Interim Management Report of Fund Performance SMC Man AHL Alpha Fund The following is a report on SMC Man AHL Alpha Fund s (the Fund ) performance and contains financial highlights but does not contain the complete financial statements of the Fund. This report should be read in conjunction with the interim financial statements for the six months ended June 30, 2013 and the annual audited financial statements for the year ended December 31, 2012. You can get a copy of the interim or annual financial statements at your request, and at no cost, by calling (416) 862-3734, by writing us at 40 King St. West, Scotia Plaza, 26th Floor, Box 4085, Station A, Toronto, Ontario M5W 2X6 Attention: SMC Man AHL Alpha Fund Investor Relations or by visiting our website located at www.scotiamanagedcompanies.com or SEDAR at www.sedar.com. Unitholders 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 and quarterly portfolio disclosure. The Fund s proxy voting disclosure record for the annual period ending June 30, 2013 will be available on our website prior to August 31, 2013. Results of Operations The Fund has exposure to a diversified portfolio of financial instruments across a range of global markets including currencies, bonds, stocks, energy, metals and interest rates (the AHL Portfolio ) managed by Man Investments Limited (the Investment Manager ) using a multi-strategy trading program (the AHL Alpha Programme ). The AHL Alpha Programme is implemented and managed by AHL ( AHL ), a division of the Investment Manager. The cornerstone of AHL s investment philosophy is that financial markets experience persistent anomalies or inefficiencies in the form of price trends. Trends are a manifestation of serial correlation in financial markets, the phenomenon whereby past price movements can be informative of future price behaviour. The investment strategies employed by the Investment Manager in applying the AHL Alpha Programme include entering into futures and forward contracts and investments in other financial instruments. The exposure under all contracts and positions held at any time for the benefit of the AHL Portfolio may be substantially larger than the actual amount invested with the result that the AHL Portfolio will be exposed to a form of leverage. The Fund obtained exposure to the AHL Portfolio through a forward purchase and sale agreement (the Forward Agreement ) with TD Global Finance. The following is a report from the Investment Manager for the six months ended June 30, 2013 providing information on the performance of the AHL Alpha Programme. AHL Q1 Performance In Q1 gains were driven almost entirely by strong trends in equity markets. Further gains came from currency, credit, metals and agriculturals trading, but these were offset by losses in energies and fixed income, leaving equity trading as the stand out performer. Global equity markets powered forward to reach new all-time highs in some cases during Q1, with unlimited quantitative easing ( QE ) support from major central banks and improving economic data fuelling the rise. An overriding positioning in the equity sector captured this move, with exposure to developed markets accounting for the larger contributions. The largest exception to this was positions in the Korean Kospi, which returned a loss, due to heightened tensions on the Korean peninsula. The key markets and positions taken during the quarter and the impact on the AHL Portfolio were as follows: Gains Stocks Currencies USD, JPY & GBP Credit default swaps Metals gold Agriculturals Losses Bonds Currencies Euro Energy oil Agriculturals Position SMC Man AHL Alpha Fund 1 Interim Management Report of Fund Performance
Credit performed well due to exposure to the cost of credit default protection as premiums fell amid the upbeat environment. Agricultural sector returns were more divided, with exposures generally losing money, but exposures more than compensating. On the negative side, fixed income exposure struggled with the bullish nature of the market. Long positions in US Treasuries and Eurodollar were amongst some of the larger detractors as safe haven plays fell out of favour amid a switch into higher risk appetite assets. Energy trading was also a loss maker for the quarter due to positions in crude oil and other oil distillates. AHL Q2 Performance Risk appetite fluctuated over the quarter. Investors chose to focus on supportive actions by central banks in April and most of May, buying into both equities and bonds. Precious metals fell sharply with investors fearing a wholesale move away from gold by struggling governments, possibly undermining its role as a traditional store of value. Confidence pulled back sharply towards the end of May when the Federal Reserve announced it might look to taper monetary stimulus. Additionally a number of major economies posted negative economic news and China reported its Purchasing Manager s Index had fallen into contractionary territory. Confidence had been building, buoyed by encouraging employment and corporate earnings data in the US but this worked against markets in the last week of the month. The recovery of the US economy prompted the Fed to consider whether support needed to be maintained at previous levels and investors began reacting negatively to positive data, seeing it as raising the probability of reduced support. Equity markets experienced notable reversals, particularly in Japanese markets which had roared ahead, backed by yen depreciation and supportive monetary policy from the Bank of Japan, before falling markedly in the face of a possible reduction in US support. Fears that the Federal Reserve s asset purchase programmes could be reduced early continued to dominate in June. Investors reacted negatively and stock and bond markets sold-off as investors de-levered and de-risked portfolios, preferring to hold cash until markets stabilised. Towards month-end the US reported disappointing GDP growth and, in an attempt to calm investors, the Fed clarified that it would not reduce its bond buying programme until the economy had strengthened. Investors reacted positively to this news, believing the end of monetary support had been delayed somewhat. The key markets and positions taken the second quarter and the impact on the AHL Portfolio were as follows: Gains Credit default swaps Energy electricity & coal Metals precious & base Losses Bonds Interest rates Currencies USD Energy oil & gas Position & Profits came from exposure to electricity and coal. Prices of metals fell over the period and the programme added profits via its allocation to both precious and base metals. Disappointing Chinese economic date undermined demand expectations for base metals; top performers were holdings of copper and aluminium which all experienced notable drops. For precious metals, fears grew that other struggling Eurozone nations would follow Cyprus s lead and dump their gold reserves and good profits were generated on exposure to both gold and silver. Short holdings of US and European credit default protection also added a gain. Rising stock markets and encouraging economic data points from the US reduced fears of corporate default. Long exposure to fixed income assets were the biggest detractors for the quarter. Initially the position generated a profit as demand was buoyed by disappointing employment and corporate earnings news from the US, as well as demand from investors switching out of gold. Fixed income assets experienced strong sell-offs, however, as expectations that the Fed would reduce its bond buying programme early increased. US Treasuries were amongst the most notable losers as yields jumped and further negative performance came from UK gilts and bonds of commodity focussed economies. Long exposure to interest rates also incurred a loss as expectations of future rate rises in the US increased. Additional negative performance came from currency trading as holdings of the US dollar lost on the side against commodity-linked currencies and on the side against major world currencies. Within energies, oil holdings suffered following poor manufacturing data from China, speculation over the future of QE in the US and moves in the US dollar resulted in increased price volatility which caused a whipsawing of positions. Long exposure to natural gas detracted, with cooler weather forecasts meaning demand from air conditioning users would not be as strong. Interim Management Report of Fund Performance 2 SMC Man AHL Alpha Fund
Financial Performance The Fund s Net Assets decreased over the six month period ended June 30, 2013 from $8.92 to $8.47 per Class A Unit and from $9.15 to $8.73 per Class F Unit. The following table shows the performance of the Fund s Units compared with other performance benchmarks. For the six months ended June 30, 2013 Performance Volatility (1) SMC Man AHL Alpha Fund Class A Units... 5.04% 4.27% SMC Man AHL Alpha Fund Class F Units... 4.59% 4.28% Merrill Lynch Canadian Corporates TR Index (2)... 0.43% 1.68% S&P/TSX Composite Total Return Index (3)... 0.88% 5.47% MSCI Daily World Gross Total Return Index (4)... 15.34% 5.42% (1) Volatility is measured by the standard deviation or variance of returns on an annual basis. Volatility is calculated as the average annualized weekly volatility based on rolling 4-week returns. (2) The index measures the performance of Canadian corporate bonds. (3) The index measures the equity performance of the Canadian markets. (4) MSCI Daily World Gross Total Return Index is based on historical U.S. dollar returns converted to Canadian dollars at the daily spot rate. The index measures the equity market performance of all the developed markets in the world. As the AHL Alpha Programme provides exposure to a diversified portfolio of financial instruments across a range of global markets including currencies, bonds, stocks, energy, metals and interest rates, it is unlikely to have similar performance to either the debt or equity markets over any given period. The measured volatility level of the Fund is considerably lower than the historical average of 13.1% and is lower than the volatility of both equity indexes. The following table provides the correlation of the Fund s Units with the above benchmarks. SMC Man SMC Man Merrill S&P/TSX AHL Alpha AHL Alpha Lynch Composite MSCI Daily Fund Fund Canadian Total World Gross Class A Class F Corporates Return Total Return Units Units TR Index Index Index SMC Man AHL Alpha Fund Class A Units... 1.00 1.00 (0.06) 0.26 0.23 SMC Man AHL Alpha Fund Class F Units... 1.00 (0.06) 0.26 0.23 Merrill Lynch Canadian Corporates TR Index... 1.00 0.05 (0.03) S&P/TSX Composite Total Return Index... 1.00 0.61 MSCI Daily World Gross Total Return Index... 1.00 Because of the nature of AHL Alpha Programme, it is not expected to have a significant correlation with any other asset class. For the six months ended June 30, 2013, the Fund has continued to show low correlation to the three noted benchmarks. Recent Developments Tax Changes Affecting Forward Agreement Structures In the budget announced March 21, 2013, the government proposed to eliminate the tax benefits associated with forward agreements used by some investment funds to achieve capital gains treatment on income that would otherwise be treated as ordinary income. The government refers to these as character conversion transactions. Distributions from investment funds which enter into a forward agreement will now generally be taxed as income at the time of distribution as opposed to returns of capital which are not generally taxable at time of receipt and capital gains. This measure will apply to forward agreements entered into on or after March 21, 2013. The less favorable tax treatment will also apply to forward agreements entered into before March 21st, if the terms of the agreement are extended or modified. This measure does not affect the Fund as it entered into its Forward Agreement before March 21, 2013 and may continue operations until the Forward Agreement matures on May 11, 2015. The Fund and its legal and tax advisors continue to consider the implications of the budget and to seek clarification on how this measure will be implemented. SMC Man AHL Alpha Fund 3 Interim Management Report of Fund Performance
Related Party Transactions For its services to the Fund, Scotia Managed Companies Administration Inc. ( SMCAI ) is entitled to receive from the Fund (i) an administration fee plus (ii) an amount equal to the service fee with respect to the Class A Units to be paid by SMCAI to the dealers whose clients hold Class A Units, plus applicable taxes. Each Class of Units is responsible for the administration fee referable to that class. The administration fee rate is equal to 0.30% per annum of the Net Asset Value of Class A Units and 0.30% per annum of the Net Asset Value of Class F Units. The total administration fees incurred to SMCAI for the six months ended June 30, 2013 were $22,599 (2012 $28,776). The service fee rate is equal to 1.00% per annum of the Net Asset Value of Class A Units. No service fee is paid in respect of the Class F Units. The total service fees incurred for the six months ended June 30, 2013 were $28,209 (2012 $39,427). The ongoing administration fees and service fees are calculated and accrued weekly as of each Valuation Date and are payable quarterly in arrears. SMCAI may pay for certain organizational and operating expenses of the Fund, which are not expected to exceed 0.5% of the Net Asset Value of the Fund, in order to maintain the Fund s operating expenses at a reasonable level. The total expenses absorbed by SMCAI for the six months ended June 30, 2013 were $57,768 (June 30, 2012 $100,908). The total receivable from the manager as at June 30, 2013 was $56,538 (December 31, 2012 $185,084) relating to reimbursements to be made by SMCAI to the Fund. As compensation for managing the AHL Portfolio, the Investment Manager receives out of the AHL Portfolio the following fees: (a) an investment management fee (calculated weekly and payable monthly) of up to one-fifty second ( 1 52) of 2.00% (approximately 2.00% per annum) of the investment exposure of the AHL SPC Notes at the relevant Valuation Date; and (b) a performance fee (calculated weekly and payable monthly) of up to 20.00% of the net appreciation of the AHL SPC Notes. In addition, the AHL Portfolio incurs expenses in connection with its operation and administration. A portion of these fees or expenses are paid to affiliates of the Investment Manager that provides such services, directly or indirectly, to the AHL Portfolio. At June 30, 2013, the Fund had accrued liabilities of $63,139 payable to SMCAI (December 31, 2012 $36,391) included as part of accrued liabilities in the statements of Net Assets, and had cash on deposit with its parent, The Bank of Nova Scotia, of $13,956 (December 31, 2012 $26,789). 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 since inception. The information for the six months ended June 30, 2013 is derived from the Fund s unaudited financial statements while annual information is derived from the Fund s audited financial statements. For the Six Months Ended June 30 For the Years Ended December 31 2013 2012 2011 2010 (1) 2012 2011 2010 (1) Class A Class F Class A Class F Net assets per Unit, beginning of period/year... $ 8.92 $ 9.15 $ 9.62 $10.40 $10.00 $ 9.77 $10.48 $10.00 Increase (decrease) from operations: Total revenue... Total expenses... (0.08) (0.04) (0.17) (0.18) (0.22) (0.08) (0.08) (0.15) Realized gains (losses) for the period/year... (0.03) (0.03) (0.59) (0.25) 0.27 (0.60) (0.25) 0.28 Unrealized gains (losses) for the period/year... (0.34) (0.35) 0.06 (0.35) 0.35 0.06 (0.38) 0.35 Total increase (decrease) from operations... (0.45) (0.42) (0.70) (0.78) 0.40 (0.62) (0.71) 0.48 Distributions:... Net assets per Unit, end of period/year... $ 8.47 $ 8.73 $ 8.92 $ 9.62 $10.40 $ 9.15 $ 9.77 $10.48 Based on the weighted average number of Units during the period/year except for the net assets and distributions wherein the actual number of Units outstanding at the relevant time are used. (1) Results for the period May 10, 2010 (commencement of operations) to December 31, 2010. Interim Management Report of Fund Performance 4 SMC Man AHL Alpha Fund
Ratios and Supplemental Data (based on net asset value) June 30 December 31 2013 2012 2011 2010 2012 2011 2010 Class A Class F Class A Class F Net asset value (000 s) (1) (2)... $ 4,651 $ 7,679 $ 5,300 $ 7,287 $ 7,306 $ 8,345 $ 10,350 $ 11,449 Number of Units outstanding (1)... 548,973 879,572 594,209 757,535 702,637 912,301 1,059,492 1,092,463 Management expense ratio (3)... 5.07% 4.03% 5.13% 5.08% 7.92% 4.10% 4.13% 6.88% Management expense ratio before absorptions (3)... 6.02% 4.84% 6.43% 6.59% 9.21% 5.24% 5.53% 8.16% Trading expense ratio (4)... 0.00% 0.00% 0.12% 0.09% 0.25% 0.12% 0.09% 0.25% Portfolio turnover rate (5)... n/a n/a n/a n/a n/a n/a n/a n/a Net asset value per Unit (1)... $ 8.471 $ 8.730 $ 8.920 $ 9.620 $ 10.398 $ 9.147 $ 9.769 $ 10.480 (1) This information is provided as at December 31st of the years shown except for the six month period where the information is provided as at June 30, 2013. (2) Net asset value is equal to net asset value per Unit multiplied by the number of Units outstanding. (3) Management expense ratio ( MER ) is based on total expenses for the stated period/year including Forward Agreement fees and expenses of AHL SPC Notes and are expressed as an annualized percentage of the weekly average Unit net asset value during the period/year. The MER without absorptions excludes the management waivers for expenses. During 2010, the Fund realized a one-time administration fee in connection with its initial public offering and the issuance of 642,882 Class A Units and 956,805 Class F Units. Without this cost, the MER would have been 6.89% and 5.87% (8.17% and 7.14% excluding expense absorptions by SMCAI) for Class A Units and Class F Units, respectively at December 31, 2010. The total expenses absorbed by SMCAI for the first six months of 2013 were $57,768 (for the years 2012 $192,054, 2011 $265,583, 2010 $151,778). (4) 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/year. (5) The Fund s portfolio turnover rate indicates how actively the investment 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 in the course of the year. The higher a 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. The AHL Alpha Programme trades derivatives, which have not been included in the calculation of the portfolio turnover rate. As such the cost of the Fund s investments is zero, resulting in a zero portfolio turnover rate. Past Performance Year-by-Year Returns The following charts show the Fund s performance of its Units since the Fund s inception indicating, in percentage terms, how much an investment made on the first day of the financial period/year would have grown or decreased by the last day of each financial period/year. Past performance is not an indication of how the Units will perform in the future. 4.0% Class A Units 6% 4% 4.8% Class F Units 2% 0% -2% 6% 4% 2% 0% -2% -4% -6% -8% -10% -7.5% -7.3% -5.0% 2010 2011 2012 2013-4% -6% -8% -10% -6.8% -6.4% -4.6% 2010 2011 2012 2013 For the Years ended December 31, 2010 to 2012 and the Six Month Period Ended June 30, 2013 23AUG201317371882 For the Years ended December 31, 2010 to 2012 and the Six Month Period Ended June 30, 2013 23AUG201317372025 SMC Man AHL Alpha Fund 5 Interim Management Report of Fund Performance
Summary of Investment Portfolio Below is a summary of the AHL Portfolio as at June 30, 2013, upon which the Unitholders return is based. This summary of the AHL Portfolio may change due to ongoing portfolio transactions. Net Asset Value of AHL SPC (1) $ 49,129,448 Portfolio Allocation % of Asset Class Net Assets (2) Stock Indices... 2.10% Agriculturals... 1.61% Interest Rates... 1.30% Metals... 1.21% Energies... 0.27% Currency... 0.01% Cash (3)... 93.50% 100.00% Top 25 Holdings % of Issuer Net Assets (2) Long Positions SOYBEAN FUTURE Chicago Board Of Trade... 0.40% US 5YR NOTE (CBT) Chicago Board Of Trade... 0.38% S&P500 EMINI FUT CME Group Inc... 0.23% NASDAQ 100 E-MINI CME Group Inc... 0.15% CORN FUTURE Chicago Board Of Trade... 0.14% DAX INDEX FUTURE EUREX... 0.13% Russell 2000 Mini ICE Futures US... 0.12% WTI CRUDE FUTURE New York Mercantile Exchange... 0.08% Short Positions KOSPI2 INX FUT Korea Futures Exchange... 0.53% LME ALUMINUM FORWARD 2013 LME... 0.38% LME ZINC FORWARD ($) 2013 LME... 0.30% WHEAT FUTURE(CBT) Chicago Board Of Trade... 0.22% LME NICKEL FORWARD 2013 LME... 0.18% US 10YR NOTE (CBT Chicago Board Of Trade... 0.18% WHEAT FUTURE(KCB) Kansas City Board Of Trade... 0.14% COPPER FUTURE CMX... 0.13% SUGAR #11 (WORLD) ICE Futures US... 0.13% HANG SENG IDX FUT Hong Kong Futures Exchange Ltd... 0.12% AUST 3YR BOND FUT Sydney Futures Exchange... 0.11% KOREA 3YR BND FUT Korea Futures Exchange... 0.10% H-SHARES IDX FUT Hong Kong Futures Exchange Ltd... 0.10% CBOE VIX FUTURE Chicago Board Options Exchange... 0.10% COFF ROBUSTA 10tn LIFFE... 0.08% MILL WHEAT EURO NYSE LIFFE Paris... 0.07% S&P/TSX 60 IX FUT Montreal Options Exchange... 0.07% (1) As a result of the Forward Agreement, the total fair value of the Fund s investments is represented by AHL SPC Notes ( Reference Notes ) issued by AHL SPC in respect of the AHL Porffolio. As at June 30, 2013, 134,285 Reference Notes with a Net Asset Value of approximately $12.4 million or approximately 25.2% of the outstanding Reference Notes were issued to the Counterparty. (2) The percentages of net assets refer to the amount of margin required in cash terms to be pledged against the relevant investment. The cash requirement has then been converted into a percentage of the Net Asset Value of AHL SPC Notes. The investments of AHL SPC Notes consist predominately of futures contracts written across a range of global markets including currencies, bonds, stocks, energy, metals and interest rates and have a substantially larger notional value than is reflected by the investment amount with the result that the AHL Portfolio is exposed to a form of leverage. Based on the Investment Manager s view,such futures contracts may be purchased or sold resulting in a or investment position. (3) Cash is comprised of cash in bank deposits and cash held with brokers in order to meet margin requirements. See accompanying notes to financial statements. Interim Management Report of Fund Performance 6 SMC Man AHL Alpha Fund