RP Strategic Income Plus Fund. Annual Audited Financial Statements December 31, 2017

Transcription

1 Annual Audited Financial Statements December 31, 2017

2 Table of Contents Title Page Independent Auditor's Report 1 Statement of Financial Position 3 Statement of Comprehensive Income 4 Statement of Changes in Net Assets Attributable to Holders of Redeemable Units 5 Statement of Cash Flows 6 Schedule of Investment Portfolio

3 Deloitte LLP Bay Adelaide East 8 Adelaide Street West Suite 200 Toronto ON M5H 0A9 Tel: Fax: Independent Auditor s Report To the Unitholders of RP Strategic Income Plus Fund We have audited the accompanying financial statements of RP Strategic Income Plus Fund, which comprise the statement of financial position as at December 31, 2017, and the statements of comprehensive income, changes in net assets attributable to holders of redeemable shares, and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of RP Strategic Income Plus Fund as at December 31, 2017, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Chartered Public Accountants Licensed Public Accountants March 22, 2018

5 Statement of Financial Position As at December 31 Assets Current assets $ $ Investments at fair value 911,027, ,370,394 Cash 174,549,752 62,208,390 Receivable for investments sold 31,326,778 2,451,226 Interest receivable 7,545,341 5,557,861 Derivative assets 3,245,721 1,704,777 Subscriptions receivable 364,763 2,346,290 Operating fees rebate receivable (Note 8) 282,722 - Prepaid fund expenses (Note 8) - 7,688 Total assets 1,128,342, ,646,626 Liabilities Current liabilities Investments sold short at fair value 32,947,033 27,415,945 Payable for investments purchased 47,789,667 2,645,176 Management fees payable (Note 8) 447,613 91,189 Interest payable 415,583 54,276 Operating fees payable (Note 8) 249, ,438 Redemptions payable 153,272 25,100 Derivative liabilities 129,169 2,674,859 Total liabilities 82,131,666 33,066,983 Net assets attributable to holders of redeemable units 1,046,211, ,579,643 Net assets attributable to holders of redeemable units per class Class A 66,327,155 16,072,664 Class F 442,904, ,483,218 Class O 536,980, ,023,761 1,046,211, ,579,643 Net assets attributable to holders of redeemable units per unit Class A Class F Class O Approved by the Trustee, RP Investment Advisors LP Chief Executive Officer RP Investment Advisors LP, By its general partner, RP Investment Advisors GP Inc. The accompanying notes are an integral part of these financial statements 3

6 Statement of Comprehensive Income For the year ended December 31, 2017 and for the period from February 26, 2016 to December 31, $ $ Income Interest income for distribution purposes 34,105,965 12,628,350 Derivative income 23,831 - Dividend income 16, ,724 Changes in fair value of investments, derivatives and cash Net realized gain (loss) 34,069,318 8,369,451 Net change in unrealized gain (loss) (15,279,706) 4,028,843 Total income 52,936,023 25,186,368 Expenses Interest on securities sold short and loan fees 896, ,435 Management fees (Note 8) 3,464, ,196 Operating fees (Note 8) 2,252, ,423 Tax expenses (Note 8) 347, ,946 Trade fees expenses 211,103 85,381 Fund expenses (Note 8) 174,557 32,312 Total expenses 7,347,261 1,693,693 Operating fees rebate (Note 8) (282,722) - Net expenses 7,064,539 1,693,693 Increase (decrease) in net assets attributable to holders of redeemable units 45,871,484 23,492,675 Increase (decrease) in net assets attributable to holders of redeemable units per class Class A 1,537, ,760 Class F 11,093,334 1,756,903 Class O 33,240,847 21,488,012 45,871,484 23,492,675 Increase (decrease) in net assets attributable to holders of redeemable units per unit Class A Class F Class O The accompanying notes are an integral part of these financial statements 4

7 Statement of Changes in Net Assets Attributable to Holders of Redeemable Units For the year ended December 31, 2017 and for the period from February 26, 2016 to December 31, Class A Class F Class O Total $ $ $ $ Net assets attributable to holders of redeemable units at beginning of year 16,072, ,483, ,023, ,579,643 Increase (decrease) in net assets attributable to holders of redeemable units 1,537,303 11,093,334 33,240,847 45,871,484 Distribution to holders of redeemable units from net investment income (1,255,296) (9,041,064) (18,263,363) (28,559,723) from dividends (921) (6,100) (9,594) (16,615) from net realized gains (1,293,665) (8,569,303) (13,476,218) (23,339,186) from operating fees rebate (17,918) (119,649) (145,155) (282,722) (2,567,800) (17,736,116) (31,894,330) (52,198,246) Redeemable unit transactions Proceeds from redeemable units issued 62,712, ,960,415 80,027, ,700,071 Reinvestments of distribution to holders of redeemable units 2,193,603 12,496,722 27,330,428 42,020,753 Switch in (out) (4,172,104) 4,596,581 (424,477) - Redemption of redeemable units (9,448,729) (37,990,045) (117,323,612) (164,762,386) 51,284, ,063,673 (10,390,223) 379,958,438 Net increase (decrease) in net assets attributable to holders of redeemable units 50,254, ,420,891 (9,043,706) 373,631,676 Net assets attributable to holders of redeemable units at end of year 66,327, ,904, ,980,055 1,046,211, Class A Class F Class O Total $ $ $ $ Net assets attributable to holders of redeemable units at beginning of period Increase (decrease) in net assets attributable to holders of redeemable units 247,760 1,756,903 21,488,012 23,492,675 Distribution to holders of redeemable units from net investment income (95,739) (660,522) (9,698,978) (10,455,239) from dividends (2,224) (14,416) (143,082) (159,722) from net realized gains (148,798) (964,521) (9,572,415) (10,685,734) (246,761) (1,639,459) (19,414,475) (21,300,695) Redeemable unit transactions Proceeds from redeemable units issued 16,934, ,976, ,648, ,559,879 Reinvestments of distribution to holders of redeemable units 165,112 1,318,213 19,414,475 20,897,800 Switch in (out) (446,764) 446, Redemption of redeemable units (581,034) (3,375,745) (113,237) (4,070,016) 16,071, ,365, ,950, ,387,663 Net increase (decrease) in net assets attributable to holders of redeemable units 16,072, ,483, ,023, ,579,643 Net assets attributable to holders of redeemable units at end of period 16,072, ,483, ,023, ,579,643 The accompanying notes are an integral part of these financial statements 5

8 Statement of Cash Flows For the year ended December 31, 2017 and for the period from February 26, 2016 to December 31, $ $ Cash flows from operating activities Increase (decrease) in net assets attributable to holders of redeemable units 45,871,484 23,492,675 Adjustment for: Net realized (gain) loss on investments (7,627,726) (10,559,322) Net change in unrealized (gain) loss on investments 19,322,343 (5,013,706) Purchases of investments (14,660,702,064) (5,769,861,617) Purchases to cover short positions (3,111,723,293) (897,891,568) Proceeds from sale of investments 14,365,833,222 5,153,486,870 Proceeds from investments sold short 3,120,771, ,884,894 (Increase) decrease in derivative assets (1,540,944) (1,704,777) (Increase) decrease in interest receivable (1,987,480) (5,557,861) (Increase) decrease in receivable for investments sold (28,875,552) (2,451,226) (Increase) decrease in operating fees rebate receivable (282,722) - (Increase) decrease in prepaid fund expenses 7,688 (7,688) Increase (decrease) in payable for investments purchased 45,144,491 2,645,176 Increase (decrease) in interest payable 361,307 54,276 Increase (decrease) in derivative liabilities (2,545,690) 2,674,859 Increase (decrease) in other liabilities 445, ,627 Net cash provided by (used in) operating activities (217,528,529) (584,557,388) Cash flows used in financing activities Proceeds from redeemable units issued 504,681, ,213,589 Amounts paid on redemption of redeemable units (164,634,214) (4,044,916) Distribution paid to holders of redeemable units, net of reinvested distributions (10,177,493) (402,895) Net cash provided by (used in) used in financing activities 329,869, ,765,778 Increase (decrease) in cash during the year 112,341,362 62,208,390 Cash - Beginning of year 62,208,390 - Cash - End of year 174,549,752 62,208,390 Supplementary information Interest received 32,118,485 7,070,489 Interest paid 535, ,159 Dividend received 16, ,724 The accompanying notes are an integral part of these financial statements 6

9 Schedule of Investment Portfolio Number of Local Average Cost Fair Shares/Par Value Security Description Currency (Proceeds) ($) Value ($) % Long-term Debt Securities 7,335,000 AERCAP IRELAND CAP/GLOBA 3.5% 01/15/2025 USD 9,397,107 9,132, % 2,500,000 AIR CANADA 4.75% 10/06/2023 CAD 2,550,800 2,601, % 20,000,000 ANHEUSER-BUSCH INBEV FIN 2.6% 05/15/2024 CAD 19,539,400 19,561, % 7,500,000 AT SECURITIES BV 5.25% 12/31/2049 USD 9,576,053 9,567, % 14,000,000 BANCO BILBAO VIZCAYA ARG 9% 12/31/2049 USD 18,253,471 18,033, % 10,000,000 BANK OF AMERICA CORP 2.604% 03/15/2023 CAD 9,980,100 9,939, % 5,750,000 BANK OF MONTREAL 3.803% 12/15/2032 USD 7,253,632 7,189, % 10,300,000 BARCLAYS PLC 6.625% 12/31/2049 USD 14,258,763 13,312, % 19,812,000 BAT CAPITAL CORP 3.222% 08/15/2024 USD 25,322,318 24,872, % 14,195,000 BECTON DICKINSON AND CO FLOATING 06/06/2022 USD 18,109,012 17,947, % 6,218,000 BELL CANADA 3.35% 03/22/2023 CAD 6,370,596 6,366, % 1,419,000 BGC PARTNERS INC 5.125% 05/27/2021 USD 1,884,597 1,875, % 985,000 BGC PARTNERS INC 5.375% 12/09/2019 USD 1,328,132 1,293, % 15,266,000 BRIGHTHOUSE FINANCIAL IN 3.7% 06/22/2027 USD 19,024,125 18,869, % 10,000,000 BROADCOM CRP / CAYMN FI 3.125% 01/15/2025 USD 12,319,106 12,025, % 20,000,000 BROADCOM CRP / CAYMN FI 3.625% 01/15/2024 USD 25,486,513 24,999, % 15,000,000 BROOKFIELD INFRA FIN ULC 3.315% 02/22/2024 CAD 14,935,210 14,920, % 20,695,000 CANADIAN GOVERNMENT 1% 09/01/2022 CAD 20,011,084 19,901, % 2,200,000 CANADIAN GOVERNMENT 2.75% 06/01/2022 CAD 2,285,118 2,285, % 12,327,000 CANADIAN NATL RAILWAY 3.6% 08/01/2047 CAD 12,636,805 12,568, % 16,400,000 CANADIAN NATL RESOURCES 3.42% 12/01/2026 CAD 16,193,980 16,100, % 8,213,000 CANADIAN NATL RESOURCES 4.85% 05/30/2047 CAD 8,469,173 8,471, % 6,019,000 CANADIAN WESTERN BANK 2.924% 12/15/2022 CAD 6,021,630 5,990, % 4,450,000 CANTOR FITZGERALD LP 7.875% 10/15/2019 USD 6,358,569 6,050, % 3,492,000 CITADEL LP 5.375% 01/17/2023 USD 4,456,565 4,521, % 4,000,000 CNX RESOURCES CORP 5.875% 04/15/2022 USD 5,085,552 5,154, % 3,630,000 CNX RESOURCES CORP 8% 04/01/2023 USD 4,852,415 4,890, % 5,000,000 CREDIT AGRICOLE SA 6.625% 12/31/2049 USD 6,743,023 6,541, % 4,700,000 DDR CORP 3.625% 02/01/2025 USD 5,966,505 5,818, % 3,000,000 DDR CORP 4.25% 02/01/2026 USD 3,938,657 3,831, % 13,000,000 DEUTSCHE BANK NY 4.875% 12/01/2032 USD 16,585,738 16,243, % 14,550,000 DEUTSCHE BANK NY FLOATING 11/16/2022 USD 18,659,557 18,330, % 9,300,000 E*TRADE FINANCIAL CORP 3.8% 08/24/2027 USD 11,875,083 11,692, % 11,700,000 ENBRIDGE INC 3.2% 06/08/2027 CAD 11,372,932 11,293, % 20,804,000 ENBRIDGE INC 5.375% 09/27/2077 CAD 20,917,600 20,704, % 14,560,000 ENBRIDGE INC CP 05/29/2018 CAD 14,314,373 14,457, % 4,800,000 ENBRIDGE INCOME FUND 3.94% 01/13/2023 CAD 5,008,067 4,977, % 16,000,000 ENBRIDGE INCOME FUND 4.87% 11/21/2044 CAD 16,442,310 16,645, % 9,235,000 ENERGY TRANSFER PARTNERS 6.25% 12/31/2049 USD 11,606,138 11,238, % 14,542,000 EQUIFAX INC 3.3% 12/15/2022 USD 18,105,559 18,264, % 1,250,000 EQUIFAX INC 6.9% 07/01/2028 USD 1,861,655 1,905, % 19,717,000 FAIRFAX FINL HLDGS LTD 4.25% 12/06/2027 CAD 19,739,972 19,552, % 4,000,000 FIRST CAP REALTY INC 4.323% 07/31/2025 CAD 4,246,400 4,190, % 5,651,000 FIRST CAP REALTY INC 4.79% 08/30/2024 CAD 6,161,342 6,100, % 16,881,000 FORD CREDIT CANADA CO 3.349% 09/19/2022 CAD 16,902,994 17,082, % 6,000,000 H&R REAL ESTATE INVESTME 2.923% 05/06/2022 CAD 5,964,810 5,921, % 2,000,000 HISTORIC TW INC 6.625% 05/15/2029 USD 3,256,532 3,183, % 16,145,000 HUSKY ENERGY INC 3.6% 03/10/2027 CAD 16,123,575 16,076, % 5,000,000 LLOYDS BANKING GROUP PLC 7.5% 12/31/2049 USD 7,231,058 7,127, % 3,000,000 METHANEX CORP 4.25% 12/01/2024 USD 3,882,233 3,823, % 4,350,000 MOLSON COORS INTL LP 2.84% 07/15/2023 CAD 4,351,315 4,287, % 13,451,000 MOLSON COORS INTL LP 3.44% 07/15/2026 CAD 13,541,250 13,219, % 11,000,000 MOSAIC CO 5.625% 11/15/2043 USD 15,442,171 14,991, % 6,000,000 NGPL PIPECO LLC 7.768% 12/15/2037 USD 9,174,153 9,337, % 2,850,000 NXP BV/NXP FUNDING LLC 3.875% 09/01/2022 USD 3,951,810 3,629, % 975,000 NXP BV/NXP FUNDING LLC 4.125% 06/01/2021 USD 1,370,171 1,254, % 4,003,000 NXP BV/NXP FUNDING LLC 4.125% 06/15/2020 USD 5,401,414 5,165, % 5,000,000 NXP BV/NXP FUNDING LLC 4.625% 06/15/2022 USD 6,922,760 6,587, % 9,500,000 OCH-ZIFF FINANCE CO LLC 4.5% 11/20/2019 USD 11,848,835 11,581, % 13,796,000 PERRIGO FINANCE UNLIMITD 3.9% 12/15/2024 USD 18,495,114 17,662, % 6,500,000 PERRIGO FINANCE UNLIMITE 4.375% 03/15/2026 USD 8,634,043 8,402, % 5,000,000 ROYAL BK SCOTLND GRP PLC 5.125% 05/28/2024 USD 6,756,672 6,658, % The accompanying notes are an integral part of these financial statements 7

10 Schedule of Investment Portfolio Number of Local Average Cost Fair Shares/Par Value Security Description Currency (Proceeds) ($) Value ($) % 24,000,000 ROYAL BK SCOTLND GRP PLC 6.1% 06/10/2023 USD 33,943,779 33,229, % 5,547,000 ROYAL BK SCOTLND GRP PLC 7.5% 12/31/2049 USD 7,362,563 7,386, % 30,805,000 SANTANDER UK PLC 5% 11/07/2023 USD 43,564,329 41,471, % 23,700,000 SEAGATE HDD CAYMAN 4.875% 03/01/2024 USD 31,561,430 29,974, % 2,000,000 SOCIETE GENERALE 6% 12/31/2049 USD 2,595,492 2,563, % 7,500,000 SUNCOR ENERGY INC 4.34% 09/13/2046 CAD 7,882,803 7,975, % 5,040,000 SUNCOR ENERGY VENTURES 4.5% 04/01/2022 USD 6,671,530 6,520, % 13,944,000 SUNCOR ENERGY VENTURES 7.75% 05/15/2019 USD 19,809,699 18,665, % 11,750,000 SYNOVUS FINANCIAL CORP 5.75% 12/15/2025 USD 15,924,603 15,730, % 14,746,000 TELUS CORP 4.4% 01/29/2046 CAD 14,659,848 14,692, % 6,110,000 TELUS CORP 4.7% 03/06/2048 CAD 6,340,384 6,403, % 7,500,000 TERRAFORM GLOBAL OPERATI 9.75% 08/15/2022 USD 10,522,639 10,432, % 7,000,000 TERRAFORM POWER OPERATIN 6.625% 06/15/2025 USD 9,685,798 9,621, % 13,735,000 TIME WARNER INC 2.95% 07/15/2026 USD 16,181,950 16,368, % 6,226,000 TIME WARNER INC 3.6% 07/15/2025 USD 7,988,269 7,854, % 4,844,000 TOROMONT INDUSTRIES LTD 3.842% 10/27/2027 CAD 4,949,320 4,961, % 10,934,000 TRANSCANADA TRUST 4.65% 05/18/2077 CAD 10,905,257 10,911, % 7,239,000 WESTERN DIGITAL CORP 7.375% 04/01/2023 USD 9,947,773 9,843, % 915,253, ,831, % Short-term Debt Securities 5,200,000 ONTARIO T-BILL 0% 01/10/2018 CAD 5,198,056 5,198, % 5,000,000 PROVINCE OF SASKATCHEWAN PN 01/11/2018 CAD 4,995,673 4,998, % 10,193,729 10,196, % Total long investments as at December 31, ,446, ,027, % Debt Securities (25,000,000) CANADIAN GOVERNMENT 1% 06/01/2027 CAD (22,772,649) (22,782,250) -2.18% (7,282,000) CANADIAN GOVERNMENT 2.75% 12/01/2048 CAD (8,144,773) (8,066,271) -0.77% (1,692,000) US TREASURY N/B 2.125% 11/30/2024 USD (2,140,244) (2,098,512) -0.20% (33,057,666) (32,947,033) -3.15% Total investments sold short as of December 31, 2017 (33,057,666) (32,947,033) -3.15% Total investment at December 31, ,080, % Cash 174,549, % Unrealized gain (loss) on forward exchange contracts 2,359, % Unrealized gain (loss) on futures contracts 757, % Other assets less liabilities (9,535,860) -0.91% NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS 1,046,211, % The accompanying notes are an integral part of these financial statements 8

11 Schedule of Investment Portfolio Foreign Currency Forward Contracts Schedule Credit Settlement Contract Market Unrealized Counterparty Rating* Date Par Value Par Value Rate Rate Gain (Loss) ($) THE TORONTO-DOMINION BANK AA- 01/02/2018 Buy CAD 63,180,050 Sell USD 50,000, ,600 BANK OF MONTREAL A+ 01/02/2018 Buy CAD 4,288,454 Sell USD 3,400, ,032 THE BANK OF NOVA SCOTIA A+ 01/04/2018 Buy CAD 31,558,181 Sell USD 24,750, ,187 THE TORONTO-DOMINION BANK AA- 01/05/2018 Buy CAD 78,358,767 Sell USD 61,830, ,454 THE BANK OF NOVA SCOTIA A+ 01/05/2018 Buy CAD 3,844,650 Sell USD 3,000, ,572 THE BANK OF NOVA SCOTIA A+ 01/31/2018 Buy CAD 126,059,300 Sell USD 100,000, ,892 ROYAL BANK OF CANADA AA- 02/28/2018 Buy CAD 125,660,000 Sell USD 100,000, ,332 THE BANK OF NOVA SCOTIA A+ 03/29/2018 Buy CAD 125,914,000 Sell USD 100,000, ,449 THE BANK OF NOVA SCOTIA A+ 01/16/2018 Buy CAD 31,523,136 Sell USD 25,150, (76,464) 2,359,054 * As rated by Standard & Poor's. Futures Contracts Schedule Maturity Number of Notional Carrying Unrealized Description Date Contracts Cost ($) Value ($) Gain (Loss) ($) CAN 10YR BOND FUT MAR18 Mar-18 (430) (57,978,100) (57,964,000) 14,100 US 10YR NOTE (CBT) MAR18 Mar-18 (398) (62,363,104) (62,030,929) 332,175 US 10YR ULTRA FUT MAR18 Mar-18 (659) (110,671,704) (110,551,546) 120,158 US 5YR NOTE (CBT) MAR18 Mar-18 (805) (117,841,328) (117,497,558) 343,770 US ULTRA BOND (CBT) MAR18 Mar-18 (61) (12,790,538) (12,843,243) (52,705) 757,498 The accompanying notes are an integral part of these financial statements 9

12 1 General information RP Strategic Income Plus Fund (the Fund ) is an open-ended mutual fund trust governed under the laws of Ontario. The Fund was formed on February 26, The address of the Fund s registered office is 39 Hazelton Avenue, Toronto, Ontario. The primary objective of the Fund is to produce stable risk-adjusted absolute returns. The Fund intends to achieve its investment objective by investing predominantly in investment-grade corporate debt and debt-like securities. This can include government securities and agency debt, and high quality asset backed securities, with a focus on capital preservation. The Fund s investment activities are managed by RP Investment Advisors LP (the Investment Manager ), which is located at 39 Hazelton Avenue, Toronto, Ontario, with the administration delegated to Apex Group Ltd. (formerly known as Equinoxe Alternative Investment Services), (Bermuda) Limited (the Administrator ). The Investment Manager will earn management fees from the Fund. These financial statements were authorized for issue by the Trustee on March 22, Summary of significant accounting policies These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Basis of presentation The financial statements have been prepared under the historical cost basis, except for the revaluation of financial assets and financial liabilities (including derivative financial instruments) at fair value through profit or loss. IAS 7 requires disclosures related to changes in liabilities arising from financing activities for annual periods beginning on or after January 1, Units issued by the Fund are classified as financial liabilities in accordance with IAS 32, as they do not meet the definition of puttable instruments to be classified as equity in accordance with IAS 32 for financial reporting purposes. A reconciliation between the opening and closing balances of the Units of the Fund is presented in the Statement of Changes in Net Assets Attributable to Holders of Redeemable Units for the year ended December 31, 2017, including changes from cash flows and non-cash changes. The principal accounting policies applied in the preparation of these financial statements are set out below. a) Foreign currency Functional and presentation currency Items included in the financial statements of the Fund are measured in the currency of the primary economic environment in which the Fund operates (the functional currency ). The financial statements of the Fund are presented in Canadian dollars, which is the Fund s functional and presentation currency. 10

13 Foreign currency translation Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the dates of such transactions. Foreign currency assets and liabilities are translated into the functional currency using the exchange rate prevailing at the Statement of Financial Position date. Foreign currency exchange gains and losses arising from translation are included in the Statement of Comprehensive Income. Foreign exchange gains (losses) on financial assets and financial liabilities at fair value through profit or loss are included in net realized and net change in unrealized gains (losses) on investments, derivatives, and cash in the Statement of Comprehensive Income. b) Financial assets and financial liabilities at fair value Classification Investments include financial assets and liabilities such as debt and equity securities and derivatives. The Fund has elected to apply IFRS 9 Financial Instruments (as amended in November 2013) (IFRS 9). Upon initial recognition, financial instruments are classified as fair value through profit or loss ( FVTPL ). Recognition, derecognition and measurement Regular purchase and sale of investments are recognized on the trade date, the date on which the Fund commits to purchase or sell the investment. Financial assets and financial liabilities are initially recognized at fair value. All financial assets and liabilities are recognized in the Statement of Financial Position when the Fund becomes a party to the contractual requirements of the instrument. Financial instruments are derecognized when the right to receive cash flows from the investment has expired or the Fund has transferred substantially all risks and rewards of ownership. As such, investment purchase and sale transactions are recorded as of the trade date. The cost of investments is based on the weighted average cost of investments. Realized gains and losses on disposition, including foreign exchange gains and losses on such investments, are determined based on the average cost of investments. Subsequent to initial recognition, all financial assets and financial liabilities at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in the fair value are presented as gains (losses) in the Statement of Comprehensive Income in the period in which they arise. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and trading securities) are based on last available quoted market prices at 4:00 pm (Eastern Time) on the reporting date and the mid of the bidask for fixed income securities. In circumstances where the 4:00 pm price is not within the bid-ask spread, 11

14 the administrator in consultation with Investment Manager will determine the point within the bid-ask spread that is most representative of fair value based on standard industry practice. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The fair value of financial assets and financial liabilities that are not traded in an active market is determined by using valuation techniques. The Fund uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques used include the use of comparable recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants, making the maximum use of market inputs and relying as little as possible on entity-specific inputs. c) Foreign currency forward contracts Foreign currency forward contracts entered into by the Fund are financial agreements to buy or sell a specific amount of an underlying currency for an agreed price at a future date. The fair value of these contracts is the gains (losses) that would be recognized if the position was closed out the valuation date and is recorded as unrealized gains (losses). When the contracts are closed out or expire, the gains (losses) are realized and are reported as net realized gains (losses) in the Statement of Comprehensive Income. d) Futures Contracts Futures contracts entered into by the Fund are financial agreements to purchase or sell a financial instrument at a contracted price on a specified future date. Futures contracts are valued at the gains (losses) that would arise as a result of closing the position on the valuation date. Any gains (losses) at the close of business of each valuation date are recorded in the Statement of Comprehensive Income. e) Offsetting financial instruments Financial assets and liabilities are offset and the net amount will be presented in the Statement of Financial Position when there is a legally enforceable right of offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. f) Cash Cash is comprised of deposits with financial institutions. g) Investment transactions and income The Fund s investment holdings include trades executed through 1:00 pm of the business day in the period. Purchases and sales of investments are recorded on a trade-date basis. Interest income (interest expense for investments sold short) is recorded on the accrual basis. Realized gains and losses are recorded on the average cost basis. Dividend income is recognized on the ex-dividend date in gross amount. 12

15 Interest receivable is shown separately in the Statement of Financial Position based on the debt instruments stated rate of interest. The cost of investments is determined using the average cost method. Investment income and net realized and unrealized gains (losses) and dividend income are allocated on a prorata basis to each class of units based on the relative net assets of each class to the total net assets of the Fund. h) Other financial assets and liabilities Other financial assets, including receivable for investments sold, interest receivable, subscription receivable, operating fees rebate receivable, and prepaid fund expenses are measured at cost or amortized cost. Amortized cost approximates fair value for these assets due to their short-term nature. Similarly, other financial liabilities, including payable for investment purchased, interest payable, redemption payable, management fees payable and accrued operating fees are measured at cost or amortized cost. Amortized cost approximates fair value for these liabilities due to their short-term nature. i) Cost of investments and investments sold short The cost of financial assets or financial liabilities at fair value represents the amount paid (or proceeds received) for each security and is determined on an average cost basis excluding commissions and other portfolio transaction costs. j) Redeemable units The Fund issues redeemable units, which are redeemable at the holder s option and do not have identical rights. Such units are classified as financial liabilities. Redeemable units can be put back to the Fund at any time for cash equal to the proportional unit of the Fund s net assets attributable to the unit class. The redeemable units are carried at the redemption amount that is payable at the Statement of Financial Position date if the holder exercises the right to put the unit back to the Fund. Redeemable units are issued and redeemed at the holder s option at prices based on the Fund s net assets per unit at the trade date. The Fund s net assets per unit is calculated by dividing the net assets attributable to the holders of each class of redeemable units with the total number of outstanding redeemable units for each respective class. k) Net assets attributable to holders of redeemable units per unit Net assets attributable to holders of redeemable units per unit is calculated at the close of business on every valuation date as the net assets attributable to each class of units divided by its outstanding units. A valuation date is every day the Toronto Stock Exchange is open. l) Future accounting changes IFRS 9 Financial Instruments ( IFRS 9 (2014) ) IFRS 9 has been issued in stages. The first instalment was issued in November 2009 ( IFRS 9 (2009) ) and only dealt with classification and measurement of financial assets. In October 2010 the Standard was reissued ( IFRS 9 (2010) ) to include the classification and measurement of financial liabilities, recognition and 13

16 derecognition, and the requirements for separating embedded derivatives. In 2013, IFRS 9 was reissued to include the new general hedge accounting model. The finalized version of IFRS 9 issued in 2014 ( IFRS 9 (2014) ) carried forward the requirements of IFRS 9 (2013) however it introduced a new impairment model for financial assets measured at amortized cost or debt instruments measured at fair value through other comprehensive income. In addition, IFRS 9 (2014) amended the classification and measurement requirements for financial assets that were firstly introduced in IFRS 9 (2009) by allowing certain financial assets to be classified at fair value through other comprehensive income based on the results of the asset s contractual cash flows and the manner in which an entity manages its financial assets. IFRS 9 (2014) is effective for annual periods beginning on or after January 1, The Fund plans to adopt the new standard when it becomes effective. The Fund will use the modified transition method allowed under the standard which does not require the restatement of prior year comparative information. The Fund is still determining the impact of the adoption of IFRS 9 (2014) will have on the Fund s financial statements. 3 Critical accounting judgments and key sources of estimation uncertainty The preparation of financial statements requires Investment Manager to use judgment in applying its accounting policies and to make estimates and assumptions about the future. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The following discusses the most significant judgments and estimates that the Fund has made in preparing the financial statements. Fair value measurement of derivatives and securities not quoted in an active market The administrator uses its judgment in selecting an appropriate valuation technique when the Fund holds financial instruments that are not quoted in active markets, including derivatives. Fair values of such instruments are determined using a variety of methods and the administrator makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques include using reputable independent pricing sources, broker quotes, counterparty valuations, comparable recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants, making the maximum use of market inputs and relying as little as possible on entity-specific inputs. Presentation of redeemable units IAS 32 requires that puttable instruments to be presented as a liability rather than the equity on the Fund s Statement of Financial Position, unless certain conditions are met. IAS 32 defines a puttable instrument as a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset. The Fund distributes any net income and capital gain in cash (at the request of the unitholder). In 14

17 addition, each class of redeemable units do not have identical features and are not equally subordinate to each other. Therefore, the Fund s redeemable units do not meet the criteria for classification as equity and have been classified as financial liabilities on the Statement of Financial Position. 4 Financial risks The nature of the Fund s activities exposes it to a variety of financial risks: market risk (including interest rate risk, and currency risk), credit risk, and liquidity risk. The Fund is also exposed to operational risks, such as custody risk. Custody risk is the risk of loss of investments held in custody occasioned by the insolvency or negligence of the prime broker or custodian. Although an appropriate legal framework is in place that mitigates the risk of loss of value of the investments held by the counterparty or custodian, in the event of its failure, the ability of the Fund to transfer the investments might be impaired. All security investments present a risk of loss of capital. The maximum loss of capital on debt securities is limited to the fair value of those positions. On debt securities sold short, the maximum loss of capital is limited to the price of a zero yield bond of equivalent duration, except for circumstances where bonds may trade at negative yields. The Investment Manager s overall risk management program aims to maximize the returns derived for the level of risk to which the Fund is exposed to and aims to minimize potential adverse effects of these risks on the Fund s performance by employing experienced market professionals, developing a formal risk management policy with guidelines and limits over the Fund s risk exposures, continuously monitoring the Fund s positions and market events, and diversifying the investment portfolio within the constraints of the investment objective. Market risk Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument. The risk committee maintains a risk management practice to monitor the market risk continuously, such as using various measures of portfolio volatility, stress testing for profit and loss and shocking interest rates and credit curves for the return. Interest rate risk Interest rate risk arises from the effects of fluctuations in the prevailing levels of market interest rates on the fair values of financial assets, financial liabilities and future cash flows. The Fund holds fixed interest investments that expose the Fund to fair value interest rate risk. The Fund also holds cash and short-term investments that expose the Fund to cash flow interest rate risk. The following tables represent the Fund s exposure based on maturity and its sensitivity assuming a 1 basis point movement in interest rates. 15

18 Maturity December 31, 2017 December 31, 2016 Fair Value Sensitivity Fair Value Sensitivity $ $ $ $ Financial assets Less than 2 years 125,299,441 12,133 88,639,339 1,339 2 to 5 years 187,864,731 56, ,300,402 60,782 5 to 10 years 502,500, , ,380, , to 30 years 89,770, ,232 56,527,033 16,703 Greater than 30 years 6,403,066 10,391 16,434,804 17,032 Perpetual ,087,848 4, ,838, , ,370, ,790 Financial liabilities Less than 2 years - - (2,015) (1,039) 2 to 5 years - (49,577) (4,095,611) (1,915) 5 to 10 years (24,880,762) (201,693) (3,917,570) (82,876) 10 to 30 years (52,705) (22,427) 251,066 (38,378) Greater than 30 years (8,066,271) (17,207) (19,424,978) (42,154) (32,999,738) (290,904) (27,189,108) (166,362) Net 878,838, , ,181, ,428 In accordance with the Fund s policy, the Investment Manager monitors the Fund s overall interest rate sensitivity continuously and the risk committee monitors it daily. Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign currency exchange rates. The Fund invests in financial assets and liabilities (including cash and investments) denominated in currencies other than the Canadian dollar, and gains and losses in investment transactions may be in currencies other than the Canadian dollar. The Funds may enter into foreign currency forward contracts for hedging purposes to reduce foreign currency exposure. The Investment Manager reviews the Fund s currency positions as part of the investment management process. 16

19 Net foreign currency exposure as at December 31, 2017 and 2016 in Canadian dollar equivalents as follows: December 31, 2017 USD EUR Monetary assets Cash 2,384, Investments at fair value 587,519,410 - Receivable for investments sold 15,253,640 - Derivative assets 796,103 - Total monetary assets 605,953, Monetary liabilities Investments sold short at fair value (2,102,484) - Payable for investments purchased (14,060,395) - Derivative liabilities (588,080,188) - Total monetary liabilities (604,243,067) - Net exposure 1,710, % Impact on net assets 171, December 31, 2016 USD EUR Monetary assets Cash 6,183, ,200 Investments at fair value 355,433,001 7,219,104 Receivable for investments sold - 1,557,366 Derivative assets 497,392 - Total monetary assets 362,113,479 9,014,670 Monetary liabilities Investments sold short at fair value (4,101,762) (45,448) Payable for investments purchased - (1,632,189) Derivative liabilities (357,197,294) (7,042,300) Total monetary liabilities (361,299,056) (8,719,937) Net exposure 814, ,733 10% impact on net assets 81,442 29,473 If foreign exchange rates had increased or decreased by 10% for each of USD and EUR compared to CAD, with all other variables held constant, net assets would have increased or decreased by $171,091 ( $110,915). This represents Investment Manager s best estimate of a reasonable possible shift in the foreign exchange rates, having regard to volatilities of those rates. 17

20 Liquidity risk Liquidity risk is the risk that the Fund may not be able to settle or meet its obligations on time or at a reasonable price. The majority of the Fund s assets are investments traded in an active market and can be easily disposed of at market prices. There is no assurance that an adequate market for investments owned by the Fund will continue to exist due to fluctuations in trading volumes and market prices. The Fund is exposed to liquidity risk due to potential daily cash redemptions of redeemable securities. In accordance with the Fund s policy, the Investment Manager monitors liquidity continuously. The Fund invests in financial instruments which are not publicly traded but traded over-the-counter. The Investment Manager only purchase over-the-counter securities with a reasonable number of market participants to facilitate disposal on a timely basis. The Investment Manager continuously review all holdings to ensure sufficient liquidity, and adjust the illiquid securities weightings or particular holdings in positions viewed as a potential future impairment to liquidity. When illiquid security weightings significantly exceed 10%, the Investment Manager will actively manage the portfolio in an effort to rebalance those weightings. The Fund also has the ability to borrow up to 5% of its net assets attributable to holders of redeemable units for the purposes of funding redemptions. Due to the continuous review and borrowing ability, the Investment Manager believes there is minimal liquidity risk. Credit risk Credit risk is the risk that a debtor will fail to discharge its obligations, causing a financial loss to bondholders or counterparties. The Fund s main credit risk concentration is in debt securities whose fair value includes consideration of the creditworthiness of the debt issuer. The Fund is also exposed to counterparty credit risk on cash and short-term investments, amounts due from brokers for investments. The Investment Manager actively manages credit risk. If securities purchased by the Fund have their investment grade lowered, the Fund will not be required to divest itself of such non-investment grade securities unless, as a result, non-investment grade securities more than 10% of the net assets of the Fund. The Fund invested in debt securities with the following credit ratings: Debt securities by rating category December 31, 2017 Fair Value (Long) Fair Value (Short) Futures Notional Net Exposure Debt rating $ $ $ $ AAA 28,195,551 (32,999,738) (361,644,774) (366,448,961) A 70,492, ,492,577 BBB 684,137, ,137,254 BB 129,012, ,012, ,838,111 (32,999,738) (361,644,774) 517,193,599 18

21 December 31, 2016 Fair Value (Long) Fair Value (Short) Futures Notional Net Exposure Debt rating $ $ $ $ AAA 58,869 (27,415,945) (220,646,903) (248,003,979) AA 76,826, ,826,970 A 132,843, ,843,043 BBB 359,946, ,946,987 BB 47,375, ,375,433 B 14,319, ,319, ,370,394 (27,415,945) (220,646,903) 383,307,546 All transactions are made through registered members of a recognized regulatory body and are settled on delivery using the Fund s broker Scotia Capital Inc., or its custodian, the Bank of Nova Scotia Toronto, Ontario. The risk of default is considered minimal, as delivery of securities sold is only made when the prime broker or the custody has received payment. The Fund is also exposed to credit risk from counterparties to foreign currency forward contracts, commodity futures, cash and short-term investments. The maximum exposure to credit risk before any credit enhancements are the carrying amount of financial assets as set out below: Credit Risk December 31, 2017 December 31, 2016 $ $ Investments at fair value 911,027, ,370,394 Cash 174,549,752 62,208,390 Receivable for investments sold 31,326,778 2,451,226 Interest receivable 7,545,341 5,557,861 Derivative assets 3,245,721 1,704,777 Subscriptions receivable 364,763 2,346,290 Operating fees rebate receivable 282,722 - Prepaid fund expenses - 7,688 1,128,342, ,646,626 Offsetting and amounts subject to master netting agreements The following table presents the Fund s financial assets and liabilities subject to offsetting, enforceable master netting agreements and similar agreements. The table is presented by type of financial instruments. The Net column shows what the impact on the Fund s Statement of Financial Position would be if all set-off rights were exercised. Amounts offset Amounts not offset Gross assets/ liabilities Gross assets/ liabilities offset Net amounts presented Financial instruments Cash collateral Net $ $ $ $ $ $ December 31, 2017 Derivative assets 3,245,721-3,245, ,245,721 Derivative liabilities (129,169) - (129,169) - - (129,169) 19

22 Amounts offset Amounts not offset Gross assets/ liabilities Gross assets/ liabilities offset Net amounts presented Financial instruments Cash collateral Net $ $ $ $ $ $ December 31, 2016 Derivative assets 1,975,836 (271,059) 1,704,777 (1,704,777) - - Derivative liabilities (2,945,918) 271,059 (2,674,859) 1,704,777 - (970,082) Capital management The capital of the Fund is represented by the net assets attributable to holders of redeemable units. The fund generally has no restrictions or specific capital requirements on the subscriptions and redemptions of units other than minimum subscription requirements; although, on rare occasions, redemption rights of unitholders may be temporarily suspended. In accordance with the objectives and the risk management policies outlined of the Fund, the Fund endeavors to invest the subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions. Such liquidity is managed by investing the majority of assets in investments that can be readily disposed and via the Fund s ability to borrow up to 5% of its net assets. 5 Fair value measurement Financial instruments are classified within a hierarchy that prioritizes the inputs to fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices and the lowest priority to unobservable inputs. If different levels of inputs are used to measure a financial instrument s fair value, the classification within the hierarchy is based on the lowest level input that is significant to the fair value measurement. The three levels of the fair value hierarchy are: Level 1 - unadjusted quoted prices in active markets for financial assets or liabilities; Level 2 - inputs other than quoted prices included within Level 1 that are observable for the financial asset or liability either directly or indirectly; and Level 3 - inputs for the financial asset or liability that are not based on observable market data. The following tables analyze within the fair value hierarchy, the Fund s financial assets and financial liabilities. December 31, 2017 Level 1 Level 2 Level 3 Total Financial assets $ $ $ $ Bonds - 911,027, ,027,908 Futures contracts 810, ,203 Forward contracts - 2,435,518-2,435,518 Total 810, ,463, ,273,629 Financial liabilities Bonds - (32,947,033) - (32,947,033) Futures contracts (52,705) - - (52,705) Forward contracts - (76,464) - (76,464) Total (52,705) (33,023,497) - (33,076,202) 20

23 December 31, 2016 Level 1 Level 2 Level 3 Total Financial assets $ $ $ $ Bonds - 619,282, ,282,546 Preferred shares 12,087, ,087,848 Forward contracts - 1,478,444-1,478,444 Total 12,087, ,760, ,848,838 Financial liabilities Bonds - (27,415,945) - (27,415,945) Futures contracts 226, ,837 Forward contracts - (2,675,363) - (2,675,363) Total 226,837 (30,091,308) - (29,864,471) Investments, whose values are based on quoted market prices in active markets, and are therefore classified within level 1, include active listed equities, exchange traded derivatives, Futures contracts and certain non-us sovereign obligations. The Fund does not adjust the quoted price for these financial instruments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. These include investment-grade corporate bonds and certain non-us sovereign obligations, and over-thecounter derivatives. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions that are attached to the instruments, valuations may be adjusted to reflect nontransferability, which are generally based on available market information. Bonds include primarily government and corporate bonds, which are valued using models with inputs including interest rate curves, credit spreads and volatilities. The inputs that are significant to valuation are generally observable and therefore the Fund s bonds and short-term investments have been classified as Level 2. There were no items classified as level 3 throughout the year nor were there transfers between level 3 and levels 1 and 2 during the year ended December 31, 2017 and The following tables present the carrying amounts of the Fund s financial instruments by category as at: December 31, 2017 Financial assets/ liabilities at fair value through profit or loss Financial assets/ liabilities at amortized cost Total $ $ $ Assets as per Statement of Financial Position Investments at fair value 911,027, ,027,908 Cash - 174,549, ,549,752 Receivable for investments sold - 31,326,778 31,326,778 Interest receivable - 7,545,341 7,545,341 Subscriptions receivable - 364, ,763 Derivative assets 3,245,721-3,245,721 Operating fees rebate receivable - 282, ,722 Total 914,273, ,069,356 1,128,342,985 21