Brookfield Investment Management 2016 Brookfield High Yield Strategic Income Fund BHY.UN Interim Management Report of Fund Performance For the period from January 1, 2016 to June 30, 2016
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IN PROFILE Brookfield High Yield Strategic Income Fund (the Fund ) is managed by Brookfield Investment Management (Canada) Inc. ( BIM Canada ). BIM Canada is a subsidiary of Brookfield Asset Management Inc., a global alternative asset manager with approximately US$250 billion of assets under management as at June 30, 2016 and over a 100-year history of owning and operating assets with a focus on property, renewable energy, infrastructure and private equity. Brookefield Investment Management Inc. is the investment manager of the Fund. BHY.UN (TSX LISTED) UNIT INFORMATION Units Outstanding (June 30, 2016): Targeted Quarterly Distributions: Record Date: Payment Date: 7,934,807 Units The quarterly distributions are currently targeted to be $0.1625 per Unit ($0.65 per annum representing an annual cash distribution of 6.5% based on the $10.00 per Unit issue price). The Fund does not have a fixed distribution. The last business day of each of March, June, September and December. No later than the 15th business day of the month following the distribution Record Date. 2016 Interim Management Report of Fund Performance 1
LETTER TO UNITHOLDERS Dear Unitholders, We are pleased to provide this Interim Management Report of Fund Performance for Brookfield High Yield Strategic Income Fund (the Fund ) for the six months ended June 30, 2016 (the Period ). The Fund was created with the objectives to (i) provide holders of Units ( Unitholders ) with tax-advantaged quarterly cash distributions; (ii) maximize total return for Unitholders through distributions and capital appreciation; and (iii) preserve capital. The quarterly distributions are currently targeted at $0.1625 per Unit or $0.65 per annum, representing a targeted annual cash distribution of 6.5% based on the $10.00 per Unit issue price. To achieve this return, the Fund obtains economic exposure to a portfolio (the Portfolio ) held by High Yield Strategic Trust through the utilization of a forward agreement. The Portfolio is comprised primarily of North American high yield debt. The Portfolio may also invest in other fixed income and equity securities. PERFORMANCE As at June 30, 2016, the net asset value per Unit was $7.47 after payments of two quarterly distributions to Unitholders of $0.1625 per Unit in the 2016 calendar year. This compares to the net asset value per Unit of $7.18 on December 31, 2015. For the six months ended June 30, 2016, the Fund had a total return of 8.9% including payment of two quarterly distributions to Unitholders of $0.1625 per Unit. For the Period, the Portfolio was predominately invested in high yield bonds and syndicated loans of companies domiciled in the United States and to a lesser extent, Canada. For the Period, the high-yield market saw a total return of 9.82% as measured by the JP Morgan U.S. High Yield Index. Confidence returned to investment markets when oil and other commodities rallied in February following sustained declines over the prior year. The market rewarded risk with lower-quality CCC rated bonds rising 17.79% while less-risky BB rated bonds rose 6.32%, as measured by the JP Morgan U.S. High Yield CCC and BB portions respectively. Returns this year have been led by real asset sectors including energy and metals & mining, which are up 51.7% and 36.6%, respectively, from the mid-february market bottom. The strong rally during the first six months of 2016 has compressed spreads to the 669 basis-point level, which remains wider than the long-term median of 569. Spreads have compressed 88 basis points since year-end 2015. High-yield-bond defaults fell in June to the lowest level since October, and marked a third consecutive monthly decline. The trailing 12-month default rate declined to 3.56%. Defaults continued to be concentrated in energy, metals, and mining. Away from these commodity sectors, however, defaults are low at 0.53%. The 12-month upgrade/downgrade ratio was 0.47x at June 30, indicating the rating agencies are downgrading almost twice the par-amount of debt as they are upgrading. Still, this ratio appears to have stabilized recently, indicating that credit ratings may be on track to stabilize. The new issue high-yield bond market has continued to heal from the turmoil of the fourth quarter of 2015. 2016 year-to-date issuance is $155.3 billion, down only 19% from the same point last year New-issue credit quality has been healthy, with only 9% falling in the lower-rated CCC category. Refinancing accounted for 54% of new issue volume, which is higher than last year s 43%. Refinancing generally tends to reduce embedded risk by eliminating near-term maturities and lowering overall debt-service costs. Overall, most new issues saw solid demand and traded well in the aftermarket. 2016 Interim Management Report of Fund Performance 2
OUTLOOK We believe the hiatus in defaults is a temporary event, and that investors are likely to see higher defaults in the second half of the calendar year. We recognize, however, that higher oil and commodity prices may enable more issuers to avoid restructuring than previously expected, which would be an unexpected credit positive for investors. Despite the improvement in defaults, and the robust rally, we recognize that spreads remain 100 basis points wide to the long-term median. With leveraged corporate credit quality remaining sound, we believe investors are adequately compensated for risk at these levels. We continue to believe that the greatest potential risk to leverage investors is geopolitical. While the market shrugged off Brexit, rising incidents of international and North American terrorism could result in a risk-off move, which would negatively impact high yield returns. Furthermore, the U.S. presidential election is widely acknowledged as unprecedented, with both major party candidates carrying record-setting negative perceptions. Markets could trade off if the wrong person is elected. We believe that near-record-low and negative interest rates in many safe haven investments are enticing investors to remain risk-on longer than they might otherwise. We welcome your questions and comments, and encourage you to contact our Investor Relations team at (855) 777-8001 or visit us at www.brookfieldim.com for more information. Thank you for your support. Dana Erikson, Managing Director On behalf of the Investment Manager, Brookfield Investment Management Inc. 2016 Interim Management Report of Fund Performance 3
MANAGEMENT REPORT OF FUND PERFORMANCE This Interim Management Report of Fund Performance contains financial highlights but does not contain the complete interim financial statements of Brookfield High Yield Strategic Income Fund (the Fund ). The interim financial statements may contain information not included in the management report of fund performance. You can get a copy of the interim financial statements at your request, and at no cost, by contacting us (see contact information at end of this report) or by visiting our website at www.brookfieldim.com or by viewing our filings on SEDAR at www.sedar.com. Unitholders may also contact us to request a free copy of the Fund's proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. This report may contain forward-looking statements. The use of any of the words such as anticipate, may, will, expect, estimate, should, believe and similar expressions are intended to identify forward-looking statements. Such statements reflect the opinion of Brookfield Investment Management Inc. ( Investment Manager or BIM ) regarding factors that might be reasonably expected to affect the performance and the distribution on units of the Fund and are based on information available at the time of writing. The Investment Manager believes that the expectations reflected in these forward-looking statements and in the report are reasonable but no assurance can be given that these expectations or the report will prove to be correct and accordingly, they should not be unduly relied upon. These statements speak only as at the date of the report. Actual events and outcomes may differ materially from those described in these forward-looking statements or report. Unless otherwise indicated, all information is presented as at June 30, 2016, and expressed in Canadian dollars. Index returns are calculated in the currency of the underlying index. None of the websites referred to in this Interim Management Report of Fund Performance, or any of the information on such websites, are incorporated by reference in this Interim Management Report of Fund Performance. INVESTMENT OBJECTIVES AND STRATEGIES The Fund's investment objectives are (i) to provide holders of units ( Unitholders ) with tax advantaged quarterly cash distributions; (ii) to maximize total return to the Unitholders through distributions and capital appreciation; and (iii) to preserve capital. The Fund was created with the purpose of producing a high income return by obtaining economic exposure to a portfolio (the Portfolio ) held by High Yield Strategic Trust (the Trust ), through the utilization of a forward agreement. The investments in the Portfolio are comprised primarily of North American high yield debt. Brookfield Investment Management (Canada) Inc. ( BIM Canada ) is the manager (the Manager ) of the Fund and the Trust (together, the Funds ) and BIM is the investment manager of the Funds. The Fund endeavours to provide Unitholders with tax-advantaged quarterly cash distributions currently targeted at $0.1625 per Unit ($0.65 per annum representing an annual cash distribution of 6.5% based on the $10.00 per Unit issue price) while maximizing total return for Unitholders through distributions and capital appreciation and preserving the net asset value ("NAV") of the Fund. RISK At June 30, 2016, the Portfolio was primarily invested in high yield bonds and syndicated loans of companies domiciled in the United States and to a lesser extent, Canada. To fund the cash distribution currently targeted at $0.65 per annum, while preserving the net asset value, the Fund, through its exposure to the Portfolio, is exposed to various risks including risks related to the credit quality of the issuer of the securities, the trading liquidity of the securities and the currency in which the securities 2016 Interim Management Report of Fund Performance 4
are denominated. The Fund seeks to minimize potentially adverse effects of these risks on the Trust s performance by employing experienced portfolio managers, by continuously monitoring the Trust s securities positions and markets, and by hedging the majority of currency risk. During the second quarter of 2016, in our opinion, the North American high yield market experienced better trading liquidity than during the second half of 2015. The overall credit quality of the Portfolio 1 at the end of the period January 1, 2016 to June 30, 2016 (the "Period") was higher than at the beginning of the Period. Currency risk can be mitigated with the use of forward currency contracts which the Trust may use from time to time. At the end of the Period, in part due to the use of forward currency contracts, the Portfolio had higher net exposure to foreign currency than at the end of the prior year. As at June 30, 2016, the Trust s net exposure to foreign currency was 3.48% of Net Assets (December 31, 2015 0.99%). The Trust uses derivative instruments for hedging purposes to protect investment returns on the Portfolio from currency fluctuations. Not less than 70% of the Portfolio s investments denominated in currencies other than the Canadian dollar are hedged back to the Canadian dollar. For discussion of the Trust's use of leverage, please see Results of Operations. RESULTS OF OPERATIONS The following Manager s commentary relates to the Fund s exposure to the performance of the Portfolio held by the Trust: The Fund effectively began operations on June 19, 2012 when it completed an initial public offering of 12,500,000 units (the Units ) and subsequently issued 425,000 Units pursuant to an over-allotment option on June 29, 2012 at $10.00 per Unit, for gross proceeds of $129.3 million and net proceeds of $121.7 million after deducting issuance costs of approximately $7.6 million. The Fund s net asset value was $59.3 million as at June 30, 2016, an increase of $2.3 million from $57.0 million as at December 31, 2015. The increase in net asset value was largely comprised of operating profit generated by the Fund of $4.9 million offset by a reduction in the Fund s net asset value of $2.6 million during the Period through distributions to Unitholders. As at June 30, 2016, the net asset value per Unit was $7.47, after recording distributions to Unitholders of $0.325 per Unit for the Period, compared to $7.18 per Unit on December 31, 2015. The total return for the Fund was 8.9% for the six months ended June 30, 2016. The Trust was overweight in the Energy, Leisure, and Telecommunications sectors over the Period, and underweight in the Basic Industry, Technology and Retail sectors. Although Energy rallied over the Period, a number of the Portfolio s Energy names moved lower which ultimately resulted in the Energy sector being a negative contributor to relative performance of the Trust. The Trust s overweight in the Leisure sector primarily gaming lagged the overall market in the rally and also was a modest detractor from positive returns. Telecommunications was a modest detractor as well, primarily due to negative security selection in the wireless subsector. The Trust s underweights generally added to relative performance due to positive security selection in Basic Industry, and a lack of exposure to Technology and Retail which tended to lag the rally. 1 As measured by Standard & Poor s credit ratings, or if not rated by Standard & Poor's, the most closely comparable rating from Moody's Investor Service. 2016 Interim Management Report of Fund Performance 5
The Trust was overweight B-rated bonds and underweight BB and CCC-rated bonds. This distribution was a minor detractor from performance. While the BB underweight contributed, the market saw a significant rally in CCC-rated bonds and the Portfolio was underweight this category. In addition, the Trust's leverage was a strong contributor to performance, magnifying returns during the rally. Leverage is restricted to 33% of the total assets of the Trust. Accordingly, at the time of borrowing, the maximum amount of leverage that the Trust could employ is 1.50:1 (total long positions, including leveraged positions, divided by net assets of the Trust). As at June 30, 2016, the Trust had employed leverage equal to 14.8% (December 31, 2015 28.7%) of the total assets of the Trust, equating to $10.8 million (December 31, 2015 - $27.5 million). The minimum and maximum amount of borrowings outstanding during the period ended June 30, 2016 was $10.8 million and $27.5 million, respectively. The minimum and maximum amount of borrowings outstanding during the period ended December 31, 2015 were $27.5 million and $58.2 million, respectively. The borrowings were used to grow the Trust s investments and for working capital needs. Adding a controlled amount of leverage to the Trust is consistent with the Trust s objectives. RECENT DEVELOPMENTS Subsequent to June 30, 2016, the Fund received tenders for the redemption of 1,872,963 units of the Fund, which were paid in early August 2016. Other than the aforementioned event, there have been no recent developments in the market, outlook, or operations of the Trust that represent a material change for investors. RELATED PARTY TRANSACTIONS The Manager and the Investment Manager are wholly owned subsidiaries of Brookfield Asset Management Inc. ( Brookfield ) and the Investment Manager manages the investment and trading activities of the Fund pursuant to a management agreement. Due to Brookfield s ability to control the Funds, Brookfield, and its affiliates over which it has the ability to exercise control or significant influence, are related parties of the Fund by virtue of common control or common significant influence. Transactions with related parties, including investment transactions, are conducted in the normal course of operations and are recorded at exchange amounts, which are equivalent to normal market terms. Please refer to the section titled Management Fees, which outlines the fees paid to the Manager by the Funds. As at June 30, 2016, Brookfield and its affiliates owned a 12.7% (December 31, 2015-12.6%) interest in the Fund. During the Period, BIM Canada purchased 6,968 units in the open market. There were no other transactions conducted with related parties during six month period ended June 30, 2016. 2016 Interim Management Report of Fund Performance 6
FINANCIAL HIGHLIGHTS The following tables provide selected key financial information about the Fund and are intended to help you understand the Fund's financial performance since inception: For the six months ended June 30, Net asset value per Unit (1) 2016 December 31, For the twelve months ended December 31, December 31, 2015 2014 2013 Period from June 19, 2012 to December 31, 2012 (2) Net assets, beginning of period $7.18 $9.61 $10.12 $9.85 $9.41 (3) Increase (decrease) from operations Total revenue 0.00 0.01 0.01 0.01 0.00 Total expenses (0.06) (0.15) (0.17) (0.17) (0.09) Realized gains (losses) for the period 0.02 0.98 (0.03) 0.26 0.04 Unrealized gains (losses) for the period 0.66 (2.13) 0.33 0.85 0.78 Total increase (decrease) from operations (4) 0.62 (1.29) 0.14 0.95 0.73 Distributions Due to capital gains - - - (0.21) - Due to return of capital (0.33) (0.65) (0.65) (0.44) (0.32) Total distributions (5) (0.33) (0.65) (0.65) (0.65) (0.32) Net assets, end of period (6) $7.47 $7.18 $9.61 $10.12 $9.82 Notes: (1) This information is derived from the Fund's financial statements as at June 30 and December 31 of the stated year. The 2016, 2015, and 2014 information was prepared in accordance with IFRS and the 2013 information was restated in accordance with IFRS. The 2012 information was prepared in accordance with Canadian GAAP. (2) The Fund commenced investment operations on June 19, 2012. (3) Reflects the issue price of $10.00 less share issue expenses of $0.59 per Unit. (4) 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. Accordingly, totals may not sum in the above table due to the different basis for computing the per Unit amounts. (5) Distributions were recorded as equal payments of $0.1625/Unit. Cash payment of distributions occurs within 15 business days of the record date. (6) This is not a reconciliation of the beginning and ending net assets per Unit. 2016 Interim Management Report of Fund Performance 7
Ratios and Supplemental Data For the six months ended June 30, December 31, 2016 2015 For the twelve months ended December 31, 2014 Period from June 19, 2012 December 31, to December 31, 2013 2012 (1) Total net asset value $59,294,678 $56,973,336 $124,166,917 $130,810,223 $127,249,310 Number of Units outstanding 7,934,807 7,936,657 12,925,000 12,925,000 12,925,000 Management expense ratio (2) 3.53% 3.33% 3.55% 4.38% 9.38% Management expense ratio before waivers and absorptions (2) 3.53% 3.33% 3.55% 4.38% 9.38% Trading expense ratio (3) N/A N/A N/A N/A N/A Portfolio turnover rate (3) N/A N/A N/A N/A N/A Net asset value per Unit $7.47 $7.18 $9.61 $10.12 $9.85 Closing market price $7.36 $6.87 $9.28 $9.41 $9.70 Notes: (1) The Fund commenced investment operations on June 19, 2012. (2) Management expense ratio ( MER ) is based on total expenses of the Funds (excluding commissions and other portfolio transaction costs but including interest expense and management fees of the Trust) for the stated period, except as stated in the following sentence, and is expressed as an annualized percentage of daily average net asset value during the period. The MER for the Period includes agents fees and other offering expenses, which are one-time expenses and therefore are not annualized. The MER for the period ended December 31, 2012, excluding agents fees and offering expenses, was 3.29%. (3) The Fund's return is linked, by virtue of a forward agreement, to the performance of the Portfolio and consequently, the portfolio turnover rate and trading expense ratio do not apply to the Fund. MANAGEMENT FEES The Manager and Investment Manager are responsible for providing or arranging for all investment advisory and portfolio management services required by the Funds including, without limitation, managing the Portfolio in a manner consistent with the investment objectives, guidelines and restrictions of the Trust and for arranging for the execution of all portfolio transactions. The Manager is also responsible for the operational and administrative functions of the Funds. An annual management fee equal to 0.3125% per annum of the net asset value of the Fund, calculated daily and payable monthly in arrears, plus an amount calculated quarterly and paid as soon as practicable after the end of each calendar quarter, equal to the service fee (the Service Fee ), plus applicable taxes, is paid to the Manager. As well, an annual management fee of 0.9375% based on the net asset value of the Trust, calculated daily and payable monthly in arrears, is paid to the Manager (total overall annual management fee for the Funds of 1.25% excluding the Service Fee). The management fee excluding the Service Fee, totaled $99,124 and $220,711 for the Fund and $300,968 and $666,876 for the Trust for the six months ended June 30, 2016 and 2015, respectively. The Manager pays to registered dealers the Service Fee equal to 0.50% annually of the net asset value per Unit for each Unit held by clients of the registered dealers, calculated and paid at the end of each calendar quarter, plus applicable taxes. The Service Fees totalled $140,352 and $278,432 for the six months ended June 30, 2016 and 2015, respectively. The Manager is also eligible in each fiscal year to receive from the Trust a performance fee (the "Performance Fee") that shall be calculated and accrued monthly and be paid annually, if applicable. The Performance Fee for a given year will, subject to some exceptions regarding redemptions and issuances of units of the Trust, be equal to 15% of the amount by which the net asset value per unit of the Trust (calculated without taking into account any Performance Fee) exceeds 106.5% of the 2016 Interim Management Report of Fund Performance 8
Threshold Amount. The Threshold Amount is the greater of: (i) $10.00; and (ii) the net asset value per unit of the Trust at the end of the last fiscal year in which a Performance Fee was paid (after payment of such Performance Fee). Please refer to the Fund s Prospectus for additional information on the Performance Fee. The Performance Fee accrual totalled $0 and $0 for the Trust for the six months ended June 30, 2016 and 2015, respectively. PAST PERFORMANCE Note that the performance information shown in this section assumes that all distributions made by the Fund in the period shown were reinvested in additional Units. Also note that the performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns on performance. The past performance of the Fund does not necessarily indicate how it will perform in the future. Year-to-Date Returns The following bar chart shows the Fund's performance for the periods stated. The bar chart shows, in percentage terms, how much an investment made on the first day of the relevant period would have increased or decreased by the last day of such period. 15.00% 10.00% 8.18% 9.67% 8.88% 5.00% 0.00% 1.52% -5.00% -10.00% -15.00% -20.00% -25.00% -19.38% 2012(1) 2013(2) 2014(2) 2015(2) 2016(3) (1) Represents the period from June 19, 2012 (the inception date) to December 31, 2012. (2) Represents the twelve month period ended December 31 of the stated year. (3) Represents the six month period ended June 30, 2016. 2016 Interim Management Report of Fund Performance 9
SUMMARY OF INVESTMENT PORTFOLIO The Fund has entered into a forward agreement whereby the Fund obtains economic exposure to the performance of the Portfolio. Accordingly, this management report of fund performance should be read in conjunction with the management report of fund performance and financial statements of the Trust. The management report of fund performance and financial statements for the Trust are available to Unitholders and may be obtained by visiting our website at www.brookfieldim.com or by writing to the Investor Relations group of Brookfield Investment Management (Canada) Inc., Brookfield Place, 181 Bay Street, Suite 300, Toronto, Ontario, Canada, M5J 2T3. The following is a summary of the Trust as at June 30, 2016. This is a summary only and will change due to ongoing portfolio transactions of the Trust. Quarterly updates will be posted to www.brookfieldim.com. As at June 30, 2016 Top 25 Positions % of Net Asset Value of the Trust Targa Pipeline Partners L.P. Bonds 3.64 Hexion US Finance Corp. Bonds 3.18 NRG Yield Operating LLC Bonds 2.85 AES Corp. Bonds 2.78 FairPoint Communications Inc. Bonds 2.77 Windstream Corp. Bonds 2.77 Cash and cash equivalents 2.77 Community Health Systems Inc. Bonds 2.71 Cedar Fair L.P. Bonds 2.67 Terex Corp. Bonds 2.66 Frontier Communications Corp. Bonds 2.64 CCO Holdings LLC Bonds 2.63 United Rentals North America Inc. Bonds 2.61 GLP Capital LP. Bonds 2.61 Zayo Group LLC Bonds 2.59 MGM Resorts International Bonds 2.57 Neptune Finco Corp. Bonds 2.55 HCA Inc. Bonds 2.54 Level 3 Financing Inc. Bonds 2.53 Lamar Media Corp. Bonds 2.53 NRG Energy Inc. Bonds 2.52 Tenet Healthcare Corp. Bonds 2.50 Blue Racer Midstream LLC Bonds 2.47 MPLX L.P. Bonds 2.43 Teekay Offshore Partners L.P. Bonds 2.42 Total 66.94 2016 Interim Management Report of Fund Performance 10
As at June 30, 2016 % of Net Asset Value Sector Allocation of the Trust Energy 26.08 Telecommunications 18.74 Leisure 13.37 Utility 11.37 Media 10.55 Healthcare 9.09 Basic Industry 7.73 Services 6.91 Transportation 6.23 Capital Goods 3.83 Automotive 0.80 Cash and Cash Equivalents 2.77 Other Liabilities and Accrued Investment Income (17.47) Total 100.00 2016 Interim Management Report of Fund Performance 11
FUND INFORMATION MANAGER AND TRUSTEE Brookfield Investment Management (Canada) Inc. Gail Cecil Director, President & Chief Executive Officer Jonathan Tyras Director, Chief Financial Officer, Treasurer, and Secretary Craig Noble Director INDEPENDENT REVIEW COMMITTEE John P. Barratt (Chair) Corporate Director James L. R. Kelly President Earth Power Inc. Frank Lochan Corporate Director CONTACT INFORMATION Brookfield High Yield Strategic Income Fund welcomes inquiries from Unitholders, analysts, media representatives or other interested parties. Investment Manager Brookfield Investment Management Inc. Brookfield Place 250 Vesey Street New York, New York 10281-1023 t. 855.777.8001 w. www.brookfieldim.com Transfer Agent and Registrar Unitholder inquiries relating to distributions, address changes and Unitholder account information should be directed to the Fund s Transfer Agent: Computershare Trust Company of Canada 100 University Avenue, 8th Floor Toronto, ON M5J 2Y1, Canada t. 1-800-564-6253 (U.S. & Canada) t. 1-514-982-7555 (International) f. 1-888-453-0330 w. www.computershare.com 2016 Interim Management Report of Fund Performance 12
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