SEMI-ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE

Transcription

1 SEMI-ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE for the period ended June 30, 2015 DDJ HIGH YIELD FUND This semi-annual management report of fund performance contains financial highlights but does not contain the complete semi-annual or annual financial statements of the investment fund. You can get a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling , by writing to us at CI Investments Inc., 2 Queen Street East, Twentieth Floor, Toronto, ON M5C 3G7 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 proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.

2 RESULTS OF OPERATIONS The net assets of the Fund decreased by $0.8 million to $32.3 million from December 31, 2014 to June 30, The decrease is mostly attributable to net redemptions totalling $0.3 million during the period. The Fund paid distributions of $1.1 million while the portfolio s performance increased assets by $0.6 million. The Fund s six-month return was 1.9%, as compared to its benchmark of 2.5%. The benchmark is the Merrill Lynch U.S. High Yield Master II Total Return Index. In Canadian dollar terms, the Fund produced a positive gross return, but underperformed its benchmark during the period. This underperformance was primarily the result of security selection, specifically the portfolio s lower-tier rated securities, which lagged such securities that are held in the index. Performance for high-yield bonds and leveraged loans was positive during the period. Declining U.S. Treasury yields, heavy inflows (concentrated among high-yield bond ETFs) coupled with light primary activity and a steady bid for energy names drove gains for high-yield bonds during the first quarter. However, some of the technical tailwinds that were beneficial to high-yield bond performance in the first quarter subsided in the second quarter. In particular, volatile U.S. Treasury yields, increased primary market activity and consecutive monthly outflows have resulted in coupon-like gains for high-yield bonds through the first half of the year. Meanwhile, leveraged loan performance has benefit this year from light primary market activity and a strong bid from collateralized loan obligations (CLO) new issuance even in the face of persistent leveraged loan fund outflows. Additionally, while energy sector bonds have been a significant contributor to performance year-to-date, the gains experienced have been realized in higher quality Ba/B rated energy bonds, while Caa-rated energy issues lagged considerably. Notably, metals and mining sector issues have been the worst performing sector in Leveraged loans have not experienced the boost or drag in performance from the energy, metals and mining sectors to the same extent as the high-yield bond market has given the leveraged loan market s limited exposure to these sectors. Overall, high-yield bond funds received net inflows year-to-date in 2015; however, inflows into ETFs, which started the year very strong, reversed in late April and assets have accelerated out of ETFs through the end of the second quarter. Nevertheless, net flows into high-yield bond funds are in-line with last year s total over the first six months of Conversely, leveraged loan funds have experienced outflows during the first half of the year. New issue activity, which began the year slowly, has increased considerably since February and included the high-yield market s second largest transaction in its history (Valeant Pharmaceuticals). Merger and acquisition activity, which was the dominant use of proceeds for high-yield issuers in the first quarter, slowed in the second quarter, while re-financing activity picked up considerably. Primary market activity for leveraged loans is well off of the pace set during the first six months of 2014, while CLO issuance has been robust; these factors have been positive for leveraged loan prices in Default activity has been relatively benign to start the year, and if one excludes the TXU Corporation and Caesars Entertainment Corp. defaults, which had been widely anticipated by the market, the high-yield bond and leveraged loan default rates would be below 2%, with volumes at their lowest level since For the six month period ending June 30, 2015, both high-yield bonds and leveraged loans outperformed investment grade bonds, emerging market bonds, and U.S. Treasuries. Top contributors to performance included Memorial Production Partners LP, Bossier Casino Venture Inc. and Ancestry.com Inc. Memorial Production Partners is a master limited partnership focused on the acquisition and exploitation of low decline, long lived assets in premier oil and gas basins in the United States. The company has roughly 20 years of reserve life, hedges a majority of its production, and owns developed, low decline assets that require minimal ongoing capital expenditure. In addition to benefiting from a strong liquidity position, DDJ believes that the company is the best hedged upstream MLP in the sector, insulating it to a large extent from commodity price movements. The company s bonds have increased basis points through the first half of We believe that this increase is the result of both the modest commodity price recovery and the market s recognition of the company s superior liquidity and hedging position. Bossier Casino is a casino and resort operator located in Bossier City, Los Angeles. The company s capital structure traded up in 2015 as a result of its improved operating performance throughout the year. The company s market share continues to grow and its improved operations can be attributed to a refined marketing approach by management, continued market-leading service and overall revenue growth. These operating improvements allowed the company to refinance a portion of its capital structure in 2015, and as a result, lowered its interest expense and increased cash flow. Ancestry.com is the leading family history and genealogical research service in the world. The Company offers users subscription access to the largest online database of family history content through an engaging, easy to use family tree interface. We believe the prices of the Ancestry.com securities have risen as a result of a very strong quarter for subscriber growth in the first quarter of 2015 as well as strong cash flow generation. In addition, beginning in the fourth quarter of 2014, the company used its excess cash to acquire holdco notes in the open market as they were trading below par. The largest detractors from performance during the first half of 2015 were Peabody Energy Corp., Shale-Inland Holdings and Legacy Reserves LP. Peabody Energy Corp. is engaged in the mining of coal through various operating subsidiaries, and sells thermal and metallurgical coal to electric utilities and industrial customers, respectively. The company s bonds traded down during the first half of 2015, along with many metals and mining companies, as commodity prices steadily declined. Peabody took steps in the first quarter to adjust its balance sheet by refinancing its 2016 maturities and, given its substantial liquidity of over $2.0 billion, we believe the company has at least three years until it needs to address its next maturity (2018). The company recently guided EBITDA lower due to shipment delays caused by inclement weather and lower commodity prices for metallurgical coal. Shale-Inland is a distributor of pipes, valves and fittings to the downstream energy industry in the U.S. and select international locations. The company s earnings have been in decline for some time. DDJ believes that this decline is primarily the result of refineries delaying turnaround activity, depressed nickel prices, which have remained at low levels for an extended period of time, and larger competitors gaining market

3 share. The company has recently announced a number of measures to address some of the internal issues that have exacerbated the earnings decline. DDJ believes that secured notes, which the Fund has purchased, are well covered by the enterprise value of the business. Legacy Reserves LP is a master limited partnership focused on the acquisition and development of oil and natural gas properties primarily located in the Permian Basin, East Texas, Rocky Mountain and Mid-Continent regions of the United States. Like other upstream MLPs, the company has a long reserve life and hedges a significant portion of its production, partially insulating it from commodity price moves. The Company recently announced two transactions: a $440 million acquisition of upstream and midstream assets in East Texas and a joint venture with TPG Special Situations to develop the company s horizontal Permian acreage. The company benefits from a strong liquidity position and has limited debt ahead of the unsecured bonds. The company s unsecured bonds have traded up modestly in 2015 in response to the slight recovery in commodity prices and the company s ability to drive operating costs lower in the first quarter of RECENT DEVELOPMENTS We continue to believe that the best course of action in the current market environment is to exhibit prudence and discipline in executing on the most appropriate reward-versus-risk investment opportunities. We always favour bonds and loans with an above-market yield, yet with a below-market risk profile. However, given the current market conditions, we believe that positioning a portion of the portfolio somewhat conservatively is the most prudent course of action. Nevertheless, we continue seeking to take advantage of opportunities to selectively swap out of safer, lower yielding, liquid debt instruments and into higher yielding bonds and loans as market conditions permit. We believe that the volatility the high-yield market experienced over the past several quarters will continue in the second half of While many segments of the high-yield market have recovered from the price declines that occurred during the second half of 2014, there are still numerous instances, in particular within the energy, metals and mining sectors, where bonds and loans continue to trade at stressed or distressed prices. With regards to the Fund s investments in these sectors in particular, we regularly review our investment thesis on each investment and remain comfortable with the longer term outlook for such positions. RELATED PARTY TRANSACTIONS Manager CI Investments Inc. is the Manager of the Fund and in consideration of management fees of $0.2 million, provided management services required in the day-to-day operations of the Fund for the period. Management Fees 100% of the management fees received, for the period were used to pay for investment management and other general administration. Independent Review Committee The Fund received standing instructions from the Board of Governors ( BoG ) in its capacity as the Independent Review Committee ( IRC ) with respect to the following Related Party Transactions: a) trades in securities of CI Financial Corp.; b) purchases or sales of securities of an issuer from or to another investment fund managed by the Manager (referred to as Inter-Fund Trades ); and c) mergers of funds with another fund that is subject to National Instrument ( Fund Mergers ). The applicable standing instructions require that Related Party Transactions be conducted in accordance with the Manager s policies and procedures. The Manager is required to advise the BoG of any material breach of a condition of the standing instructions. The standing instructions require, among other things, that the investment decision in respect to Related Party Transactions (a) are made by the Manager free from any influence by any entities related to the Manager and without taking into account any consideration to any affiliate of the Manager; (b) represent the business judgment of the Manager uninfluenced by considerations other than the best interests of the Fund; and (c) are made in compliance with the Manager s policies and procedures. Transactions made by the Manager under the standing instructions are subsequently reviewed by the BoG on a quarterly basis to monitor compliance. The Fund relied on the BoG s standing instructions regarding Related Party Transactions during this reporting period. In addition to commodity-related concerns, fears of rising interest rates and reduced dealer inventory are also contributing to volatility. With respect to reduced dealer inventory, when oil prices rapidly declined in the second half of 2014, banks were reluctant to act as liquidity providers in many energy sector debt instruments. This resulted in significantly reduced liquidity for market participants and placed further pressure on prices. Given the current regulatory environment, DDJ anticipates that this dealer inventory issue will continue to add to market volatility.

4 FINANCIAL HIGHLIGHTS The following table shows selected key financial information about the Fund and is intended to help you understand the Fund s financial performance for the past six periods. THE FUND S NET ASSETS PER UNIT (1, 2) Commencement of operations August 28, 1997 Six months Ended Year Ended Year Ended Year Ended Year Ended Year Ended Jun. 30, 2015 Dec. 31, 2014 Dec. 31, 2013 Dec. 31, 2012^ Dec. 31, 2011^ Dec. 31, 2010^ $ $ $ $ $ $ Net assets at the beginning of period (1) Increase (decrease) from operations: Total revenue Total expenses (excluding distributions) Realized gains (losses) for the period Unrealized gains (losses) for the period Total increase (decrease) from operations (2) Distributions: From net investment income (excluding dividends) From dividends From capital gains Return of capital Total distributions (2,3) Net assets at the end of the period shown (2) (0.08) (0.17) (0.17) (0.16) (0.15) (0.15) (0.42) (0.04) (0.12) (0.27) (0.68) (0.38) (0.77) (0.80) (0.80) (0.80) (0.72) (0.02) (0.03) (0.08) (0.40) (0.80) (0.80) (0.80) (0.80) (0.80) Ratios and Supplemental Data Total net assets ($000 s) (8) Number of units outstanding (000 s) (8) Portfolio turnover rate (%) (5) Trading expense ratio (%) (6) Closing market price ($) Management Expense Ratio Management expense ratio before taxes (%) (4) Harmonized sales tax/goods and services tax (%) (4) Management expense ratio after taxes (%) (4) Effective HST/GST rate for the period (%) (4) 32,295 33,144 34,827 34,289 31,265 33,282 2,938 2,965 3,031 3,078 3,114 3, ^Historical figures are based on Canadian GAAP, for more details refer to footnote 7. (1) This information is derived from the Fund s semi-annual and annual financial statements. (2) Net assets per unit and distributions per unit are based on the actual number of units outstanding at the relevant time. The increase (decrease) in net assets from operations per unit is based on the weighted average number of units outstanding over the fiscal period. (3) Distributions were paid in cash or automatically reinvested in additional units of the Fund. (4) Management expense ratio is calculated based on expenses charged to the Fund (excluding commissions and other portfolio transaction costs) and is expressed as an annualized percentage of daily average net assets for the period. As of July 1, 2010, Ontario combined the federal goods and services tax ( GST - 5%) with the provincial retail sales tax ( PST - 8%).The combination resulted in a Harmonized sales tax ( HST ) rate of 13%. The Effective HST tax rate is calculated using the attribution percentage for each province based on unitholder residency and can be different from 13%. For any particular period,the rate shown will be prorated based on the different rates in effect during that period. For the year ended December 31, 2010, the rate applied is 5% for the period January 1, 2010 to June 30, 2010 and the Fund s Effective HST rate for the period from July 1, 2010 to December 31, The rate shown for the year ended December 31, 2010 is the time weighted average of these rates. Beginning January 1, 2011, the HST rate is based on the residency of the unitholder. (5) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio advisor 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 fiscal period. The higher a Fund s portfolio turnover rate in a period, the greater the trading costs payable by the Fund in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between a higher turnover rate and the performance of a Fund. Portfolio turnover rate is calculated by dividing the lesser of the cost of purchases and the proceeds of sales of portfolio securities for the period, excluding cash and short-term investments maturing in less than one year, by the average of the monthly fair value of investments during the period. (6) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value of the Fund during the period. (7) For financial periods beginning on or after January 1, 2013 the financial highlights are derived from the financial statements prepared in accordance with International Financial Reporting Standards ( IFRS ). IFRS allows net assets to be calculated based on the last traded market price for financial assets and financial liabilities where the last traded price falls within the day s bid-ask spread. There are no differences between the net assets and the net assets attributable to holders of redeemable units used for financial statement reporting purposes as at December 31, 2014 and For financial years before January 1, 2013, the financial highlights are derived from the financial statements prepared in accordance with Canadian GAAP. Under Canadian GAAP net assets for financial statement purposes were calculated based on bid/ask price while net assets were calculated based on the closing market price. (8) This information is provided for the period ended June 30, 2015 and the years ended December 31.

5 PAST PERFORMANCE This section describes how the Fund has performed in the past. Remember, past returns do not indicate how the Fund will perform in the future. The information shown assumes that distributions made by the Fund in the periods shown were reinvested in additional units of the Fund. In addition, the information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. Year-by-Year Returns (%) The following chart shows the Fund s semi-annual and annual performance for each of the periods shown, and illustrates how the Fund s performance has changed from period to period. In percentage terms, the chart shows how much an investment made on the first day of each financial period would have grown or decreased by the last day of each financial period Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Jun. 2015

6 Summary of Investment Portfolio as at June 30, 2015 Portfolio Breakdown Percentage of Category Net Asset %) Country Allocation U.S.A Cash & Equivalents Canada Luxembourg Other Net Assets (Liabilities) Foreign Currency Forward Contracts... (2.1) Portfolio Breakdown (cont d) Percentage of Category Net Asset (%) Asset Allocation Corporate Bonds Cash & Equivalents Other Net Assets (Liabilities) Private Placements Foreign Currency Forward Contracts... (2.1) Top 25 Holdings Percentage of Security Name Net Asset (%) Cash & Equivalents Foresight Energy LLC/Foresight Energy Corp., 7.875% 08/15/ US Foods Inc., 8.5% 06/30/ Harbinger Group Inc., 7.75% 01/15/ Party City Holdings Inc., 8.875% 08/01/ Caesar s Entertainment Operating Co., Inc., 0% 06/01/ Equinox Holdings Inc., Term Loan, Private Placement, variable rate 05/06/ Century Aluminum Co., 7.5% 06/01/ Bossier Casino Venture Holdco Inc., 14% 02/09/ Ancestry.com Inc., 11% 12/15/ Memorial Production Partners L.P./Memorial Production Finance Corp., 7.625% 05/01/ BC ULC/New Red Finance Inc., 6% 04/01/ Asurion LLC, Term Loan, Private Placement, variable rate 03/03/ Connolly Corp., 8% 05/09/ Ryerson Inc./Joseph T Ryerson & Son Inc., 9% 10/15/ CPI Buyer LLC, Term Loan, Private Placement, variable rate 07/30/ Optima Speciality Steel Inc., 12.5% 12/15/ Heartland Dental Centre Inc., Term Loan, Private Placement, variable rate 12/21/ PharMEDium Healthcare Corp., Term Loan, Private Placement, variable rate 01/28/ Heartland Dental Care Inc., Term Loan, Private Placement, variable rate 06/21/ Washington Inventory Service, Term Loan, Private Placement, variable rate 06/20/ North Atlantic Trading Co., Inc., Term Loan, Private Placement, variable rate 01/13/ FPC Holdings, Term Loan, Private Placement, variable rate 05/27/ Nuance Communications Inc., 5.375% 08/15/ HC Group Holdings III Inc., 6% 03/25/ Total Net Asset Value (in 000 s) $32,295 The summary of investment portfolio may change due to ongoing portfolio transactions of the Fund and updates will be available on a quarterly basis. A NOTE ON FORWARD-LOOKING STATEMENTS This report may contain forward-looking statements about the Fund, its future performance, strategies or prospects, and possible future Fund action. The words may, could, should, would, suspect, outlook, believe, plan, anticipate, estimate, expect, intend, forecast, objective, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties, both about the Fund and general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made by the Fund. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchanges rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.

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