2015 Semi-Annual Management Report of Fund Performance

Transcription

1 (the Fund ) For the six-month period ended June 30, 2015 (the period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio Manager: Pyrford International Limited (the portfolio manager ) 2015 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 , by writing to us at BMO Investments Inc., First Canadian Place, 43rd Floor, 100 King Street West, Toronto, Ontario, M5X 1A1 or by visiting our website at 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 increased from approximately $97 million to approximately $130 million. Advisor Series units of the Fund returned 8.35%. Please see the Past Performance section for information on the performance returns of the Fund s other series. During the period, international equity markets produced strong positive returns, continuing their rise that proceeded with few interruptions since March Once again, ample supplies of liquidity have been central to this advance. In the first quarter of 2015, European markets rallied strongly in local currency terms with both the German DAX Index and the U.K. s FTSE 100 Index reaching record highs. The markets were buoyed by the announcement that the European Central Bank would begin a policy of quantitative easing (i.e., monetary policy used by central banks to increase money supply). It was hoped that this could help combat deflation that the eurozone was experiencing. In response, the euro weakened and the yield on German five-year government bonds went negative for the first time. The exception was Greece, which was weak on the back of the victory of Syriza, the anti-austerity party, in national elections. This introduced further tension into the German-Greek relationship and there were concerns that this could have negative implications for the stability of the European monetary union. Elsewhere, the Swiss National Bank abandoned the Swiss Franc cap with the euro, which sent the value of the Swiss currency soaring. In the second quarter, there were reasonable performance differentials between various markets in Asia. Commodity dependant economies such as Malaysia continued to be weak. Australia underperformed, led by financial data after a disappointing earnings seasons and concerns over tightening capital requirements. Hong Kong in contrast outperformed, buoyed by an increasingly speculative Chinese equity market. In China, recent regulatory changes encouraged retail buyers to open share trading accounts in record numbers and there appears to be explicit government support for higher equity prices. Hong Kong has benefitted from this trend as regulations have been eased to allow mainland investors to invest there. The other stand out market has been Japan, which has seen a revival in interest from global investors following a number of shareholder friendly initiatives. Over the period, the portfolio s overweight exposure to Energy and Utilities sectors, typically defensive sectors, detracted from returns. Being underweight in the Consumer Discretionary and Financials sectors also detracted from returns. On a positive note, having an overweight exposure to the Information Technology and Telecommunication Services sectors added to returns. Stock selection detracted from returns, with selection in the eurozone, Hong Kong and the U.K. detracting notably. On a positive note, selection was positive in Sweden and Singapore.

2 The overall effect of country allocation was negative, with the portfolio having a significant underweight exposure to Japan, which detracted from returns. The portfolio s overweight exposure to Malaysia, Switzerland and Taiwan, also detracted from returns. On a positive note, the portfolio s underweight exposure to U.K. equities and an overweight exposure to Hong Kong was positive, as was the overall effect of currency management. Symrise Ag was sold from the portfolio in the first quarter of the period. Symrise Ag is the fourth largest supplier in the flavours and fragrances market; that market can be characterised as concentrated, with the top four players having 55% market share. The security was first purchased in August 2011, since then it has produced a total return of 134%. The dividend yield on Symrise Ag has fallen from over 3% to its current yield of 1.7%. The long term value of Symrise Ag is now less compelling than other securities in the eurozone section of the portfolio, therefore it was sold and the proceeds distributed amongst other holdings. Japan Tobacco was purchased for the portfolio in the second quarter of the period. Japan Tobacco should be able to grow earnings by around 8% a year on a constant currency basis whilst generating plenty of cash as its capital expenditure needs are declining. Whilst the company is preparing its balance sheet for the government sale of its 33% stake, over time Japan Tobacco should be able to increase its pay-out ratio from the stated 5. The security is fairly priced but this still leaves it on a discount to international peers. This is mainly due to lower returns on capital and margins, but the gap should gradually close over time as should the valuation discount. The Fund distributes a fixed amount per unit each month, consistent with the Fund s stated objective of providing a stable cash flow to its unitholders. A portion of a distribution may consist of a return of capital. This portion may be significant, and will occur when the income earned by the Fund per unit is less than the fixed amount of the distribution. Distributions are expected to continue to include return of capital until there is a general improvement in the economy, an increase in interest rates, or there is a change in the fixed amount to be distributed. Recent Developments The portfolio remains defensively positioned with underweight exposure to cyclical sectors, particularly banks, currently the portfolio has a zero weighting in European banks. Overweight sectors include Energy, Utilities and Telecommunication Services, which offer high dividend yields and visible earnings streams. Due to private sector deleveraging (i.e., reducing overall debt levels) and public sector budgetary constraints, the portfolio manager envisage a prolonged period of subdued economic growth with Asia ex-japan continuing to provide the lead. 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 Pyrford International Limited, an affiliate of the Manager. Pyrford International Limited provides portfolio management services to the Fund. Pyrford International Limited receives from the Fund a management fee based on assets under management, calculated daily and payable quarterly. Administration Services The Manager and other members of BMO Financial Group provide the Fund with certain administration services, such as those relating to fund accounting, record keeping, order processing, issuing and distributing account statements and general administrative support. Further details about the Fund s administration fees can be found in the Fund s most recent simplified prospectus. The expenses charged to the Fund in respect of such services during the period amounted to $21,849 (2014 $5,800). The Manager confirms that the Fund did not borrow money during the period.

3 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 F Units Series D Units Series I Units Series NBA Units Series NBF Units * For Series I Units, separate Series I fees are negotiated and paid by each Series I investor. Because the Manager pays no distribution, service or trailing fees on Series I Units, Series I Units will have lower Series I fees than the management fees for Advisor Series Units. 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 (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ 0.00 Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Advisor Series Units (7) ) 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 $ 0.00 Return of capital $ Total annual distributions (4) $ Net assets, end of period $

4 Series F Units 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 $ 0.00 Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Premium Series Units Feb. 18, 2015 to June 30, 2015 Net assets, beginning of period $ 10.00* Total revenue $ 0.19 Total expenses (2) $ for the period $ 0.07 for the period $ from operations (3) $ 0.01 (excluding dividends) $ 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) $ From dividends $ From capital gains $ 0.00 Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Series I Units (6) ) Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ 0.00 From dividends $ From capital gains $ 0.01 Return of capital $ Total annual distributions (4) $ Net assets, end of period $

5 Series NBA Units 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 $ 0.00 Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Series NBF Units 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 $ 0.00 Return of capital $ Total annual distributions (4) $ Net assets, end of period $ Series N Units Apr. 17, 2015 to June 30, 2015 Net assets, beginning of period $ 10.00* Total revenue $ 0.07 Total expenses (2) $ for the period $ 0.02 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 $ 9.78 * Initial net assets. (1) The information is derived from the Fund s unaudited semi-annual and audited annual financial statements. The financial information presented for the periods ended June 30, 2015, December 31, 2014 and December 31, 2013 is derived from the financial statements determined in accordance with IFRS. Information for years prior to January 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. An explanation of these differences can be found in the notes to the Fund s financial statements. (2) Includes commissions and portfolio transaction costs. Prior to 2013, withholding taxes were not included in expenses as they were included in revenue. (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 paid in cash or reinvested in additional units of the Fund, or both, where applicable. The information shown in this column is for the period beginning December 23, 2013 (the series inception date) and ending December 31, (6) The information shown in this column is for the period beginning April 8, 2014 (the series inception date) and ending December 31, (7) The information shown in this column is for the period beginning April 7, 2014 (the series inception date) and ending December 31, 2014.

6 Ratios and Supplemental Data Series A Units Total net asset value (000s) (1) $ 6,097 1,907 outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Advisor Series Units (7) ) Total net asset value (000s) (1) $ 3,959 1,783 1 outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series F Units Total net asset value (000s) (1) $ 1, outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Premium Series Units Feb. 18, 2015 to June 30, 2015 Total net asset value (000s) (1) $ 1 outstanding (000s) (1) 0 (2) % before waivers or absorptions % 0.40 Trading expense ratio (3) % 0.16 Portfolio turnover rate (4) % 5.14 Net asset value per unit $ Series D Units Total net asset value (000s) (1) $ outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series I Units (6) ) Total net asset value (000s) (1) $ 67,393 50,129 45,254 outstanding (000s) (1) 3,911 3,137 3,000 + % before waivers or absorptions + % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series NBA Units Total net asset value (000s) (1) $ 3,276 4,643 4,178 3,682 3,096 2,990 outstanding (000s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series NBF Units Total net asset value (000s) (1) $ 5,939 37,527 16,997 13,472 11,533 9,464 outstanding (000s) (1) 355 2,409 1,174 1,134 1, (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $

7 Series N Units Apr. 17, 2015 to June 30, 2015 Total net asset value (000s) (1) $ 40,965 Number of shares outstanding (000s) (1) 4,190 (2) % 0.40 before waivers or absorptions % 0.40 Trading expense ratio (3) % 0.16 Portfolio turnover rate (4) % 5.14 Net asset value per share $ 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 June 30 or December 31 of the period shown. (2) The management expense ratio of a particular series is calculated based on all expenses allocated to the series, as applicable, including all taxes and interest expenses but excluding brokerage commissions and other portfolio transaction costs, divided by the average daily net asset value of that series, annualized. BMOII may reduce the effective management fees payable by some unitholders by reducing the management fees it charges to the Fund and directing the Fund to make management fees distributions to these unitholders in amounts equal to the amounts of the management fees reduction. The management expense ratio does not take into account the reduction in management fees due to management fees distributions to unitholders. (3) BMOII absorbed certain expenses or waived certain fees otherwise payable by a series. In doing so, BMOII attempts to maintain the overall MER of the Fund at a relatively consistent level. BMOII may discontinue the absorption or waiver at any time. (3) The trading expense ratio represents the 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. The information shown in this column is for the period beginning December 23, 2013 (the series inception date) and ending December 31, (6) The information shown in this column is for the period beginning April 8, 2014 (the series inception date) and ending December 31, (7) The information shown in this column is for the period beginning April 7, 2014 (the series inception date) and ending December 31, PAST PERFORMANCE The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional units or shares 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, 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 fees and expenses allocated and payable by each series. On December 15, 2013, Class A and Class F of BMO Nesbitt Burns International Equity Fund (the Terminating Fund ) merged into Series NBA and Series NBF, respectively, of BMO International Value Fund (the Continuing Fund ). Pursuant to exemptive relief issued in connection with the merger transaction, securities regulators approved the performance of the Terminating Fund s classes to be carried-over to the Continuing Fund s series. 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 for each series of the Fund for each of the financial years shown and for the six-month period ended June 30, 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 the financial year. Series A Units (3) 2015 (7)

8 Advisor Series Units Series I Units (2) (7) (2) (7) Series F Units Series N Units (2) (7) Premium Series Units Series NBA Units n/a (6) (1) (7) Series D Units Series NBF Units (4) 2015 (7) (1) (7) (1) Return from October 31, 2008 to December 31, (2) Return from December 23, 2013 to December 31, (3) Return from April 7, 2014 to December 31, (4) Return from April 8, 2014 to December 31, Return from April 20, 2015 to June 30, (6) The Premium Series has not been launched yet. (7) For the six-month period ended June 30, 2015.

9 SUMMARY OF INVESTMENT PORTFOLIO As at June 30, 2015 % of Net Portfolio Allocation Asset Value United Kingdom 14.7 Switzerland 13.1 Australia 10.0 Japan 8.8 France 7.0 Germany 7.0 Hong Kong 5.7 Netherlands 5.6 Singapore 4.9 Cash/Receivables/Payables 4.8 Malaysia 4.6 Sweden 3.0 Taiwan 2.9 Belgium 2.5 Norway 1.9 Israel 1.4 China 1.2 Other 0.9 Total Portfolio Allocation Sector Allocation Industrials 18.8 Telecommunication Services 12.1 Health Care 11.6 Consumer Staples 10.3 Information Technology 8.5 Energy 8.1 Materials 7.8 Financials 7.6 Utilities 6.5 Cash/Receivables/Payables 4.8 Consumer Discretionary 3.9 Total Sector Allocation % of Net Top 25 Holdings Asset Value Issuer Cash/Receivables/Payables 4.8 Nestle S.A. 3.3 Roche Holding AG 3.0 Novartis AG 2.7 Sanofi 2.1 Axiata Group Berhad 1.9 Brambles Industries Limited 1.9 Malayan Banking Berhad 1.9 Telenor ASA 1.9 China Mobile Limited 1.8 British American Tobacco p.l.c. 1.7 National Grid plc 1.7 KDDI Corp. 1.7 Computershare Limited 1.7 Unilever N.V. 1.6 Woodside Petroleum Ltd. 1.6 Legal & General Group Plc 1.6 GlaxoSmithKline plc 1.6 L Air Liquide S.A. 1.6 Deutsche Post AG 1.6 Fuchs Petrolub SE, Preference 1.6 Mitsubishi Electric Corporation 1.6 Vodafone Group Public Limited Company 1.5 Woolworths Limited 1.5 Toyota Tsusho Corporation 1.5 Top Holdings as a Percentage of Total Net Asset Value 49.4 Total Net Asset Value $129,713,496 The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

10 BMO Investments Inc. First Canadian Place, 43rd Floor, 100 King Street West Toronto, ON M5X 1A1 For more information please call 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. Registered trade-mark of Bank of Montreal, used under licence. Trade-mark of Bank of Montreal, used under licence. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal.