Moneda Latam Fixed Income Fund

Transcription

1 Interim Management Report of Fund Performance Moneda Latam Fixed Income Fund The following is an interim report on the performance of Moneda Latam Fixed Income Fund (the Fund ) and contains financial highlights but does not contain the complete financial statements of the Fund. This report should be read in conjunction with the interim financial statements for the six months ended June 30, 2014 and the annual financial statements for the year ended December 31, You can get a copy of the Fund s 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: Moneda Latam Fixed Income Fund Investor Relations or by visiting our website located 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 and quarterly portfolio disclosure. The Fund s proxy voting disclosure record for the annual period ending June 30, 2014 will be available on our website on or about August 31, 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 Canadian GAAP applicable to publicly accountable entities as presented in the financial statements of the Fund. 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. Investment Objective and Strategies The Fund is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of Class A Units and Class U units (collectively the Units and each, a Unit ) with investment exposure to a diversified portfolio (the Portfolio ) of fixed income securities of companies located in, or with significant operations in, Latin America, primarily denominated in U.S. dollars. The Fund s investment objectives are to: (i) preserve and enhance the net asset value (the Net Asset Value or NAV ) of the Fund; and (ii) provide Unitholders with quarterly tax-advantaged distributions consisting primarily of returns of capital, in each case through exposure by virtue of the Forward Agreement (as defined herein). The NAV for the Class A Units is calculated in Canadian dollars and for the Class U Units, in U.S. dollars. To pursue its investment objectives, the Fund entered into two forward purchase agreements (collectively, the Forward Agreement ) with The Bank of Nova Scotia (the Counterparty ) pursuant to which the Counterparty has agreed to pay the Fund the economic return provided by the Portfolio. The Portfolio is held by MLF Trust. Substantially all of the value of the Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U Units are designed for investors wishing to hold their investments in U.S. dollars. As a result of the forgoing, the Net Asset Value per Unit of each class of Units will vary depending on the performance of the MLF Trust by virtue of the Forward Agreement and will also vary depending on the expenses allocated to, and distributions paid in respect of, the particular class of Units of the Fund. The Fund partially pre-settles the Forward Agreement in order to fund: (i) quarterly distributions on the Units; (ii) redemptions of Units from time to time; and (iii) operating expenses and other liabilities of the Fund. High Rock Capital Management Inc. (the Portfolio Manager ) provides portfolio management services required by the Fund and MLF Trust and appointed Moneda International Inc. as the sub-advisor for MLF Trust to perform some of its services. The Portfolio Manager is responsible for ensuring that the trading and investment activities of the Portfolio are in compliance with MLF Trust s investment objectives, strategy and restrictions. MLF Trust has leveraged exposure to the Portfolio through a revolving loan facility with Scotia Capital Inc. to borrow up to 25% of the total assets of MLF Trust at the time of borrowing. As at June 30, 2014, MLF Trust had borrowed $28.6 million or 20.5% (December 31, 2013 $25.3 million or 18.3%) of the total assets (net of short positions) of MLF Trust. Report from Portfolio Manager The Latin American high yield corporate debt market, as measured by the CEMBI Broad Latin High Yield Index (the Index ), rose 7.6% over the first half of The Fund lagged this performance posting a total return of 4.1% and 3.7% for the Class A and U Units, respectively. This performance can be explained by: (i) On the positive side, a good allocation at the country level, with long positions in Argentina and Peru significantly contributing to the positive performance; and (ii) Good selection at the security level in most countries offset by a single credit event in Mexico that explains a significant portion of the underperformance versus the Index. Moneda Latam Fixed Income Fund 1 Interim Management Report of Fund Performance

2 As of the end of June 2014, the largest country allocations were Brazil, Mexico, Argentina Dominican Republic and Peru, with the last three countries being the largest overweights versus the Index. Market Outlook As we ended June 2014, the economies of developed markets kept expanding with the support of their central banks. This has brought volatility levels to record lows and asset prices to new highs. In this context, global interest rates have unexpectedly dropped, with the yield on 10 year treasuries falling 50 basis points year-to-date. We are pleased to see how the market has adjusted to the news flow coming from the US Federal Reserve and its tapering program and we are confident that Latin-American debt markets will be able to cope effectively with the normalization of global rates. Latin-American debt funds which had experienced investment outflows since April 2013, started seeing a return of money flows into Latin-American debt securities in late March It is important to mention that dedicated institutional investors kept allocating money into the region even in the worst periods of outflows which were dominated by retail fund outflow. This is a positive sign in our view as it shows the commitment of dedicated investors to the region and the asset class. We expect this support to continue for the time being. Latin-American currencies have shown uneven performances. The Brazilian real, Colombian and Mexico pesos have appreciated while all other currencies have depreciated albeit at a moderated pace. Countries in the region are entering a period of change. Chile has a newly elected government with an aggressive social agenda while the Colombian people have chosen to re-elect President Santos, therefore supporting the continuity of his economic agenda. Mexico is approving an aggressive set of economic reforms that should foster growth in the medium term, eliminating significant bottlenecks that have hampered the economy for many years, especially in the labor, energy and telecommunication sectors. Similarly, Brazil is entering an election period which will challenge the economic leadership of President Rousseff and hopefully bring the change and economic reforms that are needed. Argentina is finally dealing with issues that have been long overdue such as utility services pricing and YPF expropriation. Argentina s negotiation with holdouts on their debt restructuring is the last standing issue which we expect to be addressed and hopefully solved. In this context we continue to find value in corporates throughout the region supported by attractive spreads coupled with reasonable leverage ratios. Results of Operations The net assets attributable to Unitholders were $9.68 per Class A Unit and US$9.62 per Class U Unit at June 30, 2014 as compared to $9.67 per Class A Unit and US$9.65 per Class U Unit at December 31, The increase was due to appreciation and interest earned on Portfolio offset by the Fund s operating expenses including Forward Agreement fees and distributions paid on the Units. Distributions The Fund does not have a fixed distribution but intends to pay quarterly distributions through partial pre-settlements of the Forward Agreement based on, among other things, the interest earned on the Portfolio less actual and expected expenses of the Fund and MLF Trust. For the six month period ended June 30, 2014, the Fund declared distributions of $4.17 million (2013 $4.40 million) comprised of $3.88 million (2013 $4.07 million) to Class A Unitholders or $0.375 (2013 $0.375) per Class A Unit and US$0.29 million (2013 US$0.33 million) to Class U Unitholders or US$0.375 (2013 $0.375) per Class U Unit. Interest earned on the Portfolio funded the distributions and expenses of the Fund and MLF Trust. For the six month period ended June 30, 2014, $4.10 million was available for distribution comprised of interest earned on the Portfolio of $5.48 million offset by expenses of $1.38 million. It is expected that the quarterly distributions received by Unitholders will be characterized primarily as returns of capital and capital gains. Amounts distributed and the Units that represent reurn of capital are generally not taxable to the Unitholder but reduce the Unitholder s adjusted cost base of the Units for tax purposes. Recent Developments International Financial Reporting Standards ( IFRS ) The Fund s financial statements have been prepared in accordance with IFRS commencing January 1, 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Fund prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in Part V of the CPA Canada Handbook ( Canadian GAAP ). The comparative information has been restated from Canadian GAAP to comply with IFRS. The Fund has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position at January 1, 2013 and throughout all periods presented, as if these policies had always been in effect. There was no impact to net assets as presented under Canadian GAAP from the change over to IFRS other than additional financial statement disclosures and a change in the presentation of Unitholder s equity to a financial liability. Interim Management Report of Fund Performance 2 Moneda Latam Fixed Income Fund

3 Tax Changes Affecting Forward Agreement Structures In the budget announced March 21, 2013, the government proposed and enacted to eliminate the tax benefits associated with forward agreements used by some investment funds to achieve capital gains treatment on income that would otherwise be treated as ordinary income. The government refers to these as character conversion transactions. Distributions from investment funds which enter into a forward agreement will now generally be taxed as income at the time of distribution as opposed to returns of capital which are not generally taxable at time of receipt and capital gains. This measure will apply to forward agreements entered into on or after March 21, The less favorable tax treatment will also apply to forward agreements entered into before March 21st, if the terms of the agreement are extended or modified. This measure does not immediately affect the Fund as it entered into its Forward Agreement before March 21, 2013 and as such, we expect the distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on June 19, Related Party Transactions For its services to the Fund, Scotia Managed Companies Administration Inc., ( SMCAI ) a wholly owned subsidiary o Scotia Capital Inc. ( SCI ) which in turn is a wholly-owned subsidiary of The Bank of Nova Scotia, is entitled to receive a management fee equal to 0.25% per annum of the Net Asset Value. The total management fee paid or payable to SMCAI for the period ended June 30, 2014 was $147,475 (2013 $150,171). The ongoing management fee is calculated and accrued weekly and is payable quarterly in arrears. Under the Forward Agreement, the Fund pays to the Counterparty an additional amount, calculated weekly and payable monthly in arrears, of up to 0.40% per annum of the notional amount of the Forward Agreement being the net asset value of MLF Trust. The total fees paid or payable to The Bank of Nova Scotia relating to the Forward Agreement for the period ended June 30, 2014 were $210,428 (2013 $208,191). At June 30, 2014, the Fund had accrued liabilities of $124,450 (December 31, 2013 $195,818) payable to SMCAI and the Counterparty, and had cash on deposit with the Counterparty of $6,307 (December 31, 2013 $6,494). Moneda Latam Fixed Income Fund 3 Interim Management Report of Fund Performance

4 Financial Highlights The following tables show selected key financial information about the Fund and are intended to help the reader understand the Fund s financial performance since inception. The information for the six months ended June 30, 2014 is derived from the Fund s unaudited financial statements while the December information is derived from the Fund s audited financial statements. For the Period For the Year Ended June 30, 2014 December 31, 2013 December 31, 2012 (1) CLASS A Units CAD CAD CAD Net assets per Unit, beginning of period/year... $ 9.67 $ 9.56 $ Increase (decrease) from operations: Income... Total expenses... (0.04) (0.04) (0.70) Realized gains for the period/year Unrealized gains for the period/year Total increase (decrease) from operations (0.05) Distributions: From capital gains... From return of capital... (0.37) (0.75) (0.39) Total distributions (2)... (0.37) (0.75) (0.39) Net assets per Unit, end of period/year... $ 9.68 $ 9.67 $ 9.56 For the Period For the Year Ended June 30, 2014 December 31, 2013 December 31, 2012 (1) CLASS U Units USD USD USD Net assets per Unit, beginning of period/year... $ 9.65 $ 9.50 $ Increase (decrease) from operations: Income... Total expenses (2)... (0.04) (0.04) (0.76) Realized gains (losses) for the period/year (0.01) Unrealized gains (losses) for the period/year Total increase (decrease) from operations (0.11) Distributions: From capital gains... From return of capital... (0.37) (0.75) (0.39) Total distributions (2)... (0.37) (0.75) (0.39) Net assets per Unit, end of period/year... $ 9.62 $ 9.65 $ 9.50 Based on the weighted average number of units during the period except for the net assets and distributions wherein the actual number of units outstanding at the relevant time are used. (1) Results for the period from June 19, 2012 (commencement of operations) to December 31, (2) All distributions were paid in cash. Interim Management Report of Fund Performance 4 Moneda Latam Fixed Income Fund

5 Ratios and Supplemental Data (based on net asset value) June 30, 2014 December 31, 2013 December 31, 2012 Class A Units CAD CAD CAD Net asset value (000 s) (1)... $ 100,131 $ 99,978 $ 44,568 Number of Units outstanding... 10,345,504 10,338,753 4,661,917 Management expense ratio (2) % 2.32% 9.52% Trading expense ratio (3) % 0.00% 0.00% Portfolio turnover rate (4) % 31.1% 39.2% Net asset value per Unit... $ 9.68 $ 9.67 $ 9.56 Market value per Unit... $ 9.69 $ 9.66 $ June 30, 2014 December 31, 2013 December 31, 2012 Class U Units USD USD USD Net asset value (000 s) (1)... $ 6,947 $ 7,031 $ 3,887 Number of Units outstanding , , ,970 Management expense ratio (2) % 2.43% 9.53% Trading expense ratio (3) % 0.00% 0.00% Portfolio turnover rate (4) % 31.1% 39.2% Net asset value per Unit... $ 9.62 $ 9.65 $ 9.50 Market value per Unit... n/a n/a n/a (1) Net asset value is equal to net asset value per Unit multiplied by the number of Units outstanding. (2) Management expense ratio ( MER ) is based on total expenses of the Fund and MLF Trust for the stated period including Forward Agreement fees. The ratio is expressed as an annualized percentage of the weekly average Unit net asset value during the period/year. The Fund realized costs in connection with its initial public offering in Without these costs, the MER s would have been 2.29% and 2.26%, for Class A Units and Class U Units, respectively. (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/year. (4) The Fund s portfolio turnover rate indicates how actively the Portfolio Manager manages its bond portfolio. A portfolio turnover rate of 100% is equivalent to MLF Trust buying and selling all of the fixed income securities in its portfolio once in the course of a period/year. Past Performance Year by Year Returns The following charts shows the performance of the Fund s net asset value since inception including the six months ended June 30, 2014, indicating in percentage terms, how much an investment made on the first day of each financial period would have increased or decreased by the last day of each financial period assuming reinvestment of all distributions at net asset value. Past performance is not an indication of how the units will perform in the future. The calculation of returns based on net asset value follows the requirements of NI As an investor cannot purchase or sell the Units at net asset value, the following is an indication of the performance of the assets of the Fund rather than returns available to Unitholders. Returns based on market value are also presented for the Class A Units in narrative form below as an indication of returns actually available to Class A Unitholders. 10% Class A Units 9.1% 10% Class U Units 9.6% 5% 4.1% 5% 3.7% 0% -0.4% 0% -1.0% -5% 4AUG % 4AUG Moneda Latam Fixed Income Fund 5 Interim Management Report of Fund Performance

6 The market value return for the Class A Units was 11.5%, and (2.8%) for the period/year 2012 and 2013 respectively, and was 4.4% for the period ended June 30, This performance from inception reflects payment of upfront costs related to the establishment of the Fund and assumes that distributions are reinvested in additional units at the then market price on the TSX which price may reflect a premium or discount to net asset value. Summary of Investment Portfolio Below is a summary of the Portfolio as at June 30, 2014, upon which the Unitholders return is based. This summary of the Portfolio may change due to ongoing portfolio transactions. Weekly updates of the net asset value are available on the internet at or by contacting investor relations at Investment portfolio, at market value... $123,903,807 Geographic Distribution Industry Distribution Peru 8.4% Guatemala 6.7% Paraguay 3.6% Chile 5.2% Other 1.5% Venezuela 0.3% Colombia 0.6% Brazil 27.6% Consumer, Cyclical 7.4% Government 9.4% Basic Materials 6.0% Other 8.5% Financial 32.2% Dominican Republic 10.9% Mexico 19.0% Argentina 16.2% 18AUG Utilities 9.7% Consumer, Non-cyclical 11.8% Industrial 14.9% 4AUG Interim Management Report of Fund Performance 6 Moneda Latam Fixed Income Fund

7 Top 25 Investments Issuer % of Net Asset Value Long Positions 1 Oceanografia 11.25% 15 July % 2 Cemex Espana 9.25% 12 May % 3 Durango 7% 27 Aug % 4 Newland Int 9.5% 15 Nov % 5 BBVA Paraguay 9.75% 11 Feb % 6 Aes Andres/IT 9.5% 12 Nov % 7 Petroleos De 9.75% 17 May % 8 Corpgroup Ban 6.75% 15 Mar % 9 Banco BMG 8% 15 Apr % 10 Aeropuertos D 9.25% 13 Nov % 11 Cemex Finance 9.375% 12 Oct % 12 Axtel Sab 7 31 Jan % 13 Grupo ACP Inv 9% 30 May % 14 Grupo Posadas 7.875% 30 Nov % 15 Vrg Linhas 10.75% 12 Feb % 16 ANDINO INVEST HOLDING 11% 13 NOV % 17 Bantrab Senior Trust 9% 14 Nov % 18 WPE Intl Corp % 30 Sep % 19 Deutsche Bank AG London % 20 Banco Brasl 6.25% 29 Dec % 21 Terminales Po 8.125% 01 Apr % 22 Satmex Escrow 9.5% 15 May % 23 Rede Empresas % 29 Apr % 24 NII Intl Tele % 15 Aug % 63.0% Short Position 25. US Treasury 1.625% (3.1%) Total % Moneda Latam Fixed Income Fund 7 Interim Management Report of Fund Performance