2018 Semi-Annual Management Report of Fund Performance

Transcription

1 (the Fund ) For the six-month period ended March 31, 2018 (the Period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio manager: BMO Asset Management Inc., Toronto, Ontario (the portfolio manager ) 2018 Semi-Annual Management Report of Fund Performance This semi-annual management report of fund performance contains financial highlights but does not contain the complete semi-annual or annual financial statements of the Fund. If the semi-annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling and , by writing to us at BMO Investments Inc., First Canadian Place, 100 King Street West, 43rd Floor, Toronto, Ontario, M5X 1A1 or by visiting our website at and or SEDAR at You may also contact us using one of these methods to request a copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Results of Operations During the Period, the Fund s total net asset value changed from approximately $818 million to approximately $805 million. Series A shares of the Fund returned 2.64%. Please see the Past Performance section for information on the performance returns of the Fund s other series. The Period was a volatile one, with markets first rallying in the fourth quarter of 2017 as long-awaited tax reform was introduced in the U.S., and continued acceleration of the global economy pushed equity markets to new highs by the end of the year. This continued into January when modestly higher wage pressure and stretched valuations of some market sectors, such as Information Technology, finally forced the first correction of the S&P 500 Index since February A correction is typically defined as a greater than decline in equity prices. Bonds moved in tandem with equities, providing little comfort, as 10-year bond yields reacted to fears of accelerating inflation. Policy and politics were a major factor, with President Trump s administration s focus on global trade, first implementing steel and aluminum tariffs, with notable exceptions granted to Canada and other nations, and then more targeted levies on US$50 billion of Chinese goods in an effort to generate a US$100 billion reduction in the U.S. trade deficit. The North American Free Trade Agreement ( NAFTA ) negotiations continued, with various ups and downs as the U.S. pushed the agenda for a May 1st deal. In Canada, a deceleration of gross domestic product ( GDP ) growth in the second half of the Period kept equity prices muted before selling off in February. The quarterly annualized growth rate fell from the stratospheric 2017 second quarter rate of 4.25%, while the year over year growth rate as of the end of the Period stood at 2.7%. Despite West Texas Intermediate s ( WTI ), a benchmark used in pricing crude oil, 28% gain in the price of crude oil, the Energy sector of the S&P/TSX Composite Index fell 10.3%, reflecting the sizeable discount Canada s output trades at, a result of transportation and distribution constraints within North America. Among equity markets, the Nasdaq 100 Index and the MSCI Emerging Markets Index were the leaders, each rising more than 8% over the Period, followed by Japanese equities and the S&P 500 Index, up 5.1% and 4.4%, respectively, in local currency returns. Eurozone equities were the greatest underperformers, with the STOXX 50 Index falling 6.7%, followed by the FTSE 100 Index, which fell 5.1%. However, the Canadian dollar fell versus most foreign currencies during the Period, boosting the relative returns of foreign equities. This proved beneficial to the Fund in that foreign currency exposures were left unhedged during the Period. In Canada, the two other dominant sectors did little to offset the decline in the Energy sector, with Banks delivering a flattish 1.7% gain, and Materials falling 1.1%, for an overall decline of the broad S&P/TSX Composite Index of -2.2%. During the Period, Canadian bonds yields were volatile. The 10-year Government of Canada bond yield fell to a low of 1.83% in December, before climbing rapidly throughout January to peak at 2.37%, before settling back to end the Period at 2.09%, only 3 basis points lower than it began. Corporate bonds outperformed government issues by only a few basis points, while longer bonds (i.e., beyond 10-year maturities) outperformed as relatively muted inflation

2 pressures eased 20 and 30 year yields. U.S. credit exposures detracted from returns, as spreads (i.e., difference in yields) widened somewhat in tandem with equity market volatility. The Manager confirms that the Fund did not borrow money during the Period. For information on the Fund s performance and composition, please refer to the Past Performance section and Summary of Investment Portfolio section of this report. Recent Developments As is often the case in financial markets, investor behaviour is presently reacting to short-term impacts of political rhetoric and individual company news, and extrapolating them to entire sectors and markets, regardless of any significant changes to fundamental or economic data that support the case for continued growth. While any individual data point in a given month may be positive and negative, it is hard to determine if a firm s downward trend has been established and hence corporate earnings growth may turn sharply negative. If this is not the case, equities should outperform bonds on a 12-month horizon, despite the current market correction. While price declines of more than can be unnerving, they are hardly insurmountable, with the average intra-year drop of the S&P 500 Index having averaged 13.8% since 1980, while delivering an annualized return of 8.8% over the same Period. Of greater concern is the acceleration of anti-globalization, either due to escalation of trade disputes, nationalistic political platforms, or strains upon international diplomacy. Even the most optimistic investor would be hard pressed to look past the implications of any of these issues, but when examined in terms of pure fundamental impacts on consumer demand, corporate earnings, and global growth, a sharply negative outcome still falls in the realm of possibility, not probability. Pending further negative developments, for which the portfolio manager is closely watching, the case for a positive environment for financial markets over the next 12 months remains intact. Recent events and price corrections have modestly tilted the portfolio manager s bias for European equities back to the U.S., while the portfolio manager remains cautious on the outlook for Canadian GDP growth, and hence Canadian equities. Inflation concerns have eased somewhat, although the risk remains to the upside, with consensus expectations indicating the U.S. Federal Reserve Board remains on track for three more interest rate increases in 2018, barring significant negative economic data. As such, the portfolio manager remains neutral on duration (i.e., interest rate sensitivity) among the Fund s fixed income exposures. Subsequent Event Risk Rating Change The risks associated with an investment in the Fund remain as disclosed in the Fund s most recent simplified prospectus or any amendments and fund facts document. During the Period there were no changes to the Fund that materially affected the overall risk level associated with an investment in the Fund. However, beginning in May 2018 the Fund s investment risk level is being determined by calculating the Fund s ten-year standard deviation in accordance with the investment risk classification methodology under National Instrument Investment Funds, which came into force effective September 1, If the Fund does not have at least ten years of performance history, a reference index that is expected to reasonably approximate the Fund s standard deviation is used as a proxy for the remainder of the ten year period. In May 2018, the Manager reviewed the Fund using the new standardized investment risk classification methodology and determined that the risk rating of the Fund had not changed. The Manager reviews the Fund s investment risk level and reference index, if any, at least annually. RELATED PARTY TRANSACTIONS BMO Investments Inc., an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ), is the Manager of the Fund. From time to time, the Manager may, on behalf of the Fund, enter into transactions or arrangements with or involving other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Manager (each a Related Party ). The purpose of this section is to provide a brief description of any transaction involving the Fund and a Related Party. Portfolio Manager The Fund s portfolio manager is BMO Asset Management Inc. ( BMOAM ), an affiliate of the Manager. BMOAM provides portfolio management services to the Fund. BMOAM receives from the Fund a management fee based on assets under management, calculated daily and payable monthly. Administration Fee and Operating Expenses The Fund pays a fixed administration fee to the Manager in respect of each series. The Manager in return pays the operating expenses of these series of the Fund, other than certain specified expenses that are paid directly by the Fund ( Fund Expenses ). Fund Expenses, include expenses incurred in respect of preparing and distributing fund facts, interest or other borrowing expenses, all reasonable costs and expenses incurred in relation to compliance with NI , including compensation and expenses payable to the Fund s Independent Review Committee ( IRC )

3 members, taxes to which the Fund is or might be subject, and costs associated with compliance with any new governmental or regulatory requirement introduced after December 1, Fund Expenses are allocated proportionately among the relevant series. If the Fund Expenses are specific to a series, the Fund Expenses are allocated to that series. The fixed administration fee is calculated as a fixed annual percentage of the average net asset value of each relevant series of the Fund. Further details about the fixed administration fee and/or Fund Expenses can be found in the Fund s most recent simplified prospectus at and or Brokerage Commissions The Fund pays standard brokerage commissions at market rates to BMO Nesbitt Burns Inc., an affiliate of the Manager, for executing a portion of its trades. The brokerage commissions charged to the Fund (excluding exchange and other fees) during the periods indicated, were as follows: Mar. 31, 2018 Mar. 31, 2017 $000 $000 Total brokerage commissions $ Brokerage commissions paid to BMO Nesbitt Burns Inc. $ Distribution Services The Manager markets and distributes the Fund through Bank of Montreal branches and/or (depending on the series) through registered dealers and brokers, including BMO InvestorLine Inc. and BMO Nesbitt Burns Inc., both affiliates of the Manager. The Manager pays to these affiliates a service fee called a trailing commission based on the average daily value of the units and/or shares that are held in investor accounts. This service fee is paid monthly or quarterly and varies by purchase option and by series. Management Fees The Manager is responsible for the day-to-day management of the business and operations of the Fund. The Manager monitors and evaluates the Fund s performance, pays for the investment advice provided by the Fund s portfolio manager and provides certain administrative services required by the Fund. As compensation for its services, the Manager is entitled to receive a management fee payable monthly, calculated based on the daily net asset value of each series of the Fund at the annual rate set out in the table below. As a Percentage of Management Fees General Annual Administration, Management Dealer Investment Fee Rate Compensation Advice and Profit % % % Series A Shares Advisor Series Shares Series T6 Shares Series F Shares Series F2 Shares Series D Shares 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 Share (1) Series A Shares Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $

4 Advisor Series Shares Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Series T6 Shares Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Series F Shares Net assets, beginning of period $ Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ Series F2 Shares Net assets, beginning of period $ )* Total revenue $ Total expenses (2) $ for the period $ for the period $ from operations (3) $ (excluding dividends) $ From dividends $ 0.06 From capital gains $ 0.10 Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ )

5 Series D Shares Nov. 20, 2017 to Mar. 31, 2018 Net assets, beginning of period $ 10.00)* Total revenue $ 0.23 Total expenses (2) $ for the period $ 0.08 for the period $ from operations (3) $ (excluding dividends) $ From dividends $ From capital gains $ 0.09 Return of capital $ Total Annual Distributions (4) $ 0.09 Net assets, end of period $ 9.91 * Initial net assets. (1) This information is derived from the Fund s unaudited and audited financial statements. The financial information presented for the periods ended March 31, 2018, September 30, 2017, September 30, 2016, September 30, 2015 and September 30, 2014 is derived from the financial statements determined in accordance with IFRS. Information for periods prior to October 1, 2013 is derived from prior period financial statements prepared in accordance with Canadian GAAP. (2) Includes commissions and other portfolio transaction costs. Prior to October 1, 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 shares outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of shares outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per share. (4) Distributions were either paid in cash or reinvested in additional shares of the Fund, or both. The information shown in this column is for the period beginning February 15, 2017 (the series inception date) and ending September 30, Ratios and Supplemental Data Series A Shares Total net asset value (000 s) (1) $ 474, , , , , ,978 outstanding (000 s) (1) 32,720 35,118 33,861 44,182 50,375 63,034 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per share $ Advisor Series Shares Total net asset value (000 s) (1) $ 151, , , , , ,849 outstanding (000 s) (1) 10,789 11,097 12,197 13,601 14,033 15,905 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per share $ Series T6 Shares Total net asset value (000 s) (1) $ 74,927 70,430 53,012 53,501 37,840 26,056 outstanding (000 s) (1) 8,360 7,755 5,542 5,515 3,791 2,736 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per share $ Series F Shares Total net asset value (000 s) (1) $ 102,866 92,424 46,664 32,866 17,223 13,941 outstanding (000 s) (1) 6,717 6,172 3,177 2,376 1,299 1,181 (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per share $ Series F2 Shares Total net asset value (000 s) (1) $ 1,658 1,154 outstanding (000 s) (1) (2) % before waivers or absorptions % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per share $ Series D Shares Nov. 20, 2017 to Mar. 31, 2018 Total net asset value (000 s) (1) $ 208 outstanding (000 s) (1) 21 (2) % 0.90 before waivers or absorptions % 1.12 Trading expense ratio (3) % 0.02 Portfolio turnover rate (4) % 7.60 Net asset value per share $ ) (1) This information is provided as at March 31 or September 30 of the period shown, as applicable. (2) is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (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 February 15, 2017 (the series inception date) and ending September 30, 2017.

6 PAST PERFORMANCE Series T6 Shares The Fund s performance information assumes that all distributions made by the Fund in the periods shown were used to purchase additional securities of the Fund and is based on the net asset value of the Fund. The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember that how the Fund has performed in the past does not indicate how it will perform in the future (3) The returns of each series may differ from one another for a number of reasons, including if the series was not issued and outstanding for the entire reporting period and because of the different levels of management fees and expenses allocated and payable by each series. Year-by-Year Returns The following bar charts show the performance of each series of the Fund for each of the financial years shown and for the six-month period ended March 31, The charts show in percentage terms how an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year. Series A Shares Series F Shares (1) Series F2 Shares (4) (2) 2011 Advisor Series Shares Series D Shares (1) (1) For the period beginning with the performance launch date of April 26, 2010 to September 30, (2) For the period beginning with the performance launch date of July 12, 2010 to September 30, (3) For the period beginning with the performance launch date of November 26, 2010 to September 30, (4) For the period beginning with the performance launch date of February 17, 2017 to September 30, For the period beginning with the performance launch date of November 21, 2017 to March 31, (6) For the six-month period ended March 31, 2018.

7 SUMMARY OF INVESTMENT PORTFOLIO As at March 31, 2018 % of Net Portfolio Allocation Asset Value Fixed Income Funds 39.4 U.S. Equity Funds 21.2 Canadian Equity Funds 18.7 International Equity Funds 16.4 Emerging Markets Equity Funds 3.3 Cash/Receivables/Payables 1.0 Total Portfolio Allocation % of Net Holdings*+ Asset Value Issuer BMO S&P 500 Index ETF 13.7 BMO Discount Bond Index ETF 11.2 BMO S&P/TSX Capped Composite Index ETF 11.2 BMO MSCI EAFE Index ETF 11.0 BMO Aggregate Bond Index ETF 8.5 BMO Canadian Dividend ETF 7.5 BMO US Dividend ETF 7.5 BMO Mid-Term US IG Corporate Bond Index ETF 6.6 BMO Mid Corporate Bond Index ETF 5.0 BMO High Yield US Corporate Bond Index ETF 4.5 BMO MSCI Europe ex-uk Income Leaders (GBP Hedged) UCITS ETF 2.5 BMO MSCI Emerging Markets Index ETF 2.3 BMO Floating Rate High Yield ETF 1.6 BMO Emerging Markets Bond Hedged to CAD Index ETF 1.5 BMO MSCI Japan Hedged to USD ETF BMO MSCI UK Income Leaders UCITS ETF 1.1 Cash/Receivables/Payables 1.0 BMO India Equity Index ETF 1.0 BMO Asia High Dividend ETF BMO Asia USD Investment Grade Bond ETF Total Holdings as a Percentage of Total Net Asset Value Total Net Asset Value $805,449,443 *Represents entire portfolio. +The prospectus and other information about the underlying exchange traded funds held in the portfolio are available on the internet at and, also at +The prospectus and other information about the underlying UCITS exchange traded funds held in the portfolio are available on the internet at ++The prospectus and other information about the underlying exchange traded funds are available on the internet at The summary of investment portfolio may change due to the Fund s ongoing portfolio transactions. Updates are available quarterly.

8 BMO Investments Inc. First Canadian Place, 43rd Floor 100 King Street West Toronto, Ontario M5X 1A1 and If you have any questions, please give us a call as follows: If you purchased BMO Mutual Funds through a BMO Bank of Montreal branch or BMO Online Banking, please call If you purchased BMO Mutual Funds through a full-service or discount broker, please call or clientservices.mutualfunds@bmo.com. This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, the effects of competition in the geographic and business areas in which the Fund may invest in and the risks detailed from time to time in BMO Mutual Funds simplified prospectus. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, BMO Investments Inc. does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal. BMO (M-bar roundel symbol) registered trademark, and BMO (M-bar roundel symbol) Mutual Funds are owned by Bank of Montreal, used under license.