MANAGEMENT REPORT OF FUND PERFORMANCE W.A.M. COLLINS INCOME POOL December 31, 2018 This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the investment fund. You can get a copy of the annual financial statements at your request, and at no cost, by calling toll-free 1-877-588-6822, by writing to us at Willoughby Asset Management Inc., MNP Tower, 3100 1021 W. Hastings St, Vancouver, B.C. V6E 0C3 or by visiting our website at www.willoughbyasset.com or SEDAR at www.sedar.com. Securityholders may also contact us using one of these methods to request a copy of the investment fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE Investment Objective and Strategies The W.A.M. Collins Income Pool was formed for the purpose of creating a total income portfolio solution by investing with third party mutual fund providers, exchange traded funds ( ETFs ) and individual securities in order to generate a consistent level of interest and dividend income. Some of the Fund s underlying securities may also appreciate in value and thereby generate capital gains. The Fund s main objective is to create an income pool to be used by investors seeking a regular stream of income, and it is also suitable for use in diversification of an equity portfolio. Any individual securities the Fund may hold will be exclusively listed on North American stock exchanges that are consistent with the Fund s investment policies and restrictions, but global exposure may be attained through the use of third party fund managers or ETFs. The Fund follows a value and income-based investment strategy with an emphasis on yield. Investments in the core portfolio will have a strong bias toward quality of the portfolio, value add of the portfolio manager, liquidity and fees. Risks The risks of investing in the Fund are outlined in the Simplified Prospectus. The estimated volatility rating of the fund is low based on the investment risk calculation methodology used as outlined in the Simplified Prospectus. There have been no significant changes to the Fund that affected its overall level of risk during the period. Exposure to currency may not be fully hedged. As such, fluctuations in currency will have a positive or negative effect on the returns of the Fund. Results of Operations The Fund was created on April 6, 2017, modified its investment objectives on September 6, 2017 and commenced operations on November 7, 2017. During 2018 the fund returns were as follows: Series A -4.97% Series F -3.99% On inception, the investment strategy of the Fund involved creation of an income based portfolio consisting of ETFs and third-party managed funds. During 2018 greater efficiencies have been achieved by revising the strategy towards managing individual securities and limiting the use of third-party managed funds to investment areas that are inefficient to manage cost-effectively on an individual basis. This revised approach resulted in reducing the initial estimated volatility rating of the fund from medium to low, where it has remained in 2018. Initial portfolio investments consisted of fixed income holdings as those security prices were at near par levels, the objective being to buy good quality fixed income products at par or better with a minimum 3% yield to maturity. As this combination was not available in government fixed income products, the Fund purchased a position for stability purposes and deferred adding holdings in this area until a more advantageous time. When security prices overall started to decline in October, the Portfolio Manager tightened stop losses for all equities to protect the fund from large swings. Given the volatility in the Page 2 of 9
markets, quarterly distributions were deferred for the last half of the year. As of year-end equity positions are comprised of covered call and low volatility ETFs. The rest of the portfolio is comprised of fixed income products as we see a strengthening of the fixed income market prices. The Fund s cost yield is increasing as it is able to broaden and increase its holdings, with the objective of achieving a minimum 4% cost yield on the overall portfolio. This is expected to help the Fund achieve its targeted 5-7% return with minimum volatility going forward. Recent Developments IFRS 9, Financial Instruments The final version of IFRS 9, Financial Instruments was issued by the International Accounting Standards Board ( IASB ) in July 2014 and replaces IAS 39, Financial Instruments: Recognition and Measurement, in respect of financial assets. IFRS 9 relates to the classification and measurement of financial assets and financial liabilities in the Fund. The standard is effective for annual periods beginning on or after January 1, 2018. The Fund has adopted IFRS 9 in its financial statements for the annual period beginning on January 1, 2018. This standard does not have a material impact on the classification of financial assets and financial liabilities of the Fund. Related Party Transactions Willoughby Asset Management Inc. (the Manager ) is the Manager of the Fund and is a wholly owned subsidiary of HF Investment Holdings Inc. ( HF ). HF also owns 100% of Harbourfront Wealth Management Inc. ( Harbourfront ), an Investment Dealer. Harbourfront is the principal distributor, and also provides portfolio management services to the Fund. All transactions between the Fund and a related party are in the normal course of business, are for functions that are necessary for the operation of the Fund and are carried out at arm s length terms. Management Fees During the year ended December 31, 2018 the Fund incurred management fees in the amount of $108,670 payable to the Manager. Distribution Services The principal distributor of the Fund is a related party to the Fund and to the Manager. The Manager pays to the related party a trailer commission out of its management fees, representing distribution and servicing fees, based on the amount of assets held in the investors accounts. Investment Management Services Portfolio management of the Fund is performed by a related party to the Fund and the Manager. The Manager pays to the related party out of its management fees an investment management fee based on the amount of assets under management. Independent Review Committee The Manager has established an independent review committee (the IRC ) in accordance with NI 81 107, with a mandate to review and provide recommendations or approval, as required, on conflict of interest matters referred to it by the Manager on behalf of the Fund. The IRC is responsible for overseeing the Manager s decisions in situations where the Manager is faced with any present or perceived conflict of interest. The IRC prepares and files a report to the securityholders each fiscal year that describes the Page 3 of 9
IRC and its activities for securityholders, as well as contains a complete list of the standing instructions. These standing instructions enable the manager to act in a particular conflict of interest matter on a continuing basis provided the Manager complies with its policies and procedures established to address that conflict of interest matter and reports periodically to the IRC on the matter. This report to the securityholders is available on the Manager s website or, at no cost, by contacting the Manger. The Fund relied on IRC standing instructions regarding related party transactions during the period. 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 for the period commencing November 7, 2017 and ending December 31, 2017 and for the year ended December 31, 2018. The Fund s Net Assets per unit (1) December 31, 2018 December 31, 2017 Series A Series F Series A Series F Net Assets, beginning of period $9.84 $9.77 $0.00 $0.00 Increase from operations: Total revenue excluding investment gain 0.31 0.32 0.06 0.05 Total expenses (0.30) (0.20) (0.24) (0.28) Realized gains (losses) for the period (0.48) (0.44) 0.01 0.01 Unrealized gains (losses) for the period (0.24) (0.15) (0.07) (0.01) Total decrease from operations (2) (0.71) (0.48) (0.24) (0.23) Distributions: From Income (excluding dividends) -.02 - - From Domestic Dividends.10.10 - - From Foreign Dividends.02.05 - - From Capital Gains - - - - Return of Capital.12 0.07 - - Total Distributions for the period (3) 0.24 0.24 Net Assets, at end of period $9.16 $9.19 $9.84 $9.77 1. This information is derived from the Funds audited annual financial statements for the period ended December 31, 2017 and for the year ended December 31, 2018. 2. Net assets and distributions are based on the actual number of units outstanding for the relevant class at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding for the relevant class over the financial period. 3. Distributions are paid in cash or reinvested in additional units of the Fund, or both. Page 4 of 9
Ratios and Supplemental Data December 31, 2018 December 31, 2017 Series A Series F Series A Series F Total net asset value ($000 s) (1) $919 $11,947 $121 $2,942 Number of units outstanding (1) 100,259 1,299,674 12,285 300,972 Management expense ratio (2) 3.10% 2.11% 2.86% 2.84% Management expense ratio before waivers or absorptions 3.10% 2.11% 2.86% 2.84% Portfolio turnover rate (3) 195.61% 195.61% 0.10% 0.10% Trading expense ratio (4).323%.323% 0.01% 0.01% Net asset value per unit $9.16 $9.19 $9.84 $9.77 1. This information is provided as at December 31 of the year shown. 2. Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of the daily average net asset value during the period. 3. The Fund s portfolio turnover rate indicates how actively the Fund s portfolio advisor 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 in the course of the year. The higher the Fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a Fund. 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 period. Management Fees The Fund pays the Manager a management fee, calculated and accrued daily based on a percentage of the Net Asset Value of each series of the Fund and paid quarterly, in arrears. The management fee varies for each series, and is deducted as an expense in the calculation of the net profit of each series. The Manager uses the management fees to cover the costs of managing the Fund, arranging for investment analyses, recommendations and investment decision making for the Fund, arranging for distribution of the Fund, marketing and promotion of the Fund and providing or arranging for other services. Management Fees (%) Dealer Compensation (%) Other* (%) Series A 1.88% 53.19% 46.81% Series F 0.88% 0.00% 100.00% *Relates to all services provided by the Manager described above except dealer compensation PAST PERFORMANCE The indicated rates of return are the historical total returns including changes in unit values and assumed reinvestment of all distributions in additional units of the relevant Series of the fund. These returns do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that may reduce returns. Please note that past performance is not indicative of future performance. Rates of return are calculated based on the Net Asset Value of the particular Series of the Fund. Page 5 of 9
YEAR-BY-YEAR RETURNS The following chart shows the performance of the Fund for each series of the fund. The charts show, in percentage terms, how much an investment made on the first day of each period would have grown or decreased by the last day of that period. 0.00% -1.00% -2.00% -1.59% -3.00% -4.00% -2.27% -3.99% Series A Series F -5.00% -6.00% -4.97% 2017* 2018 * Return from commencement of operations on November 7, 2017 to December 31, 2017 (not annualized) ANNUAL COMPOUND RETURN The following table illustrates the annual compound total return for Class A and F units of the Fund for the periods shown. As a basis of performance comparison, the annual compound return of the Fund is compared to that of a blended benchmark consisting of the ishares iboxx $ HY Corp Bond TR (40%), ishares Canadian Corp Bond TR (30%), ishares S&P TSX Preferred Share TR (20%) and ishares Canadian Government Bond TR (10%). Since the Fund does not necessarily invest in the same securities or in the same proportion as the indices, the performance of the Fund is not expected to equal the performance of the blended index. 1 year 3 Years 5 Years 10 Years Class A -4.97% n/a n/a n/a Class F -3.99% n/a n/a n/a Benchmark.52% n/a n/a n/a During the year ended December 31, 2018, your investment in the Fund experienced a return below that of the Index noted in the above table for the 1-year period. Performance will vary by class largely due to the extent that fees and expenses may differ between classes. Index returns are displayed for references purposes only and are not meant to be a proxy for the returns of the Fund. The Fund does not aim to replicate the composition of either of the indices and as such its performance may differ. Page 6 of 9
SUMMARY OF INVESTMENT PORTFOLIO The largest holdings of the Fund as at December 31, 2018 and the major asset classes in which the Fund was invested are indicated below. The investment portfolio may change due to ongoing portfolio transactions. The Fund holds investments in other investment funds. The prospectus and other information about those investment funds are available on the internet at www.sedar.com. An update of the Fund s summary of investment portfolio as at the end of each calendar quarter is available from the Manager. The next update will be the Quarterly Portfolio Disclosure as at March 31, 2019. Summary of Top 23 Holdings (all fund holdings) % of Net Asset Value 1 Horizons Active Preferred Share ETF 5.68% 2 BMO Covered Call Utilities ETF 5.40% 3 Intact Financial Corp. 2.85% 07JUN2027 5.16% 4 Metro Inc. 3.39% 06DEC2027 5.16% 5 First Capital Realty Inc. 3.753% 12JUL2027 5.14% 6 Fairfax Financial Holdings Ltd 4.25% 06DEC2027 5.13% 7 TELUS Corp. 4.40% 01APR2043 5.13% 8 Bell Canada Inc. 2.90% 12AUG2026 5.13% 9 Canadian Natural Resources Ltd 3.42% 01DEC2026 5.09% 10 ishares Core Canadian Universe Bond Index ETF 5.04% 11 BMO Low Volatility US Equity ETF 5.01% 12 Enbridge Inc. PFD 5.50% 4.25% 13 Brookfield Asset Management Inc. 3.80% 16MAR2027 4.12% 14 Husky Energy Inc. 3.60% 10MAR2027 3.75% 15 Exchange Income Corp. 5.25% 31DEC2022 CONV. $51.4999 3.35% 16 Exchange Income Corp. 5.35% 30JUN2025 CONV. $48.9999 3.23% 17 Fortis Inc. PFD 4.75% 2.63% 18 Constellation Software Inc. 8.10% 31MAR2040 1.59% 19 Canadian Utilities Ltd PFD 4% 1.49% 20 Atrium Mortgage Investment Corp. 5.50% 30SEP2021 CONV. $14.65 1.45% 21 Atrium Mortgage Investment Corp. 5.25% 30JUN2020 CONV. $13.50 0.86% 22 City of Toronto Canada 2.40% 07JUN2027 0.74% 23 BMO Covered Call Canadian Banks ETF 0.03% Page 7 of 9
Summary of Composition of the Portfolio Consumer Cyclical, 1% Financial Services, 1% Real Estate, 1% Communication Services, 2% Energy, 7% Industrials, 1% Consumer Defensive, 1% Healthcare, 1% Utilities, 10% Corporate Bonds, 55% Cash and Cash Equivalents, 16% Canadian Government Bonds, 4% Page 8 of 9
Caution Regarding Forward Looking Statements Certain portions of this report may contain forward looking statements about the Fund and the underlying funds, as applicable, including statements with respect to strategies, risks, expected performance events and conditions. Forward looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as expects, anticipates, intends, plans, believes, estimates, projects and similar forward-looking expressions or negative versions thereof. In addition, any statement made concerning future performance, strategies or prospects, and possible future fund action, is also a forward looking statement. Forward looking statements are based on the Manager s current expectations and projections about future events and are inherently subject to risks, uncertainties and assumptions about the Fund and economic factors, among other things. Forward looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied in any forward looking statements. Any number of important factors could contribute to these digressions, including, but not limited to: general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. The above-mentioned list of important factors is not exhaustive. We encourage you to consider these and other factors carefully before making any investment decisions and we urge you to avoid placing undue reliance on forward looking statements. Further, except as may be required under applicable law, the Fund has no specific intention of updating any forward looking statements whether as a result of new information, future events or otherwise, prior to the release of the next management report of fund performance, and that the forward looking statements speak only to the date of this management report of fund performance. Page 9 of 9