Annual Management Report of Fund Performance

Transcription

1 Annual Management Report of Fund Performance CHYF Trust Annual Management Report of Fund Performance For the year ended December 31, 2014 This Annual Management Report of Fund Performance ( MRFP ) for the CHYF Trust (the Fund ) contains financial highlights but does not contain the complete annual financial statements of the Fund. If the annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the annual financial statements at your request, and at no cost, by calling , by writing us at 1 Adelaide Street East, Suite 600,, Toronto, ON M5C 2V9 Attention: CHYF Trust - Investor Relations or by visiting our website at or SEDAR at Holders of Units ( Unitholders ) may also contact us using one of these methods to request a copy of the Fund s proxy voting policies and procedures or proxy voting disclosure record.

2 Management Report of Fund Performance INVESTMENT OBJECTIVES AND STRATEGIES The CHYF Trust (the Fund ) is managed by Fiera Capital Corporation Inc. ( Fiera or the Manager ). On September 2, 2014 Fiera Capital Corporation acquired Propel Capital Corporation, the former manager of the Fund. The Fund was created to invest in an actively managed diversified portfolio (the Portfolio ) comprised primarily of high yield bonds of Canadian issuers. The Fund began operation on June 16, 2011 and issued units to a Canadian chartered bank (the Counterparty ). Concurrently, the Counterparty entered into a forward purchase and sale agreement with Canadian High Yield Focus Fund under which the Counterparty has agreed to pay Canadian High Yield Focus Fund on June 16, 2016, the economic return provided by the Portfolio. The Manager believes that high yield bonds offer an attractive investment opportunity, as they can provide above average yields while having a low to negative correlation to rising interest rates. Fiera will analyze and select from the universe of Canadian high yield bonds to create a diversified portfolio. The Portfolio Manager will actively manage the Fund with the intention of preserving capital while still generating an attractive amount of current income. In doing so, the Portfolio Manager will employ a combination of qualitative, top-down macroeconomic analysis and quantitative, bottom- up credit analysis. The Portfolio Manager will seek to invest in superior quality issuers that it believes possess the following: (i) strong cash flow and strong balance sheets; (ii) strong and experienced management team with a transparent business strategy; (iii) proven track record of delivering on revenue, earnings and cash flow forecasts and paying down debt; (iv) attractive valuations; and (v) sustainable competitive advantages in the industry in which they operate. The Portfolio Manager intends to acquire high yield bonds of Canadian issuers in the new issue and secondary markets and may invest up to 30% of the Portfolio in high yield bonds of US issuers. RISKS There were no material changes to the Fund over the period of this report that affected the overall level of risk associated with an investment in the Fund. For adetailed disclosure of risks associated with an investment in the Fund please refer to the Fund s prospectus. RESULTS OF OPERATIONS In preparing its annual financial statements, the Trust has reclassified redeemable units presented as liability on its interim financial statements for the six months ended June 30, 2014 to equity due to further analysis of its terms and conditions. This reclassification of redeemable units from liability to equity does not result in any measurement differences on the transition to IFRS. The Trust s statements of changes in net assets attributable to holder of redeemable units has also been restated to separately present the components of equity. Portfolio As at December 31, 2014, CHYF Trust`s portfolio included a total of 30 bonds and notes, 1 equity security and 1 warrant. Net Asset Value The net asset value per unit of the Fund as at December 31, 2014 was $4.78. Net asset value of the Fund was $15.30 million. Revenue and Expenses For the period ended December 31, 2014, the Fund generated a decrease in net assets attributable to holders of redeemable units of $193,326, including a net realized loss on sale of investments of $186,761, a net realized loss on derivatives and foreign currency of investments, derivatives and other foreign assets and liabilities of $221,491, a net change in unrealized depreciation on investments and derivatives of $919,402 and a foreign exchange loss of $133,035. The Fund paid management fees and operating expenses of $296,201. The management expense ratio ( MER ) for the Fund was 1.61%. Leverage The Trust may employ leverage in an amount up to 25% of total assets. Accordingly, the maximum amount of leverage that the Fund could employ is 1.33:1. Outstanding balances are due on demand and interest is charged on outstanding amounts at a variable rate based on the Bank of Canada overnight rate. Minimum leverage employed during the period was 0.0% and maximum leverage employed was 23.3%. At December 31, 2014 leverage employed was 11.3% (December 31, %) and bank indebtedness amounted to $1,949,531 (December 31, $5,069,010). Interest expense for the period amounted to $71,281 (December 31, $93,758). Portfolio Manager Fiera Capital is an independent and leading asset management firm offering unique expertise across both traditional and non-traditional investment strategies. With more than $86 billion in assets under management and offices across North America, Fiera Capital has established itself over the past decade as a reference for portfolio management excellence, integrity and innovation, due to its focus on superior investment performance and its ability to surpass client expectations. The Class A common shares of Fiera are listed on the TSX and trade under the ticker symbol FSZ. Portfolio Manager s Report For the second half of 2014, Canadian high yield bonds comprised a minimum of 70% of the portfolio, with the portfolio investing in both new issues to the market and secondary issues. The allocation to high yield bonds has varied periodically due to market fluctuations, relative value considerations, maturities of existing positions, merger/acquisition activity, investment in new issues and liquidity considerations. The portfolio also invested investment grade bonds and held cash or cash equivalents from time to time. The portfolio was actively managed with the intention to preserve capital, while still generating an attractive amount of current income. Additionally, the portfolio employed leverage up to an amount of 25% of its total assets. The portfolio did not engage in lending securities and does not have significant exposure to non- Canadian issuers. At the beginning of the July, US 10yr yields began the period at 2.53%, but retraced considerably during September and October on the back of strong Treasury auction results and a weaker than expected Nonfarm Payrolls report. Emerging market currency concerns and relatively sluggish economic data from both China and Europe also contributed to the negative sentiment with international yields declining. CHYF TRUST I DECEMBER 31,

3 Management Report of Fund Performance (continued) Financial Highlights After hitting an intermediate high of 2.40% in November, the US 10yr yield began moving steadily downward, ending the year at 2.17% as the risk-off tone took hold. Geopolitical concerns on the Ukraine/Russia front, as well as Greece European Union exit concerns began to flare up going into the new year. Equity and credit markets proved equally as volatile over the last six months of the year, with the S&P 500 gaining just 5.92%. Global markets have somewhat begun to shift their focus away from US monetary policy and towards that of Europe and Asia, where quantitative easing efforts continue to keep local yields artificially depressed. Yields somewhat normalized the first week of December, moving higher in concert with equities on strong economic data and a continued risk-on theme. This proved short-lived, though, as a sharp drop in oil prices and continued political turmoil in Greece led a marked reversal in risk sentiment over the next couple of weeks. The risk-off tone held until the FOMC meeting on December 17th, when a strong economic outlook and hawkish commentary forced investors to consider rate hikes as early as April. Ultimately, US 10yr yields finished 2014 at 2.17%. While equities benefitted from the largely risk-on quarter, to the tune of a 4.4% increase in the S&P 500, credit significantly underperformed, with investment grade and high yield spreads widening by 24bps and 60bps, respectively. Fiera anticipates credit spreads to remain volatile with several cross-currents transpiring. The end of the U.S. quantitative easing program signals that the Federal Reserve will be raising interest rates at some juncture during 2015 and that the domestic economy will decouple from a slowing global economy. There is the potential for a pull-back in corporate spreads in the near-term, as uncertainty surrounding geopolitical concerns and the US economic recovery remains. Fiera is biased for slightly higher yields in the short-term, and, ultimately, expects them to continue rising throughout the next few years. Our year-end 2015 expectation for 10yr Canadian yields is 2.00%-2.25%. Inflation is currently not an issue; rather, deflationary pressures have become a more immediate concern across many developed economies, in light of the declining commodities. The portfolio has slowly pared some it s overweight in energy names as geopolitical risk percolates on many fronts. Energy-related names contributed to the underperformance of the fund during the second half of RECENT DEVELOPMENTS The financial statements have been prepared in compliance with International Financial Reporting Standards (IFRS) applicable to the preparation of annual financial statements, including IFRS 1, First-time Adoption of International Financial Reporting Standards. The Fund adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Fund prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in the Part V of the Chartered Professional Accountants of Canada Handbook ( Canadian GAAP ). The comparative information in the financial statements has been restated from Canadian GAAP to comply with IFRS. The Fund has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position at January 1, 2013 and throughout all periods presented, as if these policies had always been in effect. The notes to the Fund s financial statements, discloses the impact of the transition to IFRS on the Fund s reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Fund s financial statements for the year ended December 31, 2013 prepared under Canadian GAAP. RELATED PARTY TRANSACTIONS The Manager provides all administrative services required by the Fund. The Manager receives a monthly fee in the amount of 0.60% per annum, plus applicable taxes, of the net asset value of the Fund, calculated and accrued daily and payable monthly in arrears. NBCN Inc., a wholly owned subsidiary of National Bank of Canada, which indirectly owns 35.5% of Fiera s voting shares, is the prime broker of the Fund. Under the terms of the agreement, the interest on the bank indebtedness balance represents the total fee paid to NBCN Inc. The terms and the fees paid under the agreement are described under Leverage in the Results of Operations section of this document. The Manager is reimbursed by the Fund for all reasonable costs, expenses and liabilities incurred by the Manager for performance of services on behalf of the Fund in connection with the discharge by the Manager of its duties hereunder. Such costs and expenses may include, without limitation: mailing and printing expenses for reports to unitholders and other unitholder communications; a reasonable allocation of salaries, benefits and consulting fees; and other administrative expenses and costs incurred in connection with the Fund s continuous public offering and other obligations. These expenses were $9,775 for the year ended December 31, 2014 ($9, ) and are included in the administration fees on the Statement of Comprehensive Income. The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance since its commencement of operations on June 16, NET ASSETS PER UNIT (1) For the period ended Dec ** 2013** Net Assets, beginning of period (2) $8.21 $12.19 $11.32 $12.00 Increase / (decrease) from operations: Total revenue Total expenses Realized gains / (losses) for the period Unrealized gains / (losses) for the period Foreign exchange gain (loss) on cash for the period Total increase / (decrease) from operations (3) Distributions: Net investment income Return of capital Total Distributions (4) Net Assets, end of period (5) 4.78 $8.21 $12.14 $11.32 Ratios and Supplemental Data (based on Net Asset Value) For the period ended Dec ** 2013** Total Net Asset Value (000 s) (1) $15,295 $26,279 $39,026 $36,364 Number of Units Outstanding (000 s) (1) 3,202 3,202 3,202 3,202 Management Expense Ratio ( MER ) (2) 1.61% 1.38% 1.19% 0.91% Management Expense Ratio before Waivers or Absorptions 1.61% 1.38% 1.19% 0.91% Trading Expense Ratio (3) 0.00% 0.00% 0.00% 0.00% Portfolio Turnover Rate (3) 31.87% % % 58.28% Net Asset Value per Unit (1) $4.78 $8.21 $12.19 $11.98 (1) This information is derived from the Fund s audited annual financial statements provided as of December 31, as of the year shown. (2) Net assets, beginning of period for 2011 represents the original investment amount as at June 16, (3) Net assets and distributions are based on the actual number of units outstanding. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. (4) The Financial Highlights are not intended to act as a continuity of the opening and closing net asset value per unit. The Fund commenced operations on June 16, ** 2014 and 2013 are prepared under IFRS and 2012 and 2011 are prepared under previously reported Canadian GAAP. (1) This information is provided as of December 31 as of the year shown. (2) Management expense ratio ( MER ) is based on total expenses before income taxes (excluding commissions and other portfolio transaction costs before income tax) of the stated period and is expressed as an annualized percentage of daily average NAV during the period. The MER includes all expenses. (3) A portfolio turnover of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the period. The higher a Fund s portfolio turnover rate, the greater the trading costs payable by the Fund and the greater the chance of an investor receiving taxable capital gains. ** 2014 and 2013 are prepared under IFRS and 2012 and 2011 are prepared under previously reported Canadian GAAP. 2 CHYF TRUST I DECEMBER 31, 2014 CHYF TRUST I DECEMBER 31,

4 Management Fees Summary of Investment Portfolio as of December 31, 2014 The Manager is responsible for managing the business and administration of the Fund. The Manager receives a monthly fee in the amount of 0.60% per annum, plus applicable taxes, of the net asset value of the Fund, calculated and accrued daily and payable monthly in arrears. The Manager is responsible for the payment of the Portfolio Manager s fee of 0.325% out of its annual management fees. The remaining 0.275% of management fees were used to pay for investment management and other general administration. Past Performance The CHYF Trust posted a -2.89% return versus 10.55% for the S&P/TSX Total Return Index. Underperformance was primarily due to energy related investments. The Fund s past performance is no guarantee of how it will perform in the future. All performance information is calculated using Net Asset Value per Unit and assumes that all distributions made by the Fund in the period shown were reinvested in additional Units of the Fund. YEAR-BY-YEAR RETURNS The following bar chart shows the Fund s performance for the period shown, and illustrates how the fund s performance has changed since inception. The chart shows in percentage terms how an investment made at inception would have increased or decreased by December 31, for the period. 20% 15% 10% 5% 0% -5% -10% -2.89% CHYF Trust 10.55% ANNUAL COMPOUND RETURNS (1) The inception date for the Fund was June 16, % S&P/TSX Total Return Index ANNUAL COMPOUND RETURNS as of December % 1-Year 2-Years Since Inception (1) CHYF Trust -2.89% 2.99% 18.54% S&P/TSX Total Return Index 10.55% 23.54% 18.81% 15.72% (1) The following table shows the Fund s compound return for the period ended December 31, 2014 as indicated. 7.19% -0.17% -5.53% (1) The inception date for the Fund was June 16, Source: CIBC Mellon, Bloomberg PORTFOLIO COMPOSITION OF CHYF TRUST Industry Sector Allocation % of Net Asset Value Energy 48.1 Consumer, Cyclical 18.8 Industrial 14.3 Communications 12.5 Diversified 8.0 Basic Materials 4.8 Consumer, Non-cyclical 3.8 Other Assets Net of Liabilities Total Net Asset Value of CHYF Trust TOP 25 HOLDINGS OF CHYF TRUST Description Gateway Casinos & Entertainment Ltd., Callable, Restricted, 8.5%, 2020/11/26 This Summary of Investment Portfolio may change due to ongoing portfolio transactions. % of Net Asset Value NRL Energy Investments Ltd., Callable, 8.25%, 2018/04/ Data & Audio Visual Enterprises Wireless Inc., Callable, 9.5%, 2018/04/29 Great Canadian Gaming Corp., Callable, 6.625%, 2022/07/ Paramount Resources Ltd., Callable, 7.625%, 2019/12/ Sherritt International Corp., Callable, 7.875%, 2022/10/ Newalta Corp., Callable, Restricted, 5.875%, 2021/04/ Athabasca Oil Corp., Callable, 7.5%, 2017/11/ Russel Metals Inc., Callable, 6%, 2022/04/ Sirius XM Canada Holdings Inc., Callable, 5.625%, 2021/04/ Canadian Energy Services & Technology Corp., Callable, 7.375%, 2020/04/17 Garda World Security Corp., Callable, 7.25%, 2021/11/ GFL Environmental Corp., Restricted, Callable, 7.5%, 2018/06/ Baytex Energy Corp., Callable, 6.625%, 2022/07/ Gibson Energy Inc., Callable, 7%, 2020/07/ DHX Media Ltd., Callable, Restricted, 5.875%, 2021/12/ Paramount Resources Ltd., Callable, 8.25%, 2017/12/ Connacher Oil and Gas Ltd., Callable, Restricted, 8.75%, 2018/08/01 Precision Drilling Corp., Callable, 6.5%, 2019/03/ Sherritt International Corp., Series '1', Callable, 8%, 2018/11/ Tervita Corp.,Callable, %, 2018/02/ Crew Energy Inc., Restricted, Callable, 2014/02/21, 8.375%, 2020/10/21 Western Energy Services Corp., Callable, 7.875%, 2019/01/ Trilogy Energy Corp., Callable, 7.25%, 2019/12/ Newalta Corp., Series '2', Callable, 7.75%, 2019/11/ CHYF TRUST I DECEMBER 31, 2014 CHYF TRUST I DECEMBER 31,

5 Forward-Looking Statement Some of the statements contained herein including, without limitation, financial and business prospects and financial outlook may be forward-looking statements which reflect management s expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as may, will, should, could, anticipate, believe, expect, intend, plan, potential, continue and similar expressions have been used to identify these forward-looking statements. These statements reflect management s current beliefs and are based on information currently available to management. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forwardlooking statements including, but not limited to, changes in general economic and market conditions and other risk factors. Although the forward-looking statements contained herein are based on what management believes to be reasonable assumptions, we cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances. Fiera Capital Corporation 1501 McGill College Avenue, Suite 800 Montreal, Quebec, Canada H3A 3M8 Telephone Toll-Free <<FUND CODE>>-EN