16 ANNUAL MANAGEMENT REPORT of Fund Performance for the year ended December 31, 2016 This Annual Management Report of Fund Performance contains financial highlights but does not contain the complete annual financial statements of the Funds that you hold. You can get a copy of the annual financial statements at your request, and at no cost, by calling Services d investissement FÉRIQUE s client services at 514-788-6485 (toll-free 1-800 291 0337), by writing at Gestion FÉRIQUE, Place du Canada, 1010 de La Gauchetière Street West, Suite 1400, Montréal (Québec) H3B 2N2, or by visiting our Web site at ferique.com or SEDAR at sedar.com. 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 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 December 31, 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 of Fund Performance Investment Objective and Strategies The seeks to maximize total return by a combination of high revenues and capital appreciation. The money is thus mainly invested and reinvested in fixed-income securities issued by governments and corporations. The Fund is managed equally by two portfolio managers, namely Addenda Capital Inc. (Addenda) and Baker Gilmore & Associates Inc. (Baker Gilmore). Addenda s strategy consists in actively positioning the portfolio according to economic conditions through the following factors: management of the portfolio s duration 1 with respect to the FTSE TMX Canada Universe Bond Index, as well as security allocation and selection among bond market sectors (Canadian government bonds, provincial bonds, municipal bonds, supranational institutions and corporate bonds). The portfolio manager may also invest in foreign bonds. Baker Gilmore s strategy consists in positioning the portfolio with respect to economic conditions according to the following factors: sector allocation and selection within bond market sectors (Canadian government bonds, provincial bonds, municipal bonds, supranational institutions and corporate bonds), as well as management of the portfolio s duration with respect to the index. The portfolio manager may also invest in foreign bonds. The Fund mainly invests and reinvests in bonds, debentures, notes and other securities issued and guaranteed as to principal and interest by the Government of Canada, provincial and municipal governments, or by supranational institutions or any other Canadian school board, Canadian company or corporative; mortgage-backed securities sponsored by a chartered Canadian bank; strip coupons; investment certificates; bank acceptances, exchange-traded funds and other equivalent securities. Bonds and debentures issued or guaranteed by governments or corporations (including asset-backed securities and commercial mortgage) from developed countries denominated in currencies of these countries are also allowed. Risk The risks of investing in the Fund remain the same as those described in the Prospectus. The Fund is intended for investors with a low risk tolerance who want to invest in the medium term. It can also be used as the core part of the Canadian fixed-income portion of a diversified investment portfolio. Results of Operations The Fund posted a net return of 1.5% for the fiscal year ended December 31, 2016. Its benchmark, the FTSE TMX Canada Universe Bond Index, posted a 1.7% return for the same period. Contrary to benchmark returns, which include no investment fees, Fund returns are expressed net of management and operating expenses payable by the Fund. FÉRIQUE FÉRIQUE Nom du Fonds Bond Fund On a relative basis, the Fund outperformed the industry median 2, which posted a return of 1.4% net of fees for the fiscal year. Addenda In the wake of populist sentiment (Brexit, U.S. elections, rejection of reforms in Italy) and several central banks recent admission that monetary activism might have its limits, financial markets concluded that budgetary orthodoxy no longer held water and that public spending would increase. Combined with the impact of the recent agreement between OPEC members and other major oil producers to limit supply, thereby strengthening oil prices, these events toppled inflation expectations across financial markets, which no longer fear deflation, but rather expect some inflation to return. In such a context, bond yields underwent their most significant quarterly variation in 2016 during the final quarter. The portfolio s duration was relatively short throughout the year, as bond yields hovered near the bottom of the portfolio manager s outlook range. As a result, the portfolio s positioning during the yield hike towards the end of the year was the greatest contributor to Fund returns. Provincial and corporate bonds also had a positive impact on relative performance throughout the year, as yield spreads kept narrowing, thereby coming closer to the portfolio manager s targets at year-end. Baker Gilmore A superior running yield of the portfolio combined to the overweight to A-rated corporate bonds issued in the Financials sector, BBB-rated corporate bonds in Utilities and provincial bonds, as well as narrowing credit spreads and widening implicit inflation spreads, all contributed to the Fund s relative return. A shorter duration than that of the benchmark and the flattening yield curve also had a positive impact on performance. However, the underweight to corporate bonds in Industrials partially offset these results. Bond yields were marked by two major periods in 2016. The year began with uncertainty toward China s economy and Europe s banking sector. Indeed, in light of new and unconventional recovery measures implemented by the European Central Bank (ECB) and the Bank of Japan (BoJ), as well as the U.S. Federal Reserve s (Fed) announcement of progressive rate increases, most government bonds in developed countries, mostly long-term issues, fell sharply. Late in the year, Donald Trump s election drew concerns regarding his platform s inflationary impact and energized global markets, where government bond yields grew considerably. Recent Developments Addenda The budgetary measures considerable impact on the economy upon the U.S. President s inauguration and its specific timing are still a major source of market uncertainty. Moreover, the Fed s interest rate increase and new tightening measures drove the U.S. dollar upward, thereby impeding exports and overall growth. The Fed will be increasing rates carefully in 2017 in light of structural issues and concerns regarding changes to budgetary policies and U.S. regulations. The Bank of Canada (BoC) will be attentively tracking the Fed s moves and oil price fluctuations before modifying its own monetary policy. 1 Duration is a risk measure for the interest rate of a financial instrument that corresponds to the average life, expressed in years, of the flow generated by this instrument (interest and capital), actualized based on current market rates on the date of the calculations. 2 Source: median return of similar funds according to Fundata, as at December 31, 2016.
Active management opportunities are likely to abound in 2017 in light of the near certainty that surprises will occur at the tax, regulatory and geopolitical level. Consequently, Addenda believes both sides of the border will post growth and that inflation will return near BoC and Fed targets. Such a context should lead to a slight rate increase across the Canadian interest rate curve. Against this backdrop, the portfolio manager will therefore maximize the risk-return ratio. Overall, and in light of the current low-rate context, Addenda s strategy consists in remaining very active and building quality-focused bond portfolios with a rather short duration, but whose yield to maturity matches that of its benchmark. Baker Gilmore While the portfolio manager expects that Trump s victory will drive economic growth, it would likely be modest and below historical levels at this point of the economic cycle. Among other factors, this context stems from the deflationary impact of significant debt on developed markets (particularly across the Eurozone and in Japan), as well as several emerging economies vulnerability to the Fed s launch of its tightening cycle, which would drive market volatility and the U.S. dollar upward. In light of the Trump administration s platform, the Fed will need to increase its rates to higher-than-expected levels, but will remain patient in tightening its monetary policy, thereby enabling inflation to slightly exceed its 2% target in the short term. Baker Gilmore believes this will lead to a U.S. bond yield upswing and steepen the yield curve. The BoJ and ECB will maintain their very accommodating monetary policies, which should keep global liquidity at high levels for some time, despite the fact these central banks will likely begin their tightening process next year as their inflation level approaches their target. Against this backdrop, bond yields among the major developed markets will probably remain under the levels generally corresponding to economic fundamentals. After three years of marked depreciation, the Canadian dollar s value rose compared to the lows noted in early 2016. That said, the currency remains very competitive and sustained U.S. economic growth could help drive manufacturing and service exports. However, potential trade restrictions stemming from the new U.S. government s protectionist agenda could pose a new risk on the Canadian and global economies. Baker Gilmore believes Canadian bond yields should align with higher U.S. yields. In an effort to further weaken the Canadian dollar and stimulate exports, the BoC could leave its overnight rates unchanged, and the Canadian yield curve should also steepen. In light of this context, Baker Gilmore will maintain a shorter duration than that of its benchmark. The portfolio manager will underweight Canadian government bonds in favour of provincial and corporate bonds issued in the Financials sector, as well as asset-backed securities, due to their attractive spreads. Exposure to real-return bonds will be maintained due to inflation risks, which face an upswing on the medium term. 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 fiscal year ended December 31, 2016, the Fund s portfolio managers, Addenda and Baker Gilmore, 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. Net Assets per Unit (1) (5) 2016 Years ended 2015 2014 2013 2012 $ $ $ $ $ Net assets, beginning of accounting period (4) 40.41 40.89 39.42 41.13 41.27 Increase (decrease) from operations Total revenues 1.06 1.12 1.28 1.36 1.40 Total expenses (0.33) (0.27) (0.26) (0.30) (0.25) Realized gains (losses) 0.43 0.56 0.56 0.04 0.39 Unrealized gains (losses) (0.51) (0.52) 1.28 (1.72) (0.26) Total increase (decrease) from operations (2) 0.65 0.89 2.86 (0.62) 1.28 Distributions From investment net income (excluding dividends) 0.74 0.85 1.01 1.05 1.13 From capital gains 0.45 0.56 0.40 0.08 0.32 Total annual distributions (3) 1.19 1.41 1.41 1.13 1.45 Net assets, end of accounting period (4) 39.82 40.41 40.89 39.42 41.10 (1) This information is derived from the Fund s Annual Audited 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. Ratios and Supplemental Data 2016 2015 Years ended 2014 Net asset value (in thousands of $) (1) 657,916 677,938 637,632 564,106 568,802 Number of units outstanding (1) 16,521,953 16,776,762 15,593,293 14,310,008 13,828,073 Management expense ratio (%) (2) 0.80 0.65 0.65 0.75 0.61 Management expense ratio before waivers or absorptions by the Manager (%) 0.80 0.65 0.65 0.75 0.61 Portfolio turnover rate (%) (3) 214.72 202.93 246.55 218.95 145.22 Trading expense ratio (%) (4) Net asset value per unit ($) 39.82 40.41 40.89 39.42 41.13 (1) This information is provided 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. For money market securities and fixed income securities, the transaction fees are embedded in the transaction cost. 2013 2012 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 year, annualized management fees charged to the Fund amounted to 0.80% and are detailed as follows: Management fees: 0.71% Operating expenses: 0.09%
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. 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 year. % 9 6 3 0-3 2.9 2007 4.7 4.8 2008 2009 6.0 2010 8.9 2011 3.1 2012 Annual Compound Returns (%) -1.4 2013 7.4 2014 2.3 2015 1.5 2016 1 year 3 years 5 years 10 years FÉRIQUE Bond 1.5 3.7 2.5 4.0 FTSE TMX Canada Universe Bond Index 1.7 4.6 3.2 4.8 Median* 1.4 3.1 2.2 3.5 * Median return of all investment funds of the same category according to Fundata. FTSE TMX Canada Universe Bond Index The FTSE TMX Canada Universe Bond Index includes nearly all marketable Canadian bonds, with terms to maturity of over one year. Its objective is to reflect the evolution of the Canadian bond market. Comparison with the Index The Fund posted a net return of 1.5% for the fiscal year ended December 31, 2016, compared to 1.7% for its benchmark. Contrary to benchmark returns, which include no investment fees, returns are expressed net of management and operating expenses payable by the Fund. Portfolio Overview The top 25 holdings in the portfolio % of net asset value Province of Ontario, 2.10%, due September 8, 2018 8.0 Government of Canada, 1.50%, due June 1, 2026 4.9 Province of Ontario, 2.40%, due June 2, 2026 3.4 Royal Bank of Canada, 3.31%, due January 20, 2026 2.5 Canada Housing Trust, 1.20%, due June 15, 2020 2.4 Province of Manitoba, 6.30%, due March 5, 2031 2.0 Canada Housing Trust, 1.15%, due December 15, 2021 1.7 Province of Ontario, 2.85%, due June 2, 2023 1.7 Toronto-Dominion Bank, Floating, due March 4, 2026 1.6 Province of Quebec, Floating, due January 19, 2017 1.6 Canada Housing Trust, 1.95%, due June 15, 2019 1.5 Government of the United States, 2.00%, due November 15, 2026 1.5 Province of Ontario, 3.45%, due June 2, 2045 1.3 Government of the United States, 2.25%, due August 15, 2046 1.3 Government of Canada, 0.25%, due May 1, 2018 1.3 Province of Ontario, 4.00%, due June 2, 2021 1.3 Government of Canada, Real Return 1.50%, due December 1, 2044 1.3 Scotia Bank, 3.37%, due December 8, 2020 1.3 Bank of Montreal, Floating, due June 1, 2021 1.3 Province of Ontario, 5.60%, due June 2, 2035 1.2 Province of Ontario, 2.60%, due June 2, 2025 1.2 Canada Housing Trust, 1.70%, due December 15, 2017 1.1 Province of Quebec, 3.75%, due September 1, 2024 1.0 Province of Ontario, 4.40%, due June 2, 2019 1.0 Canada Housing Trust, 1.90%, due September 15, 2026 1.0 Asset Mix 48.4 % of net asset value Provincial Bonds 38.8 Corporate Bonds 30.1 Federal Bonds 19.6 Asset Backed Securities 5.0 Foreign Bonds 4.9 Municipal Bonds 0.7 Cash, Money Market and Other Net Assets 0.9 Net Asset Value $657,915,593 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 1400 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) or client@ferique.com; by visiting ferique.com or sedar.com.