ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE MANAGER VALUE PARTNERS INVESTMENTS INC. PORTFOLIO MANAGER VALUE PARTNERS INVESTMENTS INC. This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the Pool. If you have not received a copy of the annual financial statements with this annual management report of fund performance, you may obtain a copy at your request, and at no cost, by calling toll-free at 1-866-323-4235, by writing to us at 400-305 Broadway, Winnipeg, Manitoba, R3C 3J7, by visiting our website at www.valuepartnersinvestments.ca or by visiting the SEDAR website at www.sedar.com. You may also contact us using one of these methods to request a copy of the Pool s interim financial report, proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.
Annual Management Discussion of Fund Performance February 18, 2016 Investment Objective and Strategies The investment objective of the Pool is to generate longer term growth in value through the increase in the value of its holdings, and through the receipt and reinvestment of dividend income from its holdings by investing primarily in equity securities of Canadian companies. The Pool may invest in securities outside of Canada, and has the flexibility to invest up to 30% of its assets in non-canadian securities. The Portfolio Manager strongly favours high quality common shares of very large and stable companies where profits and dividends are likely to grow significantly and, more importantly, have less chance of a significant decrease in value. This preservation of capital is pursued by focusing on companies with very strong balance sheet positions and strong competitive positions, such as being a leader in a particular market or industry. The Portfolio Manager utilizes fundamental analysis as the primary basis for security selection and makes every effort to avoid overpaying for selected stocks. Risk Overall, the risks associated with investing in the Pool have not materially changed and remain as discussed in the prospectus. The Pool is considered suitable for investors with a moderate tolerance for risk. Relative to the prior year, geographic and foreign currency risk has increased slightly. As of,, 21.8% of the Pool was invested outside of Canada compared to 15.6% a year ago. As indicated above, up to 30% of the portfolio may be invested outside of Canada if market conditions and opportunities seem appropriate. Results of Operations Net assets of the Pool decreased by approximately $12.9 million for the year ended, due to a $20.9 million decrease in net assets from operations and $3.8 million of distributions to unit holders, offset by $11.8 million of net sales. The decrease in net assets from operations was the result of $36.4 million of unrealized depreciation in the value of investments offset by net investment income of $5.4 million, foreign exchange gain on cash of $1.6 million and realized gains of $8.5 million on the sale of investments. The significant decrease in distributions to unit holders was the result of the realized gains experienced during the previous year on the sale of investments. The following table summarizes the businesses that were added or removed from the portfolio: Additions Union Pacific Corporation Dispositions Cenovus Energy Inc. General Electric Co. Potash Corporation As a result of these changes and some partial additions/dispositions to existing holdings, there were some significant shifts in the portfolio allocation from the prior year as indicated in the following table: Sector Allocation Increase Sector Allocation Decrease Cash 10.4% Energy 7.0% Transportation 6.0% Materials 6.5% Banks 3.1% Capital Goods 5.6% Each series of the Pool experienced a return in the range of -3.2% to -4.3% over the past year which was better than the -8.3% return of the S&P/TSX Composite Total Return Index (the Index ). The Portfolio Manager maintained a significant cash position during the year, protecting capital as the markets fell throughout the year. The Pool benefited from an underweight allocation to the energy sector, the worst performing sector during, as the industry struggled with lower energy prices. The Pool also benefited from having no exposure to the metals and mining and health care sectors, which were the second and third worst performing sectors during the year. These underweight allocations benefited the Pool's relative performance during the year. The financials, utilities, and consumer sectors remain important sectors for the Pool, each outperforming the Index and benefitting the Pool's relative performance during the year. 2
Revenues and Expenses Revenues of the Pool for the period amounted to $16.0 million, the majority of which can be attributed to dividend income from its holdings. Total management fees and operating expenses charged to the Pool were $10.6 million, slightly less than the previous year. The realized gain on sale of investments of $8.5 million is primarily attributable to the following dispositions in the portfolio during the year. Dividends received from each of these holdings while in the Pool are in addition to these gains (losses). Approximate Proceeds Cost Realized Gain (Loss) Holding Holding Period (millions) (millions) (millions) Cenovus Energy Inc. 5.7 Years $ 18.9 $ 29.1 $ (10.2) General Electric Co. 1 Year 37.9 30.5 7.4 Potash Corporation 1.9 Years 30.5 26.1 4.4 Partial Dispositions n/a 18.4 11.5 6.9 $105.7 $ 97.2 $ 8.5 Further to these realized gains, the Pool experienced $36.4 million in unrealized depreciation in the value of its investments as the result of market depreciation experienced across most of the Pool s sector allocations. Declining industry fundamentals in the energy sector were a significant contributor to this depreciation. Declines in the value of the Canadian Dollar relative to the US Dollar had a favorable impact on the US Dollar-denominated securities held in the Pool. Recent Developments Economic Conditions The Canadian economy continues to grow moderately, albeit at lower rates than their key trading partner, the U.S. The Canadian market has fallen from its all-time highs in September of as the weakness in global commodity prices continues. The significant decrease in energy prices will have negative impacts on the Canadian economy, especially in the western provinces. The job losses in Western Canada as a result may hinder the Bank of Canada s decision to raise interest rates over the short-term. As a result, the highly stimulative stance of monetary policy will likely continue. The Canadian dollar weakened from 0.86 USD to 0.72 USD during the year. These events should provide stimulus to the Canadian economy, potentially offsetting the negative effects of the weaker commodity prices. The Canadian unemployment rate remains steady around 7%. Inflation rates in Canada remain low as a result of continued competitive pressures; however, inflationary pressures continue to increase, especially given the weakness in the Canadian dollar. Despite this, the Government of Canada 10-year yield fell from 1.8% to 1.4%. The Portfolio Manager believes there are good opportunities in a number of industries; however, caution is warranted in the energy sector until energy prices recover. Harmonized Sales Tax (HST) The rules for calculating and charging HST to the Pool are based on a blended tax rate derived from the residency of the unit holders and the value of their units. This blended rate is required to be calculated and updated periodically and the table below indicates the rate charged to the Pool for the relevant reporting period(s). Year Ended, Year Ended, Series A 6.39% 6.48% Series B 7.53% 7.42% Cardinal Series 6.19% 6.61% Series F 6.61% 6.45% Cardinal Series Effective January 5,, Cardinal Series units were no longer offered and all units were fully redeemed in June. 3
Summary of Investment Portfolio As at, Portfolio Allocation Canadian equities 69.2% Cash 13.8% US equities 16.9% Other net assets 0.1% Sector Allocation Banks 32.6% Automobiles & components 5.6% Energy 12.8% Capital goods 5.3% Cash 13.8% Materials 4.3% Utilities 10.0% Food, beverage & tobacco 3.9% Transportation 5.9% Other net assets 0.1% Pharmaceuticals 5.7% Top 25 Holdings Issuer Percentage of Net Assets Cash 13.8% Bank of Montreal 6.4% Toronto Dominion Bank 6.2% Royal Bank of Canada 6.0% Union Pacific Corporation 6.0% Fortis Inc. 5.9% Johnson & Johnson 5.7% Magna International Inc. 5.5% Bank of Nova Scotia 5.4% United Technologies Corporation 5.3% Suncor Energy Inc. 5.1% Canadian Imperial Bank of Commerce 5.0% Agrium Inc. 4.3% Canadian Utilities Ltd. 4.1% Canadian Natural Resources Ltd. 4.1% Saputo Inc. 3.9% National Bank of Canada 3.6% Husky Energy Inc. 3.6% Other net assets 0.1% Total 100.0% The above summary of investment portfolio may change due to ongoing portfolio transactions of the Pool. An update will be made available within 60 days of each subsequent quarter-end. 4
Past Performance The historical performance information shown below assumes that all distributions were reinvested in the Pool and does not account for any sales, redemptions, distributions or optional charges or income taxes payable by an investor that would have reduced returns. Mutual fund returns are not guaranteed, their values change frequently and past performance may not be repeated. Year-by-Year Returns The bar charts below show the performance of each series of the Pool (net of fees) for the year ended,, and the previous years ended or since inception to. It shows in percentage terms, how an investment made on January 1 or on inception would have increased or decreased by the end of the respective periods. Series A 35.0% 25.0% 12.6% 15.0% 12.6% 5.0% 1.1% 1.1% -5.0% -15.0% -25.0% -35.0% Dec-06 Dec-07-30.8% Dec-08 35.0% 35.0% 20.9% 7.9% 12.6% 14.5% 7.9% -5.5% -5.5% -4.1% Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15( 1) Series B 34.7% 35.0% 25.0% 20.7% 12.3% 14.3% 15.0% 7.6% 5.0% -5.0% -3.6% -5.8% -4.3% -15.0% -25.0% -35.0% Dec-07-30.9% Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Note: 2007 return is since inception on July 3, 2007 Dec-14 Dec-15( 1) Series F 35.0% 25.0% 15.0% 5.0% -5.0% -15.0% -25.0% -35.0% -3.1% Dec-07-30.3% Dec-08 36.2% Dec-09 13.6% Dec-10-4.6% Dec-11 9.0% Dec-12 22.1% 15.6% Dec-13 Note: 2007 return is since inception on July 3, 2007 Dec-14-3.2% Dec-15(1) (1) Value Partners Investments Inc. assumed the portfolio management responsibilities of the Pool on January 5,. 5
Annual Compound Returns The following table shows the annual compound total return of each series of the Pool compared to the S&P/TSX Composite Index for the periods shown ended,. All index returns are calculated on a total return basis, meaning that performance was calculated under the assumption that all distributions were reinvested. 10 Year 5 Year 3 Year 1 Year Since Inception (2) Series A (1)(3) (Inception: October 20, 2005) 4.9% 6.3% 9.9% -4.1% 5.6% S&P/TSX Composite Index 4.4% 2.4% 4.7% -8.3% 5.4% Series B (1)(3) (Inception: July 3, 2007) n/a 6.0% 9.7% -4.3% 3.6% S&P/TSX Composite Index n/a 2.4% 4.7% -8.3% 2.2% Series F (1)(3) (Inception: July 3, 2007) n/a 7.3% 11.0% -3.2% 4.8% S&P/TSX Composite Index n/a 2.4% 4.7% -8.3% 2.2% (1) The percentage return differs for each series because the management fee rate and expenses differ for each series. (2) The return since inception for each series will differ when the inception date differs. (3) Value Partners Investments Inc. assumed the portfolio management responsibilities of the Pool on January 5,. The S&P/TSX Composite Index is a broad market indicator of activity for the Canadian equity market. Size and liquidity are among the key criteria for inclusion in the index, with size being assessed on a float market capitalization basis and liquidity being measured relative to liquidity thresholds. Management Fees The Pool pays an annual management fee on each of its series to the Manager. The management fee is calculated daily as a percentage of the net asset value of each series as of the close of business on each business day. In consideration for the management fees, the Manager may pay a percentage sales commission and/or trailing commission to registered dealers or brokers for units bought and held in the Pool depending on which series of units were purchased. The Manager also pays a portion of the management fee to the Portfolio Manager for its services in managing the investment portfolio. Effective January 5,, Value Partners Investments Inc. also became the Portfolio Manager of the Pool. From that point forward, the cost of portfolio management services are covered by the management fee. For the year ended,, approximately 46% of the management fee revenues received by the Manager from the Pool were paid to registered dealers and brokers as sales and/or trailing commissions. Since each series may have a different commission structure, this percentage may vary by series. The remainder of the management fee revenue, after payment of fees to the Portfolio Manager for its services, was retained by the Manager for corporate purposes. Related Party Transactions Value Partners Investments Inc. is the manager ( Manager ) of the Pool and is responsible for the overall business and operations of the Pool. For the year ended, the Pool paid $9.1 million in management fees (excluding taxes) to the Manager. In addition, the Manager or parent company of the Manager also held 43,534 Series F units of the Pool as of,. Effective January 5,, Value Partners Investments Inc. became the Portfolio Manager of the Pool. 6
Financial Highlights The following tables show selected key financial information about each series of the Pool and are intended to help you understand the Pool s financial performance for the past five years ended. This information is derived from the Pool s audited annual financial statements and is not intended to be a reconciliation of the net asset value per unit. The Pool s Net Assets Per Unit ($) (1) Series A Net assets, beginning of period 15.86 15.32 12.77 12.07 12.79 Increase (decrease) from operations: Total revenue Total expenses Realized gains for the period 0.55 0.52 0.46 0.44 0.41 (0.33) (0.35) (0.29) (0.26) (0.27) 0.26 1.88 0.40 0.23 0.10 Unrealized gains (losses) for the period (1.13) 0.19 2.11 0.52 (1.08) Total increase (decrease) from operations (2) (0.65) 2.24 2.68 0.93 (0.84) Distributions: From net investment income (excluding dividends) - - - - - From dividends (0.12) (0.11) (0.13) (0.11) - From capital gains - (1.54) - (0.16) - Return of capital - - - - - Total annual distributions (3) (0.12) (1.65) (0.13) (0.27) - Net assets, end of period 15.10 15.86 15.32 12.76 12.07 Series B Net assets, beginning of period 12.42 12.01 10.01 9.46 10.05 Increase (decrease) from operations: Total revenue Total expenses Realized gains for the period 0.43 0.40 0.36 0.35 0.32 (0.29) (0.30) (0.26) (0.23) (0.24) 0.20 1.45 0.32 0.17 0.08 Unrealized gains (losses) for the period (0.85) 0.18 1.65 0.41 (0.93) Total increase (decrease) from operations (2) (0.51) 1.73 2.07 0.70 (0.77) Distributions: From net investment income (excluding dividends) - - - - - From dividends (0.02) (0.06) (0.06) (0.05) - From capital gains - (1.22) - (0.13) (0.01) Return of capital - - - - - Total annual distributions (3) (0.02) (1.28) (0.06) (0.18) (0.01) Net assets, end of period 11.86 12.42 12.01 10.00 9.46 7
The Pool s Net Asset Value Per Unit ($) (continued) Cardinal Series (4) Net assets, beginning of period 12.62 12.18 10.10 9.54 10.11 Increase (decrease) from operations: Total revenue 0.19 0.41 0.35 0.35 0.32 Total expenses (0.12) (0.28) (0.23) (0.20) (0.21) Realized gains for the period 0.35 1.38 0.32 0.18 0.08 Unrealized gains (losses) for the period 0.10 0.34 1.70 0.43 (0.84) Total increase (decrease) from operations (2) 0.52 1.86 2.14 0.76 (0.65) Distributions: From net investment income (excluding dividends) - - - - - From dividends - (0.06) (0.03) (0.08) - From capital gains - (1.24) - (0.13) (0.01) Return of capital - - - - - Total annual distributions (3) - (1.30) (0.03) (0.21) (0.01) Net assets, end of period - 12.62 12.18 10.09 9.54 Series F Net assets, beginning of period 13.12 12.62 10.53 9.96 10.45 Increase (decrease) from operations: Total revenue 0.45 0.43 0.38 0.37 0.33 Total expenses (0.15) (0.16) (0.13) (0.11) (0.12) Realized gains for the period 0.20 1.79 0.30 0.18 0.08 Unrealized gains (losses) for the period (1.02) (0.21) 1.86 0.45 (0.86) Total increase (decrease) from operations (2) (0.52) 1.86 2.41 0.89 (0.57) Distributions: From net investment income (excluding dividends) - - - - - From dividends (0.24) (0.18) (0.23) (0.20) - From capital gains - (1.27) - (0.13) (0.01) Return of capital - - - - - Total annual distributions (3) (0.24) (1.45) (0.23) (0.33) (0.01) Net assets, end of period 12.46 13.12 12.62 10.52 9.96 (1) This information is derived from the Pool s audited annual financial statements. The net assets per unit presented in the financial statements may differ from the net asset value calculated for pricing purposes for years ending, and which were reported using Canadian GAAP. An explanation of these differences may be found in the notes to the audited financial statements for the respective years. (2) 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. (3) Distributions were paid in cash/reinvested in additional units of the Pool, or both. (4) Effective January 5,, Cardinal Series units were no longer offered and all units were fully redeemed in June. 8
Ratios and Supplemental Data Series A Total net asset value (000 s) (1) $402,706 $408,325 $379,132 $327,028 $306,093 Number of units outstanding (000 s) (1) 26,669 25,746 24,753 25,602 25,323 Management expense ratio (2) 2.00% 2.00% 2.02% 2.05% 2.08% Management expense ratio before waivers or absorptions 2.00% 2.00% 2.02% 2.05% 2.08% Trading expense ratio (3) 0.03% 0.05% 0.08% 0.02% 0.04% Portfolio turnover rate (4) 14.90% 26.81% 33.73% 9.24% 4.92% Net asset value per unit (1) $15.10 $15.86 $15.32 $12.77 $12.09 Series B Total net asset value (000 s) (1) $65,390 $77,540 $75,748 $66,201 $61,267 Number of units outstanding (000 s) (1) 5,513 6,244 6,307 6,614 6,468 Management expense ratio (2) 2.25% 2.25% 2.27% 2.32% 2.35% Management expense ratio before waivers or absorptions 2.25% 2.25% 2.27% 2.32% 2.35% Trading expense ratio (3) 0.03% 0.05% 0.08% 0.02% 0.04% Portfolio turnover rate (4) 14.90% 26.81% 33.73% 9.24% 4.92% Net asset value per unit (1) $11.86 $12.42 $12.01 $10.01 $9.47 Series F Total net asset value (000 s) (1) $34,186 $21,298 $11,406 $10,054 $7,942 Number of units outstanding (000 s) (1) 2,744 1,624 904 955 796 Management expense ratio (2) 1.05% 1.05% 1.06% 1.07% 1.09% Management expense ratio before waivers or absorptions 1.05% 1.05% 1.06% 1.07% 1.09% Trading expense ratio (3) 0.03% 0.05% 0.08% 0.02% 0.04% Portfolio turnover rate (4) 14.90% 26.81% 33.73% 9.24% 4.92% Net asset value per unit (1) $12.46 $13.12 $12.62 $10.53 $9.97 (1) This information is provided as at the date shown. (2) Management expense ratio is based on total expenses for the stated period (excluding distributions, commissions and other portfolio transaction costs) and is expressed as an annualized percentage of daily average net assets during the period. In the period a series is established, the management expense ratio is annualized from the date of inception to. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net assets during the period. (4) The Pool s portfolio turnover rate indicates how actively the Pool s portfolio manager manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Pool buying and selling all of the securities in its portfolio once in the course of the year. The higher the Pool s portfolio turnover rate in a year, the greater the trading costs payable by the Pool 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 the Pool. 9
Other Information As at,, Value Partners Group Inc. (VPGI) owns 100 percent of the Manager. VPGI is 39.5 percent beneficially owned by The Longton Trust II, a discretionary family trust established for the benefit of specified members of the Lawton family, including one director/ officer of the Manager. Certain of the directors, officers and shareholders of VPGI are also shareholders and sales representatives of Lawton Partners Financial Planning Services Limited, a mutual fund dealer. As of,, sales representatives of Lawton Partners Financial Planning Services Limited hold, in aggregate, Class A1 shares of VPGI representing 15.0 percent of the common equity and Class C1 shares representing 6.5 percent of the common equity. The remaining common equity of VPGI was held by sales representatives of other dealer firms and employees of the Manager. No sales representative held more than 5 percent of the common equity of the Manager. Additional information regarding equity interests may be obtained from the Pool s annual information form or from the Manager s website at www.valuepartnersinvestments.ca. Forward-Looking Statements This report may contain forward-looking statements about the Pool, including its strategy, expected performance and condition. Forwardlooking 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, or negative versions thereof and similar expressions. In addition, any statement that may be made concerning future performance, strategies or prospects, and possible future Pool action, is also a forward-looking statement. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about the Pool and economic factors. 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 made by the Pool. 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. We stress that 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, you should be aware of the fact that the Pool has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise. 10