Moneda Latam Corporate Bond Fund

Transcription

1 Interim Management Report of Fund Performance Moneda Latam Corporate Bond Fund This interim management report of fund performance contains financial highlights but does not contain either the interim or annual financial statements of Moneda Latam Corporate Bond Fund (the Fund ). This report should be read in conjunction with the interim unaudited financial statements for the six months ended June 30, 2014 and the annual audited 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 Corporate Bond Fund 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 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 by 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 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. Investment Objectives 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 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 a forward agreement (defined below) to the total return performance of the Moneda Deuda Latinoamericana Fondo de Inversion (the Moneda Fund ), a US$961 million (as at June 30, 2014) Chilean listed investment fund established in 2000 which is actively managed by Moneda S.A. Administradora de Fondos de Inversion ( Moneda or the Portfolio Manager ). 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 a forward purchase agreement (the Forward Agreement ) with The Bank of Nova Scotia (the Counterparty ) pursuant to which the Counterparty has agreed to pay the economic return provided by a notional portfolio (the Notional Portfolio ) of units of the Moneda Fund. Substantially all of the value of the Notional Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U units are designed for investors wishing to make their investment 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 Moneda Fund 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 will partially pre-settle 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. The Forward Agreement allows the Fund to leverage its exposure to the Moneda Fund in an amount up to 15% of the total assets of the Fund at the time of borrowing with a maximum leverage to net assets of 18% (the Funded Amount ). As at June 30, 2014, the Fund had leveraged exposure of $4.3 million or 8.8% (December 31, 2013 $4.6 million or 9.6%) to the net assets of the Fund. The Class A Units of the Fund are listed for trading on the Toronto Stock Exchange under the symbol MLD.UN. The Class U Units are not listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes. Results of Operations The Fund s net assets attributable to Unitholders as at June 30, 2014 increased from $10.38 to $10.61 per Class A Unit or 2.2% and from US$10.34 to US$10.56 per Class U Unit or 2.1% based on the positive performance of the Moneda Fund offset by the Fund s operating expenses including Forward Agreement fees and distributions paid on the Units. Moneda Latam Corporate Bond Fund 1 Interim Management Report of Fund Performance

2 The following is a report from the Portfolio Manager for the six month period ending June 30, 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% on a total return basis over the first half of The Moneda Fund lagged this performance posting a total return of 5.9%. 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. As of the end of June 2014, the largest country allocations were Brazil, Mexico, Argentina, Dominican Republic and Peru, with the last three countries having the largest over weights 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. Distributions The Fund does not have a fixed distribution but pays quarterly distributions funded through partial pre-settlements of the Forward Agreement based on, among other things, the current yield of the portfolio of the Moneda Fund less the expenses of the Fund for the period. The Fund paid cash distributions of $0.375 per Class A Unit and US$0.375 per Class U Unit for the six month period. It is expected that the quarterly distributions received by Unitholders will be characterized primarily as returns of capital and capital gains. Amounts distributed on the Units that represent returns of capital are generally non-taxable to the Unitholder but reduce the Unitholder s adjusted cost base of the Units for tax purposes. Recent Developments 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, the distributions will continue to be characterized primarily as returns of capital and capital gains until the forward agreement matures on October 31, Interim Management Report of Fund Performance 2 Moneda Latam Corporate Bond Fund

3 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 changeover to IFRS other than additional disclosures in the financial statements and a change in the presentation of Unitholders equity to a financial liability. Related Party Transactions For its services to the Fund, Scotia Managed Companies Administration Inc. ( SMCAI ) is entitled to receive a management fee equal to 0.40% per annum of the Net Asset Value. The total management fee payable to SMCAI for the period ended June 30, 2014 was $107,964 (June 30, 2013 $115,803). The ongoing management fee and is calculated and accrued weekly and is payable quarterly in arrears. Under the Forward Agreement, the Fund pays to the Counterparty an additional purchase amount, calculated weekly and payable monthly in arrears, of up to 0.40% per annum of the notional amount of the Forward Agreement including the cost of providing collateral. The total fees paid or payable to The Bank of Nova Scotia relating to the Forward Agreement were $107,964 for the period ended June 30, 2014 (June 30, 2013 $112,344). Fees charged on the Funded Amount totaled $34,872 (June 30, 2013 $40,361). At June 30, 2014, the Fund had accrued liabilities of $101,965 (December 31, 2013 $52,293) payable to SMCAI and Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia, and had cash of $1,178 on deposit with The Bank of Nova Scotia (December 31, 2013 $35,899). 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 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 Year For the Year For the Period For the Six Ended Ended Ended Months Ended December 31, December 31, December 31, June 30, (1) Class A Class U Class A Class U Class A Class U Class A Class U CAD USD CAD USD CAD USD CAD USD Net assets per Unit, beginning of period/year... $10.38 $10.34 $ 9.74 $ 9.72 $ 9.33 $ 9.32 $10.00 $10.00 Increase (decrease) from operations: Total revenue... Total expenses (2)... (0.04) (0.04) (0.08) (0.07) (0.07) (0.07) (0.68) (0.68) Realized gains (losses) for the period/year (3)... (0.31) 0.14 (0.13) (0.01) (0.01) (0.01) Unrealized gains (losses) for the period/year Total increase (decrease) from operations (0.67) (0.68) Distributions: From capital gains... From return of capital... (0.38) (0.38) (0.75) (0.75) (0.75) (0.75) Total distributions... (0.38) (0.38) (0.75) (0.75) (0.75) (0.75) Net assets per Unit, end of period/year... $10.61 $10.56 $10.38 $10.34 $ 9.74 $ 9.72 $ 9.33 $ 9.32 Based on the weighted average number of Units during the period/year except for the net asset values and distributions wherein the actual number of Units outstanding at the relevant time are used. (1) Results for the period November 3, 2011 (commencement of operations) to December 31, (2) Total expenses for 2011 include issue costs of $3,018,511 for Class A Units and US$291,378 for Class U Units. (3) Including transaction costs being Forward Agreement fees. Moneda Latam Corporate Bond Fund 3 Interim Management Report of Fund Performance

4 Ratios and Supplemental Data June 30, 2014 December 31, 2013 December 31, 2012 December 31, 2011 Class A Class U Class A Class U Class A Class U Class A Class U CAD USD CAD USD CAD USD CAD USD Net asset value (000 s) (1)...$44,675,440 $4,120,623 $47,715,181 $4,138,244 $44,819,171 $3,893,127 $42,551,932 $4,108,940 Number of Units outstanding... 4,212, ,165 4,207, ,165 4,600, ,390 4,559, ,890 Management expense ratio (2) % 2.69% 2.69% 2.75% 2.86% 2.90% 10.22% 10.22% Management expense ratio excluding interest (2) % 2.54% 2.53% 2.58% 2.67% 2.70% 10.03% 10.01% Trading expense ratio (3) 0.001% 0.001% 0.002% 0.002% Portfolio turnover rate (4) % 37.5% 31.7% 31.7% 62.4% 62.4% 7.2% 7.2% Net asset value per Unit $ $ $ $ $ 9.74 $ 9.72 $ 9.33 $ 9.32 Market value per Unit. $ n/a $ 9.95 n/a $ 9.86 n/a $ 9.86 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 for the stated period including Forward Agreement fees, fees on Funded Amount and expenses of the Moneda Fund and is expressed as an annualized percentage of the weekly average Unit net asset value during the year/period. The Fund realized issue costs in Without these costs, the MER s would have been 3.07% and 3.07% and excluding fees on Funded Amount embedded in the Forward Agreement, 2.88% and 2.87%, 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 year/period. (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 the Moneda Fund buying and selling all of the fixed income securities in its portfolio once in the course of a year. Interim Management Report of Fund Performance 4 Moneda Latam Corporate Bond Fund

5 Past Performance Year by Year Returns The following chart shows the performance of the Fund s Units based on net asset value since the Fund s inception indicating, in percentage terms, how much an investment made on the first day of each financial year/period would have increased or decreased by the last day of each financial year/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. Class A Class U 20.0% 15.0% 12.8% 14.7% 20.0% 15.0% 12.7% 14.4% 10.0% 5.0% 5.9% 10.0% 5.0% 5.8% 0.0% 0.0% -5.0% -10.0% -6.7% 30JUL June 30, % -10.0% -6.8% 30JUL June 30, 2014 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, 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 in narrative form below as an indication of returns actually available to Unitholders. The Class A Units are listed for trading on the TSX while the Class U Units are not but may be converted into Class A Units on a weekly basis. Accordingly, the market value return for the Class A Units was (1.4)%, 7.7% and 8.7% for 2011, 2012 and 2013, respectively and was 7.7% for the six month period ended June 30, This performance from inception reflects the 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 Toronto Stock Exchange,which price may reflect a premium or discount to net asset value. The following chart show performance data for the Moneda Fund for the past ten years including the six month period ended June 30, 2014 indicating, in percentage terms, how much an investment made on the first day of each financial year/period would have increased or decreased by the last day of each financial year or period assuming reinvestment of any dividends. There are differences between holding the Fund and the Moneda Fund including additional fees and expenses, the use of leverage and currency hedging. Year by Year Returns 100.0% 80.0% 80.2% 60.0% 40.0% 20.0% 0.0% 24.6% 14.7% 14.1% 14.5% 22.1% 2.5% 13.3% 13.4% 5.9% -20.0% -40.0% -34.9% June 30, 30JUL Moneda Latam Corporate Bond Fund 5 Interim Management Report of Fund Performance

6 Summary of Investment Portfolio Below is a summary of the investment portfolio of the Moneda Fund as at June 30, 2014, upon which the Unitholders return is based. This summary of the investment portfolio may change due to ongoing portfolio transactions. Weekly updates of the investment portfolio are available on the internet at or by contacting investor relations at Net Asset Value of the Moneda Fund (1)... US$960,851,035 Top 25 investments Issuer % of Net Assets of the Moneda Fund Long Positions 1. Argent 8.28% % 2. Cemex Espana Luxembourg 9.25% % 3. Corpgroup Banking SA 6.75% % 4. Bio Pappel Sab de CV 6.0% % 5. BBVA Bancomer SA Texas 6.75% % 6. BBVA Paraguay 9.75% % 7. Aes Andres/Itabo Dominicana Ltd. 9.5% % 8. Autnor 9.39% % 9. Cemex Espana Luxembourg 9.875% % 10. Aeropuertos Dominicanos 9.25% % 11. Grupo Posadas Sab CV 7.875% % 12. Banbra 9% % 13. Petroleos de Venezuela 9.75% % 14. Andino Invest Holding 11% % 15. Terminales Portuarios 8.125% % 16. Bantrab Senior Trust 9% % 17. TAM Capital 2 Inc. 9.5% % 18. Rede Energia Sa % % 19. PNPYG 8.125% % 20. WPE International Cooperatief % % 21. Banco Continental Sacca 8.875% % 22. Firboi 8.25% % Short Positions 1. Brazil 4.25% % 2. U.S. Treasury 3.125% % 3. Mexico 6.75% % (1) As a result of the Forward Agreement, the total fair value of the Fund s investments is referable to a Notional Portfolio of units of the Moneda Fund. Interim Management Report of Fund Performance 6 Moneda Latam Corporate Bond Fund

7 Notes Moneda Latam Corporate Bond Fund 7 Interim Management Report of Fund Performance