset Value Government Bonds 65.9 Corporate Bonds 24.4 Cash/Receivables/Payables 8.7 Supranational Bonds 1.0 Total Portfolio Allocation % of Net Top 25 Holdings Asset Value Issuer Cash/Receivables/Payables 8.7 Kingdom of Saudi Arabia, Senior, Unsecured, 2.87 Mar 4, State Grid Overseas Investment (2016) Limited, Senior, Unsecured, Notes, 3.50 May 4, Kingdom of Saudi Arabia, Euro Medium Term Notes, Senior, Unsecured, 2.37 Oct 26, Republic of Panama, Senior, Unsecured, 8.87 Sep 30, Dominican Republic, Series 144A, Sinking Funds, Senior, Unsecured, 5.87 Apr 18, Export Credit Bank of Turkey, Series 144A, Senior, Unsecured, Notes, 5.00 Sep 23, Federative Republic of Brazil, Senior, Unsecured, Callable, 4.62 Jan 13, Republic of Croatia, Series 144A, Senior, Unsecured, 5.50 Apr 4, China Cinda Finance, Series 144A, Senior, Unsecured, Notes, 5.62 May 14, Republic of Honduras, Senior, Unsecured, 6.25 Jan 19, Petroleos Mexicanos, Senior, Unsecured, Notes, 4.25 Jan 15, Republic of Argentina, Euro Medium Term Notes, Senior, Unsecured, 5.62 Jan 26, Magyar Export-Import Bank zrt., Series 144A, Senior, Unsecured, Notes, 4.00 Jan 30, KazMunayGas National Co JSC, Series 144A, Senior, Unsecured, Notes, 3.87 Apr 19, Federative Republic of Brazil, Senior, Unsecured, 6.00 Apr 7, Federative Republic of Brazil, Senior, Unsecured, 5.62 Feb 21, Republic of Indonesia, Senior, Unsecured, 4.75 Jan 8, Republic of Indonesia, Senior, Unsecured, 4.87 May 5, Colombia Telecomunicaciones S.A. E.S.P., Senior, Unsecured, Notes, Callable, 5.37 Sep 27, Mongolian People s Republic, Senior, Unsecured, 5.12 Dec 5, % of Net Top 25 Holdings Asset Value Issuer Petrobras Global Finance B.V., Senior, Unsecured, Notes, 5.299% Jan 27, Republic of Argentina, Senior, Unsecured, 6.87 Jan 11, Republic of Argentina, Sinking Funds, Unsecured, Multi-Couponed, 2.50 Dec 31, Republic of Guatemala, Senior, Unsecured, 4.87 Feb 13, Top Holdings as a Percentage of Total Net Asset Value 46.7 Total Net Asset Value $143,880,952 The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

9 BMO Investments Inc. First Canadian Place, 43rd Floor 100 King Street West Toronto, Ontario M5X 1A1 and If you have any questions, please give us a call as follows: If you purchased BMO Mutual Funds through a BMO Bank of Montreal branch or BMO Online Banking, please call If you purchased BMO Mutual Funds through a full-service or discount broker, please call or clientservices.mutualfunds@bmo.com. 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 Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal. BMO (M-bar roundel symbol) registered trademark, and BMO (M-bar roundel symbol) Mutual Funds are owned by Bank of Montreal, used under license.