Brookfield Investment Management 2013 High Yield Strategic Trust Interim Management Report of Fund Performance For the period from January 1, 2013 to June 30, 2013
IN PROFILE High Yield Strategic Trust (the Trust ) 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 over $175 billion of assets under management as at June 30, 2013 and over a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. Brookfield Investment Management Inc. is the investment manager of the Trust. 2013 Interim Management Report of Fund Performance 1
MANAGEMENT REPORT OF FUND PERFORMANCE This interim management report of fund performance contains financial highlights but does not contain the complete unaudited interim financial statements of the Trust. The unaudited interim financial statements may contain information not included in the management report of fund performance. You can get a copy of the unaudited 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 Trust 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 anticipate, may, will, expect, estimate, should, believe and similar expressions are intended to identify forward-looking statements. Such statements reflect the opinion of the investment manager ( Investment Manager ) 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 on. 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, 2013 and expressed in Canadian dollars. 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 Trust is an investment trust created to invest in a portfolio of securities (the Portfolio ) comprised primarily of North American high yield debt. Brookfield Investment Management (Canada) Inc. ( BIM Canada ) is the manager (the Manager ) of the Trust and Brookfield Investment Management Inc. ( BIM ) is the Investment Manager of the Trust. The investment objectives of the Trust are to maximize total return for holders of units ( Unitholders ) through capital appreciation and to preserve capital. RISK At June 30, 2013, the Portfolio was primarily invested in high yield bonds of companies domiciled in the United States and to a lesser extent, Canada, Europe and the United Kingdom. In addition the Portfolio was invested in asset-backed and mortgage-backed securities and equities, albeit at relatively low weightings. The Portfolio investments are 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 are denominated. The Trust 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 the Trust s foreign currency exposure. Since the Trust s inception on June 19, 2012, there has been no material change in the overall level of risk created by the credit quality, trading liquidity or currency denomination of the investments employed by the Trust. 2013 Interim Management Report of Fund Performance 2
The Trust uses leverage to finance the purchase of certain investments. Leverage in the Trust is restricted to 33% of the total assets of the Trust. As at June 30, 2013, the Trust had employed leverage equal to 27.7% of the total assets of the Trust. 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. RESULTS OF OPERATIONS The Trust began operations on June 19, 2012 when it issued 12,502,069 units (the Units ) and subsequently issued 427,936 Units pursuant to an over-allotment option on June 29, 2012 at $9.41 per Unit for gross proceeds of $121.7 million. The Trust s net asset value was $127.7 million as at June 30, 2013, a decrease of $2.8 million from $130.5 million as at December 31, 2012. The decrease in net asset value was largely comprised of net investment income of $5.1 million, net realized and unrealized investment losses of $2.1 million, and the redemption of 551,330 Units for $5.8 million. As at June 30, 2013, the net asset value per Unit of the Trust was $10.51 compared to $10.27 on December 31, 2012. The Trust s total return was 2.31% for the six months ended June 30, 2013. The Portfolio was positioned to take advantage of attractive spreads in the high yield bond market and the positive trends in corporate credit by underweighting higher quality BB-rated securities and overweighting B-rated bonds. This quality weighting added to overall performance as B-rated bonds outperformed. Additionally, the Portfolio was slightly overweight in riskier CCC-rated bonds which also added to performance. The Portfolio was overweight in the Basic Industry sector, which benefited from stronger economic growth and improved corporate cash flows which resulted from strict cost controls on the part of many companies. This overweight allocation added significant performance during the Period, particularly from Building Materials and Chemical holdings and was somewhat offset by lagging performance in the Trust s allocation to Metals. The Trust was overweight the Services sector, which also contributed to performance, particularly due to effective security selection in Gaming bonds. The Automotive sector was also over-weighted as the Investment Manager perceived improved prospects for North American automobile sales resulting from increasing consumer confidence and an aging automobile fleet. This overweight contributed to performance. The Trust was underweight the Banking sector, with no holdings due to perceived risk in many of the issuers, and that underweight detracted from performance during the period as those bonds tended to outperform. The Trust was underweight the Energy sector due to concerns about a surplus of natural gas in North America causing pricing pressure, and that proved to be a positive to the Trust s performance as Energy bonds tended to lag. Finally, the Trust was underweight Financial Services, which proved to be a positive as Financial Services bonds also lagged so far this year. In August 2012, the Trust established the ability to borrow using a prime brokerage account. The Trust subsequently added leverage to the Portfolio through the margining of certain securities. 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 po sitions, including leveraged positions, divided by net assets of the Trust). As at June 30, 2013, the Trust had employed leverage equal to 27.7% (December 31, 2012-23.2%) of the total assets of the Trust, equating to $50.7 million (December 31, 2012 - $39.3 million). The minimum and maximum amount of borrowings outstanding during the Period was $39.2 and $50.7 million, respectively. The minimum and maximum amount of borrowings outstanding during the period from June 19, 2012 to December 31, 2012 was $0 and $39.3 2013 Interim Management Report of Fund Performance 3
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 There have been no recent developments in the market, outlook, or operations of the Trust that represent a material change for investors. FUTURE ACCOUNTING CHANGES International Financial Reporting Standards ( IFRS ) replaced Canadian GAAP for publicly accountable enterprises other than investment funds. Under the general transition rules, publicly accountable enterprises, other than investment funds, adopted IFRS for the fiscal period beginning January 1, 2011. On September 7, 2010, the Canadian Accounting Standards Board ("AcSB") approved an optional one year deferral of IFRS adoption for investment companies applying Accounting Guideline AcG 18, Investment Companies until fiscal years beginning on or after January 1, 2012. On January 12, 2011, the AcSB approved an additional one year extension to the optional one year deferral until fiscal years beginning on or after January 1, 2013 and in December 2011, was further extended to January 1, 2014. Accordingly, the Trust will adopt IFRS no later than for the fiscal year beginning January 1, 2014, and will issue its initial financial statements in accordance with IFRS, including comparative information, no later than for the period ending June 30, 2014. RELATED PARTY TRANSACTIONS The Manager and Investment Manager are wholly owned subsidiaries of Brookfield Asset Management Inc. ( Brookfield ) and the Investment Manager manages the investment and trading activities of the Trust pursuant to a management agreement. Due to Brookfield s ability to control the Trust, Brookfield, and its affiliates over which it has the ability to exercise control or significant influence, are related parties of the Trust 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 Trust. During the year ended December 31, 2012, the Trust entered into cross transactions with Brookfield Global High Yield UCITS Fund which is a related party of the Trust due to common control. The Investment Manager determined that these cross transactions complied with the Trust s investment restrictions and that owning such securities was consistent with the Trust s investment objectives. The Manager sought the approval of the Trust s Independent Review Committee (the IRC ) of the proposed cross transactions. The IRC provided its approval on the proposed cross transactions on the Manager s recommendation. There were no other transactions conducted with related parties during the six month period ended June 30, 2013 and the twelve month period ended December 31, 2012. 2013 Interim Management Report of Fund Performance 4
FINANCIAL HIGHLIGHTS The following tables provide selected key financial information about the Trust and are intended to help you understand the Trust s financial performance since inception: The Fund s Net Assets per Unit (1) For the six months ended June 30, 2013 Period from June 19, 2012 (2) through December 31, 2012 Net assets, beginning of period (3) $ 10.26 $ 9.41 Increase (decrease) from operations Total revenue 0.51 0.40 Total expenses (0.09) (0.08) Realized gains (losses) for the period (0.17) 0.32 Unrealized gains (losses) for the period (0.00) 0.22 Total increase (decrease) from operations (4) $ 0.25 $ 0.86 Net assets, end of period (4)(5) $ 10.50 $ 10.26 Notes: (1) This information is derived from the Trust s audited annual and unaudited interim financial statements. The net assets per Unit presented in the Trust s financial statements may differ from the net asset value calculated for fund pricing purposes. An explanation of these differences can be found in the notes to the Trust s financial statements. (2) Commencement of investment operations. (3) The beginning period net assets per Unit in 2012 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) This is not a reconciliation of the beginning and ending net assets per Unit. Ratios and Supplemental Data For the six months ended June 30, 2013 Period from June 19, 2012 (5) through December 31, 2012 Total net asset value (1) $ 127,758,769 $ 130,474,156 Number of Units outstanding 12,156,788 12,708,117 Management expense ratio (2) 1.76% 1.46% Management expense ratio before waivers and absorptions (2) 1.76% 1.46% Trading expense ratio (3) 0.01% 0.00% Portfolio turnover rate (4) 4.40% 6.12% Net asset value per Unit $ 10.51 $ 10.27 Notes: (1) This information is provided as at June 30, 2013 and December 31, 2012. The net asset value calculated for fund pricing purposes may differ from the net assets per Unit presented in the Trust's financial statements. An explanation of these differences can be found in the notes to the Trust's financial statements. (2) Management expense ratio ( MER ) is based on total expenses (excluding distributions, commissions and other portfolio transaction costs but including interest expense) for the stated period, and is expressed as an annualized percentage of daily average net asset value during the Period. (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 Period. (4) The Trust's portfolio turnover rate indicates how actively the Trust's portfolio adviser manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Trust buying and selling all of the securities in its portfolio once in the course of the year. The higher a trust's portfolio turn-over rate in a year, the greater the trading costs payable by the trust 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 trust. (5) Commencement of investment operations. 2013 Interim Management Report of Fund Performance 5
MANAGEMENT FEES The Manager and Investment Manager are responsible for providing or arranging for all investment advisory and portfolio management services required by the Trust 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 Trust. As compensation for the management services rendered to the Trust, the Manager is entitled to receive an annual management fee of 0.9375% of the net asset value of the Trust. The management fee totaled $690,740 for the six months ended June 30, 2013 and totaled $709,814 during the period from June 19, 2012 to December 31, 2012. 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, be equal to 15% of the amount by which the net asset value per Unit (calculated without taking into account any Performance Fee) exceeds 106.5% of the Threshold Amount. The Threshold Amount will be the greater of: (i) $10.00; and (ii) the net asset value per Unit 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 Trust s Prospectus for additional information on the Performance Fee. No Performance Fee has been collected since the inception of the Trust. PAST PERFORMANCE Note that the performance information shown in this section assumes that all distributions made by the Trust in the period shown were reinvested in additional Units of the Trust. 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 performance of the Trust in the past does not necessarily indicate how it will perform in the future. Year-to-Date Returns The following bar chart shows the Trust s performance for the period from June 19, 2012 to December 31, 2012 and the six months ended June 30, 2013. The bar chart shows, in percentage terms, how much an investment made on the first day of the Period would have increased or decreased by the last day of the Period. 20.00% 15.00% 10.00% 9.11% 5.00% 2.31% 0.00% -5.00% 12/31/2012 (1) (2) 6/30/2013 (1) Represents period from June 19, 2012 (inception date) to December 31, 2012. (2) Represents the period from January 1, 2013 to June 30, 2013. 2013 Interim Management Report of Fund Performance 6
SUMMARY OF INVESTMENT PORTFOLIO The following is a summary of the Trust s Portfolio as at June 30, 2013. 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, 2013 Top 25 Issuers % of Net Asset Value of the Trust Cash and cash equivalents 5.88 Terex Corp. Bonds 2.62 Chrysler Group LLC Bonds 2.04 Arch Coal Inc. Bonds 1.91 Cincinnati Bell Inc. Bonds 1.87 Frontier Communications Corp. Bonds 1.86 Windstream Corp. Bonds 1.81 First Data Corp. Bonds 1.73 USG Corp. Bonds 1.69 Jaguar Land Rover PLC Bonds 1.67 Freescale Semiconductor Inc. Bonds 1.61 HCA Inc. Bonds 1.59 Level 3 Communications Inc. Bonds 1.59 American Axle & Manufacturing Inc. Bonds 1.58 United Rentals North America Inc. Bonds 1.58 Avis Budget Car Rental LLC Bonds 1.55 CenturyLink Inc. Bonds 1.53 Iron Mountain Inc. Bonds 1.53 CCO Holdings LLC Bonds 1.51 New Albertsons Inc. Bonds 1.50 Casella Waste Systems Inc. Bonds 1.48 BreitBurn Energy Partners L.P. Bonds 1.47 Hexion US Finance Corp. Bonds 1.47 Masonite International Corp. Bonds 1.43 Crosstex Energy L.P. Bonds 1.40 Total % of Net Asset Value represented by these issuers 45.90 2013 Interim Management Report of Fund Performance 7
As at June 30, 2013 Sector Allocation % of Net Asset Value of the Trust Automotive 7.96 Basic Industry 22.10 Capital Goods 11.26 Consumer Cyclical 9.83 Consumer Non-Cyclical 2.36 Energy 14.26 Equity 2.49 Financial Services 1.85 Healthcare 8.44 Media 11.18 Real Estate 2.01 Services 20.16 Technology & Electronics 3.34 Telecommunications 14.51 Utility 0.97 Securitized 6.65 Unrealized loss on foreign exchange contracts (4.60) Accrued investment income & other liabilities (34.77) Total 100.00 2013 Interim Management Report of Fund Performance 8
TRUST INFORMATION MANAGER, TRUSTEE, TRANSFER AGENT, AND REGISTRAR Brookfield Investment Management (Canada) Inc. George E. Myhal Director, President & Chief Executive Officer Jonathan Tyras Managing Director, Chief Financial Officer, and General Counsel Gail Cecil Director, Managing Director Kim G. Redding Director INDEPENDENT REVIEW COMMITTEE John P. Barratt (Chair) Corporate Director James L. R. Kelly President Earth Power Inc. Frank Lochan Corporate Director CONTACT INFORMATION High Yield Strategic Trust 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. 800.497.3746 w. www.brookfieldim.com 2013 Interim Management Report of Fund Performance 9