Interim Management Report of Fund Performance

Transcription

1 Interim Management Report of Fund Performance 20SEP The following is an interim report on the performance of Canadian Resources Income Trust ( CaRIT or the Trust ) and contains financial highlights but does not contain the complete financial statements of the Trust. This report should be read in conjunction with the unaudited interim financial statements for the six months ended June 30, 2016 and the audited annual financial statements and notes thereto for the year ended December 31, You can get a copy of the interim or annual financial statements at your request and at no cost by calling (416) , by writing us at 40 King St. West, Scotia Plaza, 26th Floor, Box 4085, Station A, Toronto, Ontario M5W 2X6, Attention: Canadian Resources Income Trust Investor Relations or by visiting our website located at or SEDAR at Unitholders may also contact us using one of these methods to request a copy of the Trust s proxy voting policies and procedures, proxy voting disclosure and quarterly portfolio disclosure. The Trust s proxy voting disclosure record for the annual period ending June 30, 2016 is available on our website. Any references to net assets or net assets per Unit in this report are references to net assets attributable to Unitholders determined in accordance with IFRS as presented in the financial statements of the Trust. Additionally, any references to net asset value or net asset value per Unit are references to values determined for valuation and transactional purposes. There are no differences between net assets per Unit and net asset value per Unit post December 31, Prior to 2013, any differences between the two values was a result of net assets per Unit being calculated for financial statement purposes using closing bid prices versus net asset value per Unit being calculated for transactional purposes using closing sale prices. Investment Objectives and Strategies The Trust is a closed-end investment trust established to provide holders (the Unitholders ) of units (the Units ) with investment exposure to an equally weighted portfolio (the Portfolio ) comprised of the 20 highest yielding natural resource issuers (the Portfolio Securities ) included in the S&P/TSX 60 Index. The Trust does not have a fixed distribution but intends to pay equal monthly distributions based on, among other things, the forecasted dividends and other income to be received for a calendar quarter from the Portfolio Securities net of estimated expenses, excluding transaction costs, ( Net Investment Income ) and premiums received on writing covered calls on a portion of the Portfolio Securities. Monthly distributions are currently targeted to be $0.059 per Unit ($0.71 annually). Natural resource issuers will be those classified as operating in the energy, materials and utilities sectors under the Global Industry Classification System (GICS). Portfolio Securities will be removed from the Portfolio at any point in response to: (a) the removal of a Portfolio Security from the S&P/TSX 60 Index; (b) corporate actions such as mergers, acquisitions or other fundamental corporate action or change that in the opinion of Scotia Managed Companies Administration Inc. (the Administrator or SMCAI ), requires an issuer to be removed from the Portfolio; (c) a Portfolio Security suspending or cutting its dividends/distributions by 25% and is no longer amongst the 20 highest yielding securities; or (d) Highstreet is no longer able to write call options on the equity securities of an issuer included in the Portfolio. In such cases, Portfolio Securities that are removed from the Portfolio will be replaced with the next highest yielding natural resource issuer in the S&P/TSX60 Index. The Portfolio is reconstituted annually to include the then top 20 highest yielding constituents of the S&P/TSX 60 Index using the closing prices on December 31 and will be rebalanced to an equal weight basis concurrently with the reconstitution process. The Trust s investment objectives are to provide holders of Units with: (i) stable monthly distributions; and (ii) the opportunity for capital appreciation. The distributions are funded from dividends generated by the Portfolio and supplemented by premiums received on writing covered call options on a portion of the Portfolio Securities. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides portfolio management services required by the Trust, and acts as the options advisor to execute and maintain the option writing strategy of the Trust. Highstreet writes covered call options from time to time on not more than 33% of the Portfolio in order to earn income from option premiums to supplement dividends and distributions generated by the Portfolio. Highstreet will generally only write covered calls to the extent needed for the Trust to pay the targeted distribution. The Trust will purchase Units under the mandatory market purchase program to the extent premiums generated from writing covered call options are in excess of amounts needed to fund the distribution. Report from Portfolio Manager and Options Advisor Overview Highstreet manages the option overlay strategy which involves selling covered call options on up to, but not more than, 33% of the Portfolio. The percentage of Portfolio Securities written on for each holding and the strike prices chosen are primarily a function of the Trust s income requirements. Highstreet may choose to close out option positions prior to their expiry, for options that are both Canadian Resources Income Trust 1 Interim Management Report of Fund Performance

2 out-of-the-money, and/or in-the-money, when prudent. Highstreet endeavors to avoid assignment, when possible, on any in-the-money positions. The overall investment objectives of the Trust are to provide targeted monthly cash distributions, to provide the opportunity for capital appreciation, and to provide lower overall volatility of portfolio returns than would otherwise be experienced from owning the equity securities on a stand-alone basis. Market Performance The first half of 2016 started on a negative note as Canadian and global market s experienced some of the steepest start of the year declines in more than a decade fueled by anxiety over global growth, persistant weak inflation in Japan and Europe, continuing concerns over the Chinese economy, and somewhat paradoxically uncertainty over the future path of interest rate increases out of the Federal Reserve, following the Federal Reserve s Federal Open Market Committee s decision to raise interest rates for the first time in 9 years, setting the United States on a divergent monetary policy course from other central banks. The US economy showed persistent signs of improvement, save for a weak jobs report closer to the end of the first half of This, in addition to uncertainty around the Brexit vote, caused the Federal Reserve s monetary policy stance to whipsaw between hawkish and dovish tones on raising interest rates. Meanwhile, the Japanese Central Bank and the European Central Bank stayed the course of negative interest rates, along with officials around the world who engaged in further easing in an attempt to spur tepid growth. Against all market expectations, the British people opted to leave the European Union on the Brexit vote on the 23rd of June, 2016, shocking the markets and sending them broadly lower. In this environment risk-off assets outperformed led by precious metal stocks, while volatility increased. Oil prices rebounded from their February lows, below $30/barrel, to highs of above $50/barrel, ending the quarter closer to its highs as the supply and demand dynamics of the oil market settled. Gold and other precious metals rallied steadily due to the combination of the prevalent risk-off sentiment and a relatively weaker US Dollar. Bond yields around the world reached record lows; the German 10-year yield became negative, and the US 10-year yield dipped below 1.40% as investors fled to the safe havens. The Japanese Yen displayed notable strength due to their status as a safe haven asset, while the rally in commodities helped the Canadian Dollar appreciate from lows of $0.69 USD to a high of $0.80 USD through the first half of the year. The first half of 2016 was positive for the material and resource sectors, as well as emerging market economies, and saw the TSX 60 among the top performing developed global equity markets during the period. The Basic Materials sector as defined by the Global Industry Classification System was the top performing industry sector during the first half of 2016, up 52.3%, with the Energy 19.3%, and Utilties 17.3% sectors also exhibiting strong performance. The Fund, buoyed by the strong performance of resource stocks, was up 27.2% for the first half solidly outperforming its benchmark the S&P TSX 60 Index, which was up 8.7%. Interim Management Report of Fund Performance 2 Canadian Resources Income Trust

3 Portfolio Performance The Portfolio delivered a total return of 27.5% for the period comprised of: 21.4% of price change, 1.5% from dividends received and 4.5% from premiums earned. Performance for each of the individual Portfolio Securities held during the period was as follows: Securities Performance (1) (%) Energy ARC Resources Ltd Cameco Corp. (15.8) Canadian Natural Resources Ltd Canadian Oil Sands Ltd Cenovus Energy Inc. 2.7 Crescent Point Energy Corp Enbridge Inc Encana Corp Husky Energy Inc. (7.8) Imperial Oil Ltd. (3.1) Inter Pipeline Ltd Pembina Pipeline Corp PrairieSky Royalty Ltd. (4.7) Suncor Energy Inc. 2.1 TransCanada Corp Basic Materials Agnico Eagle Mines Ltd Agrium Inc. (3.6) First Quantum Minerals Ltd Franco-Nevada Corp Goldcorp Inc Potash Corp. of Saskatchewan Inc. (7.8) Silver Wheaton Corp Teck Resources Ltd Yamana Gold Inc Utilities Emera Inc. 8.2 Fortis Inc (1) Performance comprised of price change and dividends. Options Activity For the period, call options were written on the Trust s Portfolio Securities raising $0.5 million in premiums or approximately 4.5% on the Portfolio. The average percentage written on the Portfolio was approximately 25.9% with an average strike percentage of 102.7%. Highstreet s proprietary option overlay model examines a number of factors, including short-term price change and momentum metrics, to determine a target level of call writing and level of strike for each holding in the underlying Portfolio. Targeted strike levels are preferably out-of-the-money to allow the opportunity to capture potential positive performance of the underlying stocks in addition to option premiums. Canadian Resources Income Trust 3 Interim Management Report of Fund Performance

4 Results of Operations The net assets attributable to Unitholders per Unit at June 30, 2016 were $10.05 as compared to $8.21 at December 31, 2015, representing an increase of 22.4% or $1.84 per Unit due primarily reflecting appreciation in the fair value of the Trust s Portfolio. As at June 30, 2016, the total fair value of the Portfolio was $13.5 million (December 31, 2015 $11.2 million), reflecting net unrealized appreciation of $0.06 million (December 31, 2015 net unrealized depreciation of $3.4 million). Pursuant to the mandatory market purchase program, the Trust may purchase any Units offered in the market at a price less than 98% of the latest net asset value per Unit. For the six month period ended June 30, 2016, 8,400 (2015 6,300) Units were purchased under this program at an average price of $8.71 (2015 $11.54) per Unit for a total purchase amount of $73,157 (2015 $72,684). For the six months ended June 30, 2016, $0.503 million (2015 $0.483 million) was available for distribution purposes, comprised of an estimated $0.030 million (2015 $0.208 million) of Net Investment Income, $0.546 million (2015 $0.349 million) of option premiums received, nil (2015 ($0.001) million) of return of capital less purchases under the mandatory market purchase program of $0.073 million (2015 $0.073 million). For the six months ended June 30, 2016, the Trust declared total distributions of $0.48 million or $0.354 per Unit (2015 $0.45 million or $0.292 per Unit). Related Party Transactions For its services to the Trust, which includes the provision of key management personnel, SMCAI is entitled to receive an administration fee equal to 0.75% per annum of the net assets of the Trust. SMCAI pays Highstreet out of the administration fee. The total administrative fees paid to SMCAI for the six months ended June 30, 2016 were $52,992 (2015 $51,834). As of June 30, 2016, the Trust had no accrued liabilities payable to SMCAI (December 31, 2015 $16,842), and had cash on deposit with SCI and The Bank of Nova Scotia of $5,807 (December 31, 2015 $7,346). The Portfolio Manager and Options Advisor is responsible for managing the purchase and sale of Portfolio Securities as required to meet investment objectives and operating policies of the Trust. Such transactions may be carried out using the services of SCI or other brokerage houses on an agency basis for a fixed cost. During the period ended June 30, 2016, all portfolio transactions were conducted on an agency basis with SCI receiving commissions of $6,200 (2015 $19,392). For the six months ended June 30, 2016, transaction costs of $168 (2015 $126) were paid to SCI under the mandatory market purchase program. Interim Management Report of Fund Performance 4 Canadian Resources Income Trust

5 Financial Highlights The following tables show selected key financial information about the Trust and are intended to help you understand the Trust s financial performance for the interim period and past five years. The information for the six months ended June 30, 2016 is derived from the Trust s unaudited financial statements while the annual information is derived from the Trust s audited financial statements. For the Six Months Ended June 30, For the Years Ended December (1) Net assets per Unit, beginning of period/year... $8.21 $12.17 $13.15 $12.13 $13.08 $14.16 Increase (decrease) from operations: Total income Total expenses (2)... (0.13) (0.37) (0.16) (0.13) (0.13) (0.31) Realized gains (losses) for the period/year... (0.34) (0.10) 0.71 Unrealized gains (losses) for the period/year (3) (3.96) (1.14) 0.97 (0.83) (1.58) Total increase (decrease) from operations (3.31) (0.40) 1.64 (0.34) (0.42) Distributions: From dividends... (0.14) (0.36) (0.38) (0.45) (0.55) From return of capital... (0.51) (0.22) (0.24) (0.19) (0.11) Total Distributions (4)... (0.35) (0.65) (0.58) (0.62) (0.64) (0.66) Net assets per Unit, end of period/year... $10.05 $ 8.21 $12.17 $13.15 $12.10 $13.08 Based on the weighted average number of Units during the period/year except for the net assets and distributions wherein the actual number of Units outstanding at the relevant time are used. (1) Upon adoption of IFRS, net assets, beginning of year, increased $62,768 or $0.03 per Unit, unrealized gains (losses) decreased $37,637 or $0.02 per Unit and net assets, end of year, increased $25,131 or $0.01 per Unit following revaluation of investments to closing prices. All years prior to 2013 have not been restated for IFRS. (2) 2015 total expenses include reorganization costs of $203, total expenses include an adjustment of ($4,619) on warrant issuance costs total expenses include transaction costs of $582,866 on warrants exercised. (3) Includes adjustment to reconcile the basis of calculation of per Unit amounts between the weighted average and the end of period/year number of Units as follows: 2016 nil, 2015 ($0.06), 2014 $0.01, 2013 $0.03, 2012 $0.03, and in 2011 ($0.44) also reflects the issue of Units on the exercise of warrants. (4) All distributions were paid in cash. The allocations for 2016 between the various components will be determined at year end. Ratios and Supplemental Data (based on net asset value) June 30, Net asset value (000 s) (1)(2)... $ 13,557 $ 11,144 $ 19,611 $ 24,067 $ 24,729 $ 28,537 Number of Units outstanding (1)... 1,349,010 1,357,410 1,611,085 1,829,983 2,038,816 2,176,532 Management expense ratio (3) % 3.33% 1.14% 1.01% 1.01% 2.16% Trading expense ratio (4) % 0.32% 0.01% 0.01% 0.01% 0.14% Portfolio turnover rate (5 ) % % 0.00% 1.99% 2.70% 7.49% Net asset value per Unit (1)... $ $ 8.21 $ $ $ $ Closing market price per Unit... $ 9.52 $ 7.72 $ $ $ $ (1) This information is provided as at December 31st of the year shown except for the six month period where the information is provided at June 30, (2) Net asset value is equal to net asset value per Unit multiplied by the number of Units outstanding. (3) Management expense ratio is based on total expenses for the stated period/year, excluding transaction costs, and is expressed as an annualized percentage of the weekly average Unit net asset value during the period/year. The Trust realized costs in connection with its reorganization in 2015, warrant offering in 2011, and adjustment to warrant issuance costs in Without these costs, the management expense ratio would have been 2.05% in 2015, 1.03% in 2012 and 0.82% in (4) Purchases and sales of the Portfolio Securities in rebalances of the Portfolio and to fund the annual retraction may be executed on a basket bid basis. Commissions are not explicitly charged on these basket bids and as such, trading expenses are considered nil for these purposes. The trading expense ratio represents commissions on trades exclusive of these basket bids. (5) The portfolio turnover rate indicates how actively the Portfolio Manager manages the portfolio investments. A portfolio turnover rate of 100% is equivalent to the Trust buying and selling all of the securities in the Portfolio once in the course of the period/year. Canadian Resources Income Trust 5 Interim Management Report of Fund Performance

6 Past Performance Year by Year Returns The following chart shows the performance of the Trust s Units based on net asset value for the past ten years including for the six months ended June 30, 2016, indicating, in percentage terms, how much an investment made on the first day of each financial period/year would have increased or decreased by the last day of each financial period/year and assumes that distributions and deemed distributions based on the warrant s intrinsic value on their exercise date were reinvested in additional Units at net asset value. Past performance is not an indication of how the Units will perform in the future. The calculation of the returns based on net asset value follows the requirements of NI As an investor cannot purchase or sell the Units at net asset value except on an annual retraction, the following is an indication of the performance of the assets of the Trust rather than returns available to Unitholders. Returns based on market value are also presented in narrative form below as an indication of returns actually available to Unitholders. 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 13.3% 36.2% 16.6% 4.1% 2.5% -30.8% -2.6% 13.9% -3.6% -28.1% 27.2% 8AUG For the Years Ended December 31, and the Six Months Period Ended June 30, 2016 The market value return for the Units was 4.1%, 12.5%, 31.0%, 39.6%, 14.3%, 29.8%, 20.0%, 13.1%, 0.1%, and 31.2% for the years 2006 through 2015, respectively and was 28.5% for the six months ended June 30, This performance reflects payment of costs related to the Reorganization of the Trust and assumes that distributions are reinvested in additional Units at the then market price on the Toronto Stock Exchange, which price may reflect a premium or discount to net asset value. In addition, deemed distributions based on a warrant s intrinsic value on their exercise date were assumed to be reinvested in additional Units at net asset value. Interim Management Report of Fund Performance 6 Canadian Resources Income Trust

7 Summary of Investment Portfolio Below is a summary of the Trust s Portfolio based on closing sale prices as at June 30, This summary of Portfolio may change due to corporate actions of the Portfolio Securities. Weekly updates are available on the internet at or by contacting investor relations at Portfolio, at fair value... $13,610,267 The Trust s Portfolio as at June 30, 2016 is listed below: Securities % of Net Asset Value Teck Resources Limited B Agnico Eagle Mines Limited Silver Wheaton Corp Encana Corporation TransCanada Corporation ARC Resources Ltd Franco-Nevada Corporation Pembina Pipeline Corporation Canadian Natural Resources Limited Crescent Point Energy Corp Enbridge Inc Fortis Inc Inter Pipeline Ltd Emera Inc Cenovus Energy Inc Suncor Energy Inc Agrium Inc Imperial Oil Limited Potash Corporation of Saskatchewan Inc Cameco Corporation Canadian Resources Income Trust 7 Interim Management Report of Fund Performance