Leith Wheeler Canadian Equity Fund

Transcription

1 Leith Wheeler Canadian Equity Fund ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE December 31, 2014 This annual management report of fund performance contains financial highlights, but does not contain 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 , by writing to us at Burrard Street, Vancouver, BC V6C 3A6 or by visiting our website at or SEDAR at Securityholders may also contact us using one of these methods to request a copy of the investment fund s interim financial report, proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.

2 Management Discussion of Fund Performance Investment Objective and Strategies To provide superior long-term investment returns by investing primarily in a diversified portfolio of common shares and other equity related securities of Canadian issuers. The Fund is not restricted by capitalization or industry sector although portfolio diversification is a consideration in the selection of securities for the Fund. Under normal circumstances, the Fund will keep its portfolio fully invested, to the greatest extent possible, in Canadian equity and equity related securities. Our approach to stock picking is based on fundamental research with a strong value bias. Our test for value is viewing any investment we make as if we were buying the whole business. Therefore, the critical question becomes what would be the price of the whole business that would make the purchase a profitable one? Our experience has been that the price of a company in the stock market does not always reflect its real value. This discrepancy between price and value creates excellent investment opportunities. As value investors, we tend to include companies in the portfolio when they are out of favour by the market and have declined in price. Companies can become undervalued when there is a lack of investor awareness; when an entire industry is out of favour with investors; or when a company experiences a short-term difficulty which, following careful analysis, we believe can be overcome. By purchasing these companies after a price decline, we find we are able to control risk in the portfolio as these investments often have less downside risk while offering a decent potential return. Risk The overall risks of investing in the Fund are as described in the Simplified Prospectus. There were no material changes to the Fund during the year that affected the overall level of risk. Results of Operations The Fund s net assets increased by 10.9% in 2014 to $2,131.1 million from $1,921.7 million at the end of Of this change, $168.4 million was attributable to investment gains and $41.0 million to net inflows. The TSX Composite Index began 2014 positively, rising 6.1% during the first quarter. The TSX Composite Index continued its strong performance in the second quarter of 2014, rising an additional 6.4%. Faced with very low interest rates and supportive economic news, investors continued to view equity assets as attractive and pushed prices higher. In the third quarter the TSX Composite fell 0.6% amid concerns of slower economic growth in China and Europe, which had the potential to negatively impact Canadian companies with exposure to these regions. Resource companies were particularly impacted by these concerns, with the Materials sector declining 10.1% and the Energy sector falling 6.6% in the quarter. In the fourth quarter of 2014, the TSX composite fell an additional 1.5%. Despite the weak second half of the year, the index ended up 10.6%. In 2014, the S&P/TSX Composite s positive performance was broadly based, with eight of the ten industry sectors outperforming the market for the year. The Index was led by the Consumer Staple (+49.1%), Information Technology (+35.1%) and Health Care (+30.3%) sectors, which were all up by more than 30% on the year. The worst performing sectors in 2014 were the Energy (-4.8%) and Materials (-2.6%) sectors, which both declined in value during the year. The poor performance of the Energy and Materials sectors was primarily due to the significant drop in crude oil prices as well as weaker natural gas, copper and iron ore prices. The Fund lagged the S&P/TSX Composite Index in 2014 as Series A of the Fund returned 8.9% and Series B of the Fund increased by 7.3% after fees and expenses. After solid relative performance in the first nine months, the Fund trailed the TSX Composite in the fourth quarter. An underweight position in Energy stocks helped relative performance but this was offset by a lack of exposure to defensive sectors such as Telecommunications and Health Care. More specifically, stock selection also created a drag on relative performance. Indirect exposure to the fortunes of the oil and gas industry impacted several holdings such as Finning and Canadian Western Bank. This, combined with lack of exposure to safe, but in our view fully valued stocks, hurt the Fund s performance compared to the index. Among the top contributors to the Fund s performance in 2014 were Constellation Software (+56.1%), Saputo (+46.6%) and Open Text (+40.1%). In contrast, the Fund s performance in 2014 was hurt by the Materials and Energy sectors. Specifically, Labrador Iron Ore Royalty Co (-42.1%), Teck Resources (-39.5%), Calfrac Well Services Ltd. (-33.3%), and Capstone Mining Corp (-32.3%) all dropped by more than 30% on weaker crude oil, natural gas, copper, and iron ore prices. In the fourth quarter, we initiated positions in BMO Financial Group (Financials), Raging River (Energy), and Progressive Waste (Industrials). BMO Financial Group is a chartered Canadian bank that has total assets of $589 billion and provides a broad range of retail banking, investment banking and wealth management products and services to more than 12 million customers in Canada and the Midwest United States. Empire is a small-cap Canadian oil producer with a land position concentrated in southwest Saskatchewan, where it is exclusively focused on the Viking light oil play. Leith Wheeler Investment Counsel Ltd. Well Into the Future 2

3 Management Discussion of Fund Performance (cont.) Progressive Waste Solutions is one of the major players in the waste management industry and serves more than 4 million customers in North America. After a long period of growing by acquisitions, the company is turning its focus to improving operational efficiency and return on capital. In the third quarter of 2014, we eliminated our positions in CAE (Industrials), Intact Financial Corp (Financials), and TransCanada Corp. (Energy). After a period of disappointing results, CAE began to show improvement during the first two quarters of Combined with a confident outlook from management, investors pushed the stock valuation up to a point where our expected return narrowed compared to other opportunities in the Fund. We sold Intact Financial following a jump in the company s stock after indications that it was pursuing several acquisition targets. While Intact has historically done a good job of integrating acquisitions, we felt that the higher stock price largely discounted the benefits of a reasonable level of future acquisitions. We sold the Fund s shares in TransCanada Pipelines as the stock appreciated to a level where it became fully-valued based on our outlook for earnings over the next three to five years. In the fourth quarter, the Fund sold its positions in Interfor (Materials) as the stock appreciated to a level where it become fully-valued based on our outlook for earnings over the next three years. Global equity market performance was strong in the U.S., Canada, China and India in 2014 despite a number of challenges facing investors such as Ebola, the Russia/Ukraine crisis and the collapse in oil prices. Interest rates remain low and accommodative, and while economic growth has improved in North America, it remains sluggish in Europe. We believe current equity valuations already reflect this lethargic growth outlook and any improvement in overall economic sentiment should provide a boost for equity investors. We continue to base our equity selections on our one and three year forward return expectations. Recent Developments Equity markets continued to display high levels of volatility in the first two months of The U.S. and global equity markets were very strong, up over 10.6% and 14.8%, respectively, when reported in Canadian dollar terms. A large amount of both of these returns was from currency as the U.S. dollar continued to be strong. The Canadian market continued to be volatile, but was up 4.6% in the first two months of the year. Transition to IFRS The Fund adopted International Financial Reporting Standards (IFRS) effective January 1, 2014 with a transition date of January 1, Accordingly, the annual statements of the Fund as at December 31, 2014, including all comparative information, are presented in accordance with IFRS. Previously the Fund reported in accordance with Canadian generally accepted accounting principles (Canadian GAAP). In preparing the Fund s opening statements of financial position as at January 1, 2013, adjustments were made to the fair value of investments classified as financial assets at fair value through profit or loss from the amounts previously reported in accordance with previous Canadian GAAP. The Fund adopted IFRS 13 with effect from January 1, Under IFRS 13, the Funds use closing prices to determine the fair values of financial assets quoted in an active market. Under previous Canadian GAAP, the Funds valued financial assets quoted in an active market at bid prices. This adjustment to financial assets at fair value through profit or loss also impacted each Fund s total net asset value and net asset value per unit for financial reporting purposes. There was no impact to transactional net asset value. Also under previous Canadian GAAP, unitholders equity was classified as unitholders equity. Under IFRS, units meet the definition of a financial liability as there is a contractual obligation to deliver cash or another financial asset. Although presentation is similar to Canadian GAAP, unitholders equity is classified as liabilities. Related Party Transactions Leith Wheeler Investment Counsel Ltd. (the Manager ) is the manager and portfolio advisor of the Fund and is responsible for the Fund s day-to-day operations. The Fund pays the Manager a management fee as compensation for managing the investment portfolio of the Fund. Leith Wheeler Investment Counsel Ltd. Well Into the Future 3

4 Management Discussion of Fund Performance (cont.) Management Fees The Manager provides the Fund with investment management services, including fund accounting and unitholder record keeping. In return, the Manager receives a management fee based on the net assets of the Fund, calculated on a daily basis. The annualized management fee for the Series B units of the Fund is 1.40%. During the year, the Fund paid the Manager $1,992,124 (exclusive of GST/HST) of its net assets as management fees. The Fund does not reimburse the Manager for operating costs incurred in administering the Fund. The Manager paid all operating expenses except brokerage charges and taxes. In respect of Series A units, the unitholder pays the Manager a negotiated management fee outside the Fund. We do not, directly or indirectly, pay fees, sales commissions or trailing commissions, nor do we provide any non-monetary benefits to registered dealers for distributions of units of the Fund. If a broker charges you a commission or fee, that is a matter between you and the dealer. Leith Wheeler Investment Counsel Ltd. Well Into the Future 4

5 Financial Highlights The Fund s Net Assets Attributable to Holders of Redeemable Units per Unit 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 past five years. This information is derived from the Fund s audited annual financial statements. The financial information presented below for the year ended December 31, 2014 and 2013 is presented in accordance with IFRS. For all prior years, the financial information is presented in accordance with Canadian GAAP and the net assets attributable to holders of redeemable units and the net assets attributable to holders of redeemable units per unit may differ from the Net Assets and Net Assets per Unit due to the valuation methodology previously used in determining fair values. Series A Net assets attributable to holders of redeemable units - per unit, beginning of year (1) Increase (decrease) from operations: $39.47 $33.15 $29.88 $33.21 $29.04 Total revenue Total expenses Realized gains (losses) for the year Unrealized gains (losses) for the year (1.26) (5.03) 3.61 Total increase (decrease) from operations (1) (1.63) 5.16 Distributions: From income (excluding dividends) - (0.01) (0.01) (0.01) (0.13) From dividends (1.10) (0.91) (0.85) (0.84) (0.66) From capital gains (2.54) (0.91) (0.49) (0.93) - Return of capital Total Annual Distributions (2) (3.64) (1.83) (1.35) (1.78) (0.79) Net assets attributable to holders of redeemable units - per unit, end of year (1) $39.35 $39.47 $33.07 $29.88 $33.21 Series B Net assets attributable to holders of redeemable units - per unit, beginning of year (1) $43.14 $35.78 $31.74 $34.46 $30.04 Increase (decrease) from operations: Total revenue Total expenses (0.58) (0.49) (0.53) (0.54) (0.48) Realized gains (losses) for the year (0.01) 0.75 Unrealized gains (losses) for the year (1.42) Total increase (decrease) from operations (1) (0.53) 4.76 Distributions: From income (excluding dividends) From dividends (0.34) (0.38) (0.26) (0.11) (0.22) From capital gains (2.42) (0.47) (0.09) (0.44) - Return of capital Total Annual Distributions (2) (2.76) (0.85) (0.35) (0.55) (0.22) Net assets attributable to holders of redeemable units - per unit, end of year (1) $43.55 $43.14 $35.70 $31.74 $34.46 (1) Net assets attributable to holders of redeemable units 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. (2) Distributions are reinvested in additional units of the Fund or paid in cash. Leith Wheeler Investment Counsel Ltd. Well Into the Future 5

6 Financial Highlights (cont.) Ratios and Supplemental Data Series A Total net assets attributable to holders of redeemable units - ($000s) (1) 1,990,341 1,791,587 1,369,114 1,046, ,029 Number of units outstanding (000s) (1) 50,583 45,395 41,299 34,941 27,079 Management expense ratio(%) (2) Management expense ratio before waivers or absorptions (%) Trading expense ratio (%) (3) Portfolio turnover rate (%) (4) Net assets attributable to holders of redeemable units per unit ($) Series B Total net assets attributable to holders of redeemable units - ($000s) (1) 140, , , , ,579 Number of units outstanding (000s) (1) 3,232 3,016 3,220 3,481 5,926 Management expense ratio(%) (2) Management expense ratio before waivers or absorptions (%) Trading expense ratio (%) (3) Portfolio turnover rate (%) (4) Net assets attributable to holders of redeemable units per unit ($) (1) This information is provided as at December 31 of the year shown; unless noted otherwise. (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 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 Fund s portfolio turnover rate indicates how actively the Fund s portfolio adviser 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. Leith Wheeler Investment Counsel Ltd. Well Into the Future 6

7 Past Performance General The Fund s performance assumes all distributions made by the Fund in the years shown were reinvested in units of the Fund and is based on net asset value per unit. If you hold the Fund outside a Registered Plan, you will be taxed on these distributions. The performance information does not take into account sales charges, other charges or taxes that, if applicable, would have reduced returns or performance; but includes management fees and other expenses borne directly by the Fund. Past performance does not necessarily indicate how the Fund may perform in the future. Year-by-Year Returns The following bar chart shows the Fund s historical return, which changes each year and illustrates how the Fund s performance has changed from year to year. The bar chart shows, in percentage terms, how much an investment made on the first day of each financial year would have grown or decreased by the last day of each year. 40% 30% 20% 10% 21.1% 19.3% 19.3% 17.5% 10.7% 9.1% 29.3% 27.5% 17.1% 15.4% 24.9% 23.1% 15.4% 13.6% 8.9% 7.3% 0% -10% -4.8% -6.2% -20% -30% -40% -31.9%-32.9% Series A Series B Annual Compound Returns The following table compares the historical annual compound return of the Fund (before fees for Series A and after fees for Series B) with the S&P/ TSX Composite Index, in each case for the year ended December 31, The S&P/TSX Composite Index is the headline index and the principal broad market measure for the Canadian equity markets. A discussion of the performance of the Fund as compared to the benchmark is found in the Results of Operations section of this document. For the Years ended December 31 1 Year 3 Years 5 Years 10 Years Fund Series A 8.9% 16.2% 11.9% 9.5% Benchmark 10.6% 10.2% 7.5% 7.6% Fund Series B 7.3% 14.5% 10.2% 7.8% Benchmark 10.6% 10.2% 7.5% 7.6% Leith Wheeler Investment Counsel Ltd. Well Into the Future 7

8 Summary of Investment Portfolio As at December 31, 2014 Top 25 Positions Issuer % of Net Asset Value Portfolio Allocation Portfolio Breakdown % of Net Asset Value The Toronto-Dominion Bank 7.4% Financials 39.2% Royal Bank of Canada 6.3% Energy 16.9% Saputo Inc. 5.8% Industrials 13.0% Canadian National Railway Co. 5.3% Consumer Discretionary 7.7% Brookfield Infrastructure Partners LP 4.3% Consumer Staple 6.0% Encana Corp. 3.9% Information Technology 5.8% Canadian Imperial Bank of Commerce 3.7% Materials 5.5% Bank of Nova Scotia 3.6% Utilities 5.3% Manulife Financial Corp. 3.3% Cash & Other Net Assets 0.6% Finning International Inc. 3.2% Canadian Natural Resources Ltd. 3.2% Home Capital Group Inc. 3.2% Tourmaline Oil Corp. 3.1% Open Text Corp. 2.9% Canadian Tire Corp. Ltd. Class A 2.9% Constellation Software Inc. 2.9% Toromont Industries Ltd. 2.8% Sun Life Financial Inc. 2.8% CI Financial Corp. 2.7% Cameco Corp. 2.2% First Quantum Minerals Ltd. 2.1% Teck Resources Ltd. Class B 1.8% BRP Inc. 1.8% WestJet Airlines Ltd. 1.7% Aimia Inc. 1.6% The Fund held no short positions as at December 31, The Summary of Investment Portfolio may change due to ongoing portfolio transactions of the Fund and a quarterly update is available at Leith Wheeler Investment Counsel Ltd. Well Into the Future 8