Scotia Canadian Corporate Bond LP

Transcription

1 Scotia Canadian Corporate Bond LP Annual Management Report of Fund Performance For the period ended December 31, 2013 This annual management report of fund performance ( MRFP ) contains financial highlights, but does not contain the complete annual financial statements of the fund. If you have not received a copy of the annual financial statements with this report, you may obtain a copy at your request, and at no cost, by calling toll-free , by visiting our website or SEDAR at or by writing to us at 1832 Asset Management L.P., Scotia Plaza, 52nd Floor, 40 King Street West, Toronto, Ontario M5H 1H1. Securityholders 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 or quarterly portfolio disclosure Asset Management L.P. is the manager (the Manager ) of the fund. In this document, we, us, our and the Manager refer to 1832 Asset Management L.P. and fund refers to the Scotia Canadian Corporate Bond LP. Caution Regarding Forward-Looking Statements Certain portions of this report, including, but not limited to, Recent Developments, may contain forward-looking statements about the fund and the underlying funds, as applicable, including statements with respect to strategies, risks, expected performance events and conditions. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as expects, anticipates, intends, plans, believes, estimates, projects and similar forward-looking expressions or negative versions thereof. In addition, any statement that may be made concerning future performance, strategies or prospects and possible future action by the fund is also a forward-looking statement. Forward-looking statements are based on current expectations and projections about future general economic, political and relevant market factors, such as interest rates, foreign exchange rates, equity and capital markets, and the general business environment, in each case assuming no changes to applicable tax or other laws or government regulation. Expectations and projections about future events are inherently subject to, among other things, risks and uncertainties, some of which may be unforeseeable. Accordingly, current assumptions concerning future economic and other factors may prove to be incorrect at a future date. Forward-looking statements are not guarantees of future performance and actual results or events could differ materially from those expressed or implied in any forward-looking statements made by the fund. Any number of important factors could contribute to these digressions, including, but not limited to, general economic, political and market factors in North America and internationally, such as interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government relations, unexpected judicial or regulatory proceedings and catastrophic events. We stress that the above mentioned list of important factors is not exhaustive. Some of these risks, uncertainties and other factors are described in the fund s simplified prospectus, under the heading Specific risks of mutual funds. We encourage you to consider these and other factors carefully before making any investment decisions. Forward-looking statements should not be unduly relied upon. Further, you should be aware of the fact that the fund has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, prior to the release of the next management report of fund performance, and that the forward-looking statements speak only to the date of this management report of fund performance. Management Report of Fund Performance Investment Objectives and Strategies The fund s objective is to provide exposure to a high level of income and modest capital gains from primarily bonds issued by Canadian corporations. The fund will obtain such exposure using forward contracts, deposit notes or other derivatives to gain exposure to the return of Scotia Private Canadian Corporate Bond Pool (the Reference Fund ). The fund follows the same investment strategies as the Reference Fund, as the fund primarily obtains exposure to the Reference Fund. The fund may enter into forward contracts under which it purchases or sells Canadian equity securities, may purchase deposit notes or may enter into other derivatives transactions in order to gain exposure to the Reference Fund. The fund may also invest directly in the Reference Fund. The Reference Fund invests primarily in fixed-income securities issued by Canadian corporations. Securities with a maturity of one year or less will generally have a credit rating of R2 (low) or better by DBRS Limited (DBRS), or an equivalent rating by another approved rating agency. Securities with a maturity of more than one year must have a credit rating of BBB (low) or better by DBRS, or an equivalent rating by another approved rating agency. The Reference Fund can invest up to 25% of its assets in securities that have a credit rating of no lower than B (low) by DBRS, or an equivalent rating by another approved rating agency. Risk The overall risks of investing in the fund are as discussed in its simplified prospectus. The fund may be suitable for investors who want exposure to a well diversified portfolio of fixed-income securities issued by Canadian corporations, can accept medium risk, are investing for the long term, and are planning to hold the investment in a non-registered account.

2 Results of Operations For the year ended December 31, 2013 (the period ), the Series I units of the fund generated a total return of 0.95%. Fund returns are reported net of all management fees and expenses for all series, unlike the returns of the fund s benchmark, which is based on the performance of an index that does not pay fees or incur expenses. The fund s broad-based benchmark DEX Universe Bond Index, returned 1.19% during the same period. We have included a comparison to this broad-based index to help you understand the fund s performance relative to the general performance of the market. The fund s relevant benchmark DEX Capped Short-Mid Corporate Bond Index (Blended), returned 1.7% during the same period. We have included this comparison, which more closely reflects the asset classes in which the fund invests, to provide a more useful comparative to the performance of the fund. Over the review period, Canadian corporate bond performance was mixed. In the first quarter, Canadian corporate bond spreads tightened by 15 to 17 basis points (bps) despite new corporate issuance. In the second quarter, the U.S. Federal Reserve Board (the Fed) indicated that it could begin to scale back its quantitative easing program later in the year. Bond yields rose sharply, equity markets retreated somewhat, and commodities prices declined. Corporate bond spreads also widened, particularly shorter-term spreads. In the third quarter, new corporate issuance remained strong in the Canadian market, yet bond spreads ended the quarter almost unchanged. Toward the end of the review period, the Fed began the process of scaling back its quantitative easing program by reducing its monthly bond purchases. The market reaction to this news was subdued. Over the entire review period, mid-term corporate spreads tightened by 21 bps, outperforming shorter-term corporate bonds, as investors seeking yield took advantage of relatively steep yield and credit curves. However, this was more than offset by increases in five- and 10-year yields of about 50 bps and 85 bps, respectively. New Canadian corporate issuance reached record levels in The Reference Fund outperformed its broad-based benchmark but underperformed its relevant benchmark over the review period. The fund s underweight position in the life insurance company sub-sector detracted from performance, as did its longer-thanbenchmark duration. However, the fund s overweight positions in the auto finance, grocery retail, and banking sub-sectors contributed to performance, as did holdings in these sectors. The banking sub-sector benefited from strong new issuance outside of the Canadian market. The fund s holdings in telecommunication services sector bonds also contributed to performance, as these bonds performed well when it was confirmed that no large foreign wireless operators would enter the Canadian market. Significant individual contributors to performance included bonds issued by Ford Credit Canada Limited, Loblaw Companies Limited, and Sobeys Inc. Certain series of the fund, as applicable, may make distributions at a rate determined by the Manager from time to time. If the aggregate amount of distributions in such series exceeds the portion of net income and net realized capital gains allocated to such series, the excess will constitute a return of capital. The Manager does not believe that the return of capital distributions made by such series of the fund have a meaningful impact on the fund s ability to implement its investment strategy or to fulfill its investment objective. The fund s net asset value increased by 15.6% to $104.4 million at December 31, 2013, from $90.3 million at December 31, The increase is attributed to net sales of $13.1 million and investment performance of $1.0 million. The investment performance of the fund includes earned income and expenses which vary year over year due to portfolio activity. The fund s expenses increased as compared to the previous year mainly as a result of changes in average net assets and portfolio activity. Income increased as compared to the previous year due to changes in the fund s income earning investments. Recent Developments Although there are signs that the economy is still improving, the portfolio advisor believes declining inflation and the growing risk of deflation are likely to contribute to higher real interest rates. Both of these issues are likely to be significant concerns for the Fed. Absolute bond spreads have performed well, and credit curves have flattened. However, the portfolio advisor believes credit fundamentals and metrics remain strong. Therefore, the portfolio advisor believes the opportunity to earn excess returns still exists. In the portfolio advisor s view, the biggest risks to credit fundamentals include mergers and acquisitions, large debtfunded projects, and increased leverage as a result of dividend increases and share buybacks. Macroeconomic risks also appear to exist, such as the potential for further European sovereign debt issues, slower growth in China, and the continued potential for fiscal and monetary policy missteps. The portfolio advisor will likely continue to monitor these risks closely. Manager Name Change Effective September 30, 2013, the Manager changed its name from Scotia Asset Management L.P. to 1832 Asset Management L.P. Harmonized Sales Tax On August 26, 2011, a majority of voters in a British Columbia referendum opted to eliminate the application of harmonized sales tax ( HST ) in that province. Effective April 1, 2013 the government of British Columbia phased out the HST and returned to its former system of the federal goods and services tax ( GST ) and provincial sales tax ( PST ). In addition, effective April 1, 2013, the government of Prince Edward Island harmonized its PST with the federal HST at a combined rate of 14%. Furthermore, the government of Quebec harmonized certain aspects of the Quebec sales tax ( QST ) with the HST effective

3 January 1, 2013, subject to certain transitional rules. As a result of the harmonization, the fund s overall tax burden may increase. Among other things, financial services are now generally exempt from QST rather than being zero-rated, such that QST payable by the fund, for instance on management fees and other fees, are no longer refundable. As of January 1, 2013, the QST is calculated on the selling price not including GST. However, to ensure the total taxes payable remain the same, the QST rate has been increased to 9.975%. The combined GST/QST rate is %. International Financial Reporting Standards On December 12, 2011, the Canadian Accounting Standards Board ( AcSB ) extended the deferral of the mandatory International Financial Reporting Standards ( IFRS ) changeover date for investment entities to fiscal year beginning on or after January 1, Consequently, the fund will adopt IFRS beginning January 1, 2014 and will publish the first financial statements, prepared in accordance with IFRS, for the semi-annual period ending June 30, The June 30, 2014 semi-annual and December 31, 2014 annual financial statements will include an opening Statement of Financial Position as at January 1, 2013 ( the transition date ), and comparative financial information prepared in accordance with IFRS. In addition, on May 12, 2011, the International Accounting Standards Board ( IASB ) issued IFRS 13 Fair Value Measurement, which defines fair value, sets out a single IFRS framework for measuring fair value and requires disclosure about fair value measurements. It only applies when other IFRS standards require or permit fair value measurement. If an asset or a liability measured at fair value has a bid price and an ask price, it requires valuation to be based on a price within the bid-ask spread that is most representative of fair value. It allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread. This may result in eliminating the difference between the net asset value per unit and net assets per unit under current Canadian GAAP. Furthermore, in October 2012, the IASB issued Investment Entities (Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements ), which define an investment entity and introduce an exception to the consolidation requirements. The amendments require an investment entity to measure investments in most controlled subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments. The amendments also introduce new disclosure requirements for these entities and apply for annual periods beginning on or after January 1, The Manager has developed a changeover plan to meet the implementation date published by the AcSB. The key elements of the plan include identifying differences between the fund s current accounting policies and those the fund expects to apply under IFRS, as well as any accounting policy and implementation decisions and their resulting impact, if any, on the net assets or net asset value of the fund. Based on the Manager s analysis to date, there will likely be no material impact to the net asset value per unit of each series of the fund due to the changeover to IFRS. The major changes that will result from the adoption of IFRS will be in the areas of fair valuation measurement, the addition of cash flow statements, classification of net assets representing unitholders equity, and additional note disclosures. However, this present determination is subject to change resulting from the issuance of new standards or new interpretations of existing standards. Related Party Transactions The Manager is a wholly-owned subsidiary of The Bank of Nova Scotia ( Scotiabank ) and a related party to the fund. In addition, Scotiabank owns a significant interest in CI Financial Corp. and owns, directly or indirectly, 100% of Scotia Capital Inc. ( SCI ). CI Financial Corp. and SCI are related parties to the fund. The following arrangements listed below are considered related party transactions: Operating expenses The fund is responsible for operating expenses relating to the carrying on of its business. Each series of a fund is allocated its own expenses and its proportionate share of the fund s expenses that are common to all series. Operating expenses may include legal fees and other costs incurred in order to comply with legal and regulatory requirements and policies, audit fees, custodial fees, taxes, brokerage commissions, unitholder communication costs and other administration costs. Examples of other administrative costs include departmental expenses incurred and paid by the Manager which support the daily operation of the funds. The fund incurred $9,708 (December 31, 2012 $2,219) in administration service expenses. The Manager absorbed $163 (December 31, 2012 $36) of total expenses during the period. Such absorption may be terminated by the Manager at any time without notice. Other Fees Our affiliates may earn fees and spreads in connection with various services provided to, or transactions with, the fund, such as banking, brokerage, securities lending, foreign exchange and derivatives transactions. We, or our affiliates, may earn a foreign exchange spread when unitholders switch between units of funds denominated in different currencies. The fund also maintains bank accounts and over-draft provisions with Scotiabank for which Scotiabank may earn a fee. Independent Review Committee The Manager has established the Independent Review Committee (the IRC ) for the funds in accordance with the requirements of National Instrument Independent Review Committee for Investment Funds ( NI ) in order to review and provide recommendations or approval, as required, regarding certain conflict of interest matters referred to it by the Manager on behalf of the funds. The IRC is responsible for overseeing the Manager s

4 decisions in situations where the Manager is faced with any present or perceived conflicts of interest, all in accordance with NI The composition of the IRC was changed on November 1, The IRC consists of six members, all of whom are independent of the Manager. The IRC prepares and files a report to securityholders each fiscal year that describes the IRC and its activities for securityholders which is available on the Manager s website at The compensation and other reasonable expenses of the IRC will be paid out of the assets of the funds as well as out of the assets of the other investment funds for which the IRC may act as the independent review committee. The main components of compensation are an annual retainer and a fee for each committee meeting attended. The chair of the IRC is entitled to an additional fee. Expenses of the IRC may include premiums for insurance coverage, travel expenses and reasonable out-of-pocket expenses. The fund received the following standing instructions from the IRC with respect to related party transactions: Paying brokerage commissions and spreads to related brokers for effecting security transactions on an agency and principal basis on behalf of the fund (referred to as Related Brokerage Commissions ); Purchases or sales of securities of an issuer from or to another investment fund managed by the Manager (referred to as Inter-Fund Trades ); Investments in the securities of issuers for which a related underwriter acted as an underwriter during the distribution of such securities and the 60-day period following the completion of such distribution (referred to as Underwriting of Securities ); Executing foreign exchange transactions with SCI on behalf of the fund; Purchases of securities of a related issuer, including Scotiabank and CI Financial Corp; The Manager is required to advise the IRC of any breach of a condition of the standing instructions. The standing instructions require, among other things, that the investment decision in respect to a related party transaction: (a) is made by the Manager free from any influence by an entity related to the Manager and without taking into account any consideration to any associate or affiliate of the Manager; (b) represents the business judgment of the Manager uninfluenced by considerations other than the best interests of the fund; and (c) is made in compliance with the Manager s written policies and procedures. Transactions made by the Manager under the standing instructions are subsequently reviewed by the IRC to monitor compliance. 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 information on the following tables is based on prescribed regulations and as a result, is not expected to add down due to the increase (decrease) in net assets from operations being based on average units outstanding during the period and all other numbers being based on actual units outstanding at the relevant point in time. Footnotes for the tables are found at the end of the Financial Highlights section. Series I units are available only to eligible institutional investors and other qualified investors. The Fund s Net Assets per Unit Series I Units * Net Assets, beginning of period $ Increase (decrease) from operations: Total revenue $ Total expenses $ (0.06) 0.00 Realized gains (losses) for the period $ Unrealized gains (losses) for the period $ (0.03) 0.03 Total increase (decrease) from operations (2) $ Distributions: From net investment income (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total annual distributions (3) $ Net Assets, end of period (4) $ * Start date for Series I units was May 18. This information is derived from the fund s audited annual financial statements. The net assets per security presented in the financial statements differs from the net asset value calculated for fund pricing purposes. This difference is due to the requirements of generally accepted accounting principles ( GAAP ), including CICA Handbook Section 3855, and may result in a different valuation of securities held by the fund in accordance with GAAP than the market value used to determine net asset value of the fund for the purchase, switch and redemption of the fund s units ( Pricing NAV ). The Pricing NAV per unit at the end of the period is disclosed in Ratios and Supplemental Data. (2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. (3) Distributions were paid in cash/reinvested in additional units of the fund, or both. (4) The net assets per unit at period end is not a cumulative amount but, rather, the value of the fund s units, in accordance with GAAP, as at the fund s period end. The fund did not rely on IRC standing instructions regarding related party transactions during the period.

5 Ratios and Supplemental Data Series I Units Total net asset value (000 s) $ 104,414 90,315 Number of units outstanding (000 s) 10,135 8,850 Management expense ratio (2) % Management expense ratio before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % 1, Net asset value per unit $ This information is provided as at December 31st of the year shown. (2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) of each series of the fund and the underlying funds, where applicable, for the stated period and is expressed as an annualized percentage of the 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 the daily average net asset value during the period. (4) The fund s portfolio turnover rate indicates how actively the fund s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% 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. Past Performance The performance shown assumes that all distributions made by the fund in the periods shown were reinvested in additional units of the fund. If you hold the fund outside of a registered plan, you will be taxed on these distributions. The performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns. How the fund has performed in the past does not necessarily indicate how it will perform in the future. All rates of return are calculated based on Pricing NAV and are in Canadian dollars unless stated otherwise. Year-by-Year Returns This chart shows the fund s performance, which changes from year to year. It shows in percentage terms how much an investment held on January 1, or held commencing from start of series in each year, would have increased or decreased by December 31 of that year. Annual Compound Returns This table shows the fund s annual compound returns compared to the DEX Universe Bond Index, and the blended benchmark consisting of 50% DEX Short All Corporate Index and 50% DEX Mid All Corporate Index for the periods shown ending December 31, year 3 year 5 year 10 year Since Inception Series I Units % DEX Universe Bond Index % DEX Capped Short-Mid Corporate Bond Index (Blended) % Inception Dates: Series I shares May 18, The DEX Universe Bond Index is a broad measure of the total return of Canadian bonds that have at least one year remaining to maturity. It includes approximately 900 Canadian federal, provincial, municipal and corporate bonds rated BBB or higher. DEX Short All Corporate Index is a broad measure of investment grade bonds issued by Canadian corporations with remaining effective terms greater than 1 year and less than or equal to 5 years. DEX Mid All Corporate Index is a broad measure of investment grade bonds issued by Canadian corporations with remaining effective terms greater than 5 years and less than or equal to 10 years. Please see the Results of Operations section for a discussion of the fund s performance relative to the index. Summary of Investment Portfolio The fund gains exposure to the return of the Reference Fund through the use of forward contracts. As a result, this is a breakdown of the Reference Fund s investments and a list of up to 25 of its largest holdings, as applicable. The holdings will change as the portfolio advisor buys and sells securities. You can obtain an up to date list of portfolio holdings on a quarterly basis by calling , or by visiting Sector mix % of net asset value (2) Corporate Bonds 92.8 Federal Bonds % of the Pool s assets are held in Cash, Other Assets and Liabilities. (2) Based on Pricing NAV. % Series I Units %

6 Top Holdings of Reference Fund Issuer % of net asset value Canada Housing Trust No % due Sep. 15, Greater Toronto Airports Authority 5.96% due Nov. 20, CIBC Capital Trust (callable) 9.98% due Jun. 30, 2108-(2019) 2.6 Bank of Nova Scotia, The (callable) 3.04% due Oct. 18, 2024-(2019) 2.4 Royal Bank of Canada (callable) 2.99% due Dec. 6, 2024-(2019) 2.4 Suncor Energy, Inc. 5.80% due May 22, International Business Machines Corporation 2.20% due Feb. 10, Bank of Montreal Capital Trust II (callable) 10.22% due Dec. 31, 2107-(2018) 2.1 Husky Energy Inc. 5.00% due Mar. 12, Toronto-Dominion Bank, The (callable) 4.78% due Dec. 14, 2105-(2016) 2.0 Genesis Trust II 2.30% due Feb. 15, Enbridge Inc. 4.04% due Nov. 23, Bank of Montreal 3.98% due Jul. 8, Loblaw Companies Limited 3.75% due Mar. 12, Royal Bank of Canada 2.89% due Oct. 11, Anheuser-Busch Companies, Inc. 2.38% due Jan. 25, Canadian Natural Resources Limited 3.05% due Jun. 19, Bell Canada 3.25% due Jun. 17, General Electric Capital Corporation 4.60% due Jan. 26, BRP Finance ULC 5.14% due Oct. 13, Inter Pipeline Fund 3.45% due Jul. 20, Rogers Communications Inc. 5.34% due Mar. 22, National Bank of Canada 2.69% due Aug. 21, HSBC Bank of Canada 2.94% due Jan. 14, Shaw Communications Inc. 5.65% due Oct. 1, Based on Pricing NAV.

7 Registered trademarks of The Bank of Nova Scotia, used under licence. ScotiaFunds are managed by 1832 Asset Management L.P., a limited partnership the general partner of which is wholly owned by The Bank of Nova Scotia. ScotiaFunds are available through Scotia Securities Inc. and from other dealers and advisors, including ScotiaMcLeod and Scotia itrade which are divisions of Scotia Capital Inc. Scotia Securities Inc. and Scotia Capital Inc. are wholly owned by The Bank of Nova Scotia. Scotia Capital Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.