16 INTERIM MANAGEMENT REPORT for the period ended June 30, 2016 This Interim Management Report contains financial highlights but does not contain the complete interim or annual financial statements of the Fund. You can get a copy of the Interim Financial Statements at your request, and at no cost, by calling our Advisory Service at 514-788-6485 (toll-free 1-800-291 0337), by writing to us at Gestion FÉRIQUE, Place du Canada, 1010 de La Gauchetière Street West, Suite 1000, Montreal, Quebec H3B 2N2, or by visiting our Web site at ferique.com or SEDAR at sedar.com. 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 record and quarterly portfolio disclosure.
There may be management fees and expenses associated with an investment in the Funds. Management expense ratios vary from one year to another. Please read the Prospectus before investing. Mutual funds are not guaranteed or covered by the Canada Deposit Insurance Corporation or another government deposit insurer. Their values fluctuate frequently and past performance may not be repeated. FÉRIQUE Funds are distributed by Services d investissement FÉRIQUE since July 1, 2013 and used to be by National Bank Securities Inc., until June 30, 2013. A Note on Forward looking Statements This report may contain forward looking statements about the Funds, their future performance, strategies or prospects, and possible future Fund actions. The words may, could, should, would, suspect, outlook, believe, plan, anticipate, estimate, expect, intend, forecast, objective and similar expressions are intended to identify forward looking statements. Forward looking statements are not guarantees of future performance. Forward looking statements involve inherent risks and uncertainties, both about the Funds and general economic factors, so it is possible that predictions, forecasts, projections and other forward looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward looking statement made in relation to the Funds. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward looking statements are subject to change without notice and are provided in good faith but without legal responsibility. Some rates or returns presented in this report come from the PALTrak study as at June 30, 2016, owned by Morningstar Research Inc. Please read the following note: [2016] Morningstar Research Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Morningstar may not be held responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Management Discussion Results of Operations The is managed by two portfolio managers who use different styles, namely Integra Capital Limited (Integra), which manages approximately 65% of the portfolio, and River Road Asset Management, LLC (River Road), which manages approximately 35% of the portfolio. The Fund posted a net return of -2.6% for the six-month period ended June 30, 2016, compared to -2.9% for its benchmark, the S&P 500 Index. Contrary to benchmark returns, which include no investment fees, Fund returns are expressed net of management and operating expenses payable by the Fund. On a relative basis, the Fund outperformed the industry median 1, which posted a -4.1% result, net of management fees, for the six-month period. Compared to the benchmark, River Road had a positive impact to the Fund s relative performance during the six-month period, while Integra detracted from performance. Integra Health Care, Financials and Consumer Discretionary were the largest sector overweights for the period, while Consumer Staples, Utilities and Materials were the largest underweights. This positioning impeded the Fund s relative performance. At the security level, the top overweights were Citigroup, CVS Health and Activision Blizzard. Meanwhile, the largest underweights were Bank of America, United Technologies and Goldman Sachs; the portfolio manager exiting all three of these positions during the period. Among the top contributors to portfolio performance were two holdings in Consumer Discretionary, namely Comcast and Coach, while Health Care companies Biogen, Endo International and Vertex were among the top detractors during the period. The portfolio manager increased its weight to Consumer Discretionary, Financials and Energy, while reducing its exposure to Information Technology, Health Care and Industrials during the period. Some additions to the portfolio during the six-month period included Morgan Stanley, Alexion Pharmaceuticals, and Marriott International. Among the positions sold were Bank of America, Goldman Sachs, United Technologies, Hewlett Packard, Baxalta and EMC. River Road At a sector level, the underweight to Health Care and overweight to Financials had the most significant impact on the portfolio s relative performance during the period, with the former sector being the biggest contributor to relative results, while the latter was the main detractor. At the stock selection level, the overweight to Iron Mountain and ADT was the biggest contributor to relative returns, while the overweight to PNC Financial Services Group and Kohl s was the most significant detractor. The most notable changes in the portfolio s relative positioning were seen in three sectors. In Consumer Staples, holdings in Sysco were liquidated, while the positions in Kimberly-Clark and Molson Coors Brewing were reduced. In Financials, positions in BB&T, Allied World Assurance Holdings and WesBanco were introduced, while exposure to Sabra Health Care REIT was increased. Finally, in Health Care, a position in Amgen was added to the portfolio. Recent Developments Integra The beginning of 2016 was marked by a very aggressive stock sell-off, as falling oil prices reached the end of the commodity super-cycle and the US dollar stretched to decade highs. However, after one of the worst starts to a year in history, the market reversed course, as the Federal Reserve (Fed) decided to push out future rate hikes. Investors considered this as a positive decision. The risks that put the brakes on bullish markets earlier this year turned around, and the S&P 500 rallied to a few points from its all-time highs. This type of revolving market presented the strategy with opportunities, as many quality firms were sold off arbitrarily during the period. The United Kingdom s vote to leave the European Union (Brexit) was the most significant economic trend that persisted during the period. While the impact on global stock markets was initially negative, markets recovered quickly and regained much lost ground by the end of June. That said, the Brexit vote s long-term economic impact on the United Kingdom and other countries remains unknown, as the political process they have embarked on will take many years to sort out. The path of future interest rate hikes by the Fed remains one of the biggest uncertainties in the stock market, as the next rate hike may have been pushed back further due to the Brexit vote. Moreover, the upcoming US presidential election will be sure to further increase investor anxiety. The portfolio manager believes growing market volatility could generate buying opportunities as part of its stock selection strategy focused on fundamentals. The portfolio manager strives to benefit from less favoured companies through a bottom-up stock selection approach. River Road Early during the first quarter, low earnings growth and tightening in both credit conditions and monetary policy is a recipe for volatility. Absent a significant decline in the US dollar or a surge in oil prices, the portfolio manager does not expect a rapid acceleration in earnings, or the follow-on improvement in credit, over the next couple of quarters. As such, it expects volatility to remain high, as 1 Source: Median return of similar funds according to the PALTrak survey, owned by Morningstar Research Inc., as at June 30, 2016.
investors will focus on every statement from a Fed official in an attempt to ascertain the impact on growth. The United Kingdom s recent referendum (Brexit) will likely add to market volatility in the quarters to come and appears to put the brakes on further monetary policy tightening by the Fed, both factors which could lead to increased incremental demand for US stocks. As a result, the portfolio manager s outlook for US markets has improved modestly, yet remains tempered by slow earnings growth expectation projections. One of the biggest challenges going forward will be managing the heightened valuations of traditionally high dividend-paying sectors, including Consumer Staples, Health Care, and Utilities. The portfolio manager s concern is that since investors equate defensive firms with safe stocks, they will be very disappointed with the end result of buying a stock at a valuation that is not supported by underlying fundamentals. The portfolio manager will continue to focus on identifying high-quality stocks with attractive yields and discounts, but will likely have to accept exposure to securities generating more cyclical income than one would get with regulated Utilities issues, for example. The portfolio manager believes this approach s outcome will be superior to simply chasing the market into seemingly overvalued, defensive stocks. Related Party Transactions The Manager of the Fund is Gestion FÉRIQUE, a not for profit organization. Gestion FÉRIQUE receives management fees to cover its expenses with respect to the day to day business and operations of the Fund, as reported under the Management Fees section. These expenses include the portfolio manager s fees, the fees relating to the marketing and distribution of the Fund, as well as the administration fees of the Manager. Services d investissement FÉRIQUE (SIF) is a not for profit subsidiary of Gestion FÉRIQUE registered as a group savings plan brokerage and financial planning firm, and acts as distributor of units of the Fund. A percentage of the management fees paid by the Fund to Gestion FÉRIQUE is used to cover the expenses of SIF with respect to its day to day activities. For the six-month period ended June 30, 2016, Integra and River Road did not enter into any related party transactions as it pertains to the management of the ($0 as at December 31, 2015). 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 for the accounting periods shown. (1) (5) Net Assets per Unit Six-month period ended June 30 2016 (6 months) 2015 2014 Years ended 2013 2012 2011 $ $ $ $ $ $ Net assets, beginning of accounting period (4) 13.64 12.06 10.08 7.07 6.56 6.63 Increase (decrease) from operations Total revenues 0.16 0.32 0.30 0.18 0.15 0.11 Total expenses (0.08) (0.15) (0.12) (0.11) (0.08) (0.08) Realized gains (losses) 0.53 1.29 1.14 1.36 0.17 0.07 Unrealized gains (losses) (0.96) 0.81 0.83 1.65 0.33 (0.10) Total increase (decrease) from operations (2) (0.35) 2.27 2.15 3.08 0.57 Distributions From dividends 0.17 0.17 0.08 0.07 0.04 From capital gains 0.52 Total annual distributions (3) 0.69 0.17 0.08 0.07 0.04 Net assets, end of accounting period (4) 13.29 13.64 12.06 10.08 7.07 6.56 (1) This information is derived from the Fund s Annual Audited Financial Statements and Interim Unaudited Financial Statements. The net assets per unit presented in the financial statements could differ from the net asset value calculated for fund pricing purposes. The differences are explained in the notes to the financial statements. (2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase or decrease from operations is based on the weighted average number of units outstanding during the accounting period. This table is not intended to show a reconciliation between net assets per unit at the beginning and at the end of the accounting period. (3) Distributions were paid in cash or reinvested in additional units of the Fund, or both. (4) Since January 1, 2013, the net assets are calculated in accordance with International Financial Reporting Standards (IFRS). Previously, it was the accounting principles as set out in Part V of the CPA Canada Handbook Accounting ( Canadian GAAP ). (5) Issued and outstanding units of the Fund have been redesignated as Series A units effective on July 1, 2015. This change relates only to the designation of the units and the rights, privileges and other attributes of units redesignated into Series A units remain unchanged. In this document, the word units indicates Series A units.
Financial Highlights (continued) Six-month period ended Years ended Ratios and Supplemental Data June 30 2016 (6 months) 2015 2014 2013 2012 2011 Net asset value (in thousands of $) (1) 362,455 372,915 309,068 251,390 164,076 144,432 Number of units outstanding (1) 27,272,938 27,335,109 25,634,806 24,948,327 23,196,184 22,005,453 Management expense ratio (%) (2) 1.15 1.05 1.07 1.10 1.05 1.02 Management expense ratio before waivers or absorptions by the Manager (%) 1.15 1.05 1.07 1.10 1.05 1.02 Portfolio turnover rate (%) (3) 22.30 51.31 58.54 113.11 49.26 94.86 Trading expense ratio (%) (4) 0.05 0.04 0.05 0.09 0.12 0.15 Net asset value per unit ($) 13.29 13.64 12.06 10.08 7.07 6.56 (1) This information is provided as at June 30, 2016 and as at December 31 for the comparative accounting periods. (2) Management expense ratio is based on total expenses for the stated accounting period (excluding commissions, other portfolio transaction costs and withholding taxes on dividend income) and is expressed as an annualized percentage of the daily average net asset value during the accounting period. (3) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio manager 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 during the accounting period. The higher a Fund s portfolio turnover rate in the accounting period, the greater the trading costs payable by the Fund during the accounting period, and the greater the chance of an investor receiving taxable capital gains during the accounting period. There is not necessarily a relationship between a high turnover rate and the performance of a portfolio. (4) 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 accounting period. Management Fees The fees and expenses payable by the Fund include management fees and operating expenses. The management fees include, among others, the portfolio manager s fees, the fees relating to the marketing and distribution of the Fund, and administration fees of the Manager. These fees are calculated and credited daily and paid monthly. Operating expenses include, among others, regulatory filing fees, registrar, custodian and fiduciary fees, expenses relating to accounting and valuation of the Fund, taxes and duties, auditors and legal advisors fees, and reporting fees to unitholders. For the period, annualized management fees charged to the Fund amounted to 1.15% and are detailed as follows: Management fees: 1.03% Operating expenses: 0.12% % 50 25 15.0 12.3 7.1 8.9 43.5 21.4 18.9 0-0.4-14.5-25 -26.0-50 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-2.6 6 months Annual Compound Returns (%) Past Performance The performance information assumes that all distributions made by the Fund in the periods shown were reinvested in additional securities of the Fund. The information does not take into account purchase, redemption, investment or other optional charges that would have reduced returns or performance. The Fund s past performance is not necessarily indicative of how it will perform in the future. Annual Returns The bar chart shows the Fund s annual performance for each of the years shown, and illustrates how the Fund s performance has changed from year to year, with the exception of the last bar, which indicates the Fund s total return for the interim six-month period ended June 30, 2016. The bar chart shows, in percentage terms, how much an investment made on the first day of each financial year would have grown or decreased by December 31 of each financial year or on the last day of the six-month period. 1 year 3 years 5 years 10 years FÉRIQUE American 6.8 18.0 16.6 6.9 S&P 500 Index ($CA) 8.2 19.7 19.0 9.1 Median* 1.5 14.8 13.8 6.0 * Median return of all investment funds of the same category according to Morningstar Inc. S&P 500 Index The S&P 500 Index is used to measure the growth of the entire American economy through fluctuations in the market value of 500 securities representing the main sectors of the US economy. Comparison with the Index The Fund posted a net return of -2.6% for the six-month period ended June 30, 2016, compared to -2.9% for its benchmark index. Please note that the Fund s return is presented net of management fees and operating expenses, while the Index s return is gross of fees.
Portfolio Overview The top 25 holdings in the portfolio % of net asset value Cash, Money Market and Other Net Assets 5.2 Verizon Communications Inc. 3.0 Microsoft Corp. 2.9 Exxon Mobil Corp. 1.9 Berkshire Hathaway Inc., Class B 1.8 Wells Fargo & Co. 1.8 Johnson & Johnson 1.8 Apple Inc. 1.8 Alphabet Inc., Class C 1.8 PepsiCo Inc. 1.7 Citigroup Inc. 1.6 Pfizer Inc. 1.6 Medtronic PLC 1.6 Comcast Corp., Class A 1.6 J. P. Morgan Chase & Co. 1.5 Chevron Corp. 1.4 Activision Blizzard Inc. 1.4 Lowe s Companies Inc. 1.3 Facebook Inc., Class A 1.3 Nielsen Holdings PLC 1.2 Honeywell International Inc. 1.2 Iron Mountain Inc. 1.2 CVS Health Corp. 1.1 General Electric Co. 1.1 Morgan Stanley 1.1 43.9 Weighting by Sector % of net asset value Financials 19.1 Information Technology 18.0 Consumer Discretionary 13.0 Health Care 12.9 Industrials 9.7 Consumer Staples 7.3 Energy 6.3 Telecommunication Services 3.1 Utilities 2.9 Materials 2.5 Cash, Money Market and Other Net Assets 5.2 Net Asset Value $362,454,668 The allocation of the portfolio may vary due to the transactions carried out by the Fund. A quarterly update is available.
Gestion FÉRIQUE Place du Canada 1010 de La Gauchetière Street West Suite 1000 Montreal, Quebec H3B 2N2 ferique.com Additional information about the Funds is available in the Funds Prospectus, Annual Information Form, Fund Facts and Financial Statements. You may obtain a copy of these documents, free of charge and on demand: by contacting the Manager, Gestion FÉRIQUE, at 514-840 9206 (toll free at 1-888-259 7969); by contacting the Principal Distributor, Services d investissement FÉRIQUE at 514-788 6485 (toll free at 1-800-291 0337); by visiting ferique.com or sedar.com.