Annual Management Report of Fund Performance

Transcription

1 2012 Annual Management Report of Fund Performance for the year ended December 31, 2012 Skylon Global Yield Fund Limited Series A Series A redeemable, transferable notes are denominated in Canadian dollars This annual management report of fund performance contains financial highlights but does not contain the 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 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 Series A redeemable, transferable notes are denominated in Canadian dollars Series B redeemable, transferable notes are denominated in U.S. dollars INVESTMENT OBJECTIVE AND STRATEGIES The Skylon Global Yield Fund Limited s investment objectives are to provide Noteholders with a stable stream of monthly payments of $ per Series A Note and US $ per Series B Note and to endeavour to preserve and enhance the net asset value of Skylon Global Yield Fund Limited (the Fund ). The Fund has invested the proceeds of Series A Notes and Series B Notes in the Series A Portfolio and the Series B Portfolio respectively. The Series A and the Series B Portfolio (each, a Global Yield Portfolio ) are managed together as one portfolio, which consists primarily of global yield instruments and may also hold institutional class income shares of certain funds included in PIMCO Funds: Global Investors Series plc which invest in similar instruments. The Fund may apply a variety of strategies, including but not limited to the use of loan facilities, reverse repurchase agreements, credit derivatives, and other derivative instruments. The Fund may utilize derivative instrument positions for hedging, investment or leverage purposes consistent with its investment objective. Each Global Yield Portfolio may lever up to 33% in aggregate of its net asset value (at the time of the transaction), and it may lend securities to generate additional returns. The portfolio advisor intends to hedge at least 90% of the Series A Portfolio back to the Canadian dollar at all times. RISK The risks of investing in the Fund remain as discussed in its Non-Offering Prospectus. There can be no assurance that the Fund will be able to achieve its monthly payment objective or its objective to endeavour to preserve and enhance the net asset value. There is no guarantee that the Global Yield Portfolios will earn any return; the Global Yield Portfolios could be subject to losses. RESULTS OF OPERATIONS The net asset value of the Fund decreased by $0.4 million to $8.3 million from December 31, 2011 to December 31, The Fund had net redemptions of $1.1 million for the period. The Fund paid distributions totalling $0.5 million while the portfolio s performance increased assets by $1.2 million. The Fund s one year return for Series A Notes was 14.5%, as compared to the benchmark s return of 11.5% in Canadian dollars for the same period. The benchmark is a combination of the J.P. Morgan Emerging Markets Bond Global Total Return Index (33%), the Barclays Capital Global Aggregate Bond Total Return Index (34%), and the Merrill Lynch U.S. High Yield Cash Pay Total Return Index (33%). Market sentiment reflected a more favourable short-term economic outlook and risk assets rallied amid supportive policy measures in the U.S. and Europe in the first quarter of U.S. Treasury yields rose, especially on the longer end, as economic data release for the country was mainly positive. Credit spreads continued to tighten, with high-yield corporate bonds outperforming investment-grade credits. In the second quarter, most bonds gained in absolute terms, with Treasury yields declining sharply as investors moved away from risky assets. Financial markets in the second half of the period reflected uncertainty over the outcome of the European debt crisis. Credit spreads widened, with higher rated bonds outperforming the lower tiers. Central bank activism led by the U.S. Federal Reserve and the European Central Bank sparked a rally in risk assets during the third quarter. Most bonds gained in absolute terms during the quarter as negative event risk in Europe receded. Credit spreads tightened across the board, with lower quality tiers outperforming higher quality tiers on rising risk appetite. Capital markets remained choppy through much of the fourth quarter of 2012 as investors focused their concerns on the U.S. Presidential election and the negotiations related to the country s fiscal cliff of tax increases and spending cuts. As it became clearer that a resolution to the budget discussions in Congress would be reached, markets ground higher into year-end. The Fund outperformed its index during the period. Strategies that added to relative performance include an underweight to longer maturity bonds, as the U.S. yield curve steepened; an emphasis on financials and tactical exposure to emerging markets local duration, such as Brazilian and South African local rates; an emphasis on select Russian and Mexican corporate bonds, which outperformed sovereign bonds; and exposure to non-agency mortgages amid positive supply data and increased demand for spread products. Strategies that detracted from the Fund s relative performance during the period include an underweight to total spread duration, particularly in the high-yield and emerging market sectors; underweight allocations to lower quality insurance and telecommunication bonds and to high-beta emerging markets countries, such as Argentina, Hungary, and Ivory Coast; and tactical currency strategies designed to benefit from a depreciation of the euro, which strengthened against the U.S. dollar.

3 RECENT DEVELOPMENTS We expect the global economy to grow at a real rate of 1.5% to 2.0% in 2013 as the efforts to resolve debt overhangs through fiscal restraint serve as headwinds to real growth. Households and governments will face continued pressure to reduce debt, while the corporate sector will remain reluctant to spend in the face of weak global demand and heightened uncertainty. As an offset to these forces, we expect central banks to continue to employ monetary policy as a means to spur nominal growth. The net effect of these countervailing global forces will determine whether GDP growth slows to stall speed or if a synchronized global slowdown can be averted. While we maintain our positive view on the emerging market asset class as a whole, we expect to see much greater differentiation across emerging countries in the future. In light of this cautious outlook, we remain underweight emerging market spread duration, with an emphasis on countries with stronger balance sheets, solid growth drivers and greater resilience to global shocks, such as Brazil, Mexico and Russia. Likewise, we expect to maintain our underweight allocations to countries with heavy debt burdens, weak growth prospects, limited flexibility to enact effective policy changes, and clear vulnerability to global shocks. We are carrying underweight allocations to industries which are sensitive to developed market consumer demand in favor of a focus on multinational companies with greater exposure to higher growth developing economies. We remain cautious towards companies that are overly dependent on revenue from regions in the early stages of extended deleveraging cycles, such as Europe. By sector, the resilient performance of the U.S. banking sector in the face of credit downgrades reinforces our conviction in the solid fundamental characteristics of certain of these issuers. We will, however, continue to assess and refine our financials exposure due to industry developments as well as from a valuation perspective given the outperformance of this sector in We also continue to favor sectors that are industrial, defensive in nature, non-cyclical, and asset-rich. International Financial Reporting Standards As previously confirmed by the Canadian Accounting Standards Board ( AcSB ), most Canadian publicly accountable entities adopted International Financial Reporting Standards ( IFRS ), as published by the International Accounting Standards Board, on January 1, However, the AcSB has allowed most investment funds to defer adoption of IFRS until fiscal years beginning on or after January 1, Accordingly, the Fund will adopt IFRS for its fiscal period beginning January 1, 2014, and will issue its initial financial statements in accordance with IFRS, including comparative information, for the interim period ending June 30, RELATED PARTY TRANSACTIONS Manager Skylon Management Services Inc. is the Manager of Skylon Global Yield Fund Limited and in consideration of management fees of $0.05 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. Broker commissions During the period, the Fund did not pay brokerage commissions to The Bank of Nova Scotia or its subsidiaries. The Bank of Nova Scotia has a significant interest in CI Financial Corp., the parent company of CI Investments Inc.

4 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. and The Bank of Nova Scotia; b) purchases or sales of securities of an issuer from or to another investment fund managed by the CI Investments Inc. (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.

5 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 five years. The Ratios & Supplemental Data shown below are based on Net Asset Values. The Fund s Net AssetS per Series A Note ($) (1) 2012 ($) 2011 ($) 2010 ($) 2009 ($) 2008 ($) Net assets, beginning of year (2) Increase (decrease) from operations: Total revenue Total expenses Realized gains (losses) for the year Unrealized gains (losses) for the year Total increase (decrease) from operations (2) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital Total annual distributions (2)(3) Net assets at December 31 of year shown (2) Ratios and Supplemental Data Net asset value ($000 s) (7) Number of notes outstanding (000 s) Portfolio turnover rate (%) (5) Trading expense ratio (%) (6) Net asset value per note ($) (7) Management Expense Ratio Management expense ratio before taxes (%) (4) Goods and services tax (GST)/Harmonized sales tax (HST) (%) (4) Management expense ratio after taxes (%) (4) GST/Effective HST Rate, for the prior calendar year or period (%) (4) (0.24) (0.23) (0.22) (0.20) (0.21) (3.28) (0.35) (3.23) (1.37) (1.57) (0.25) (0.40) (1.54) (0.77) (1.37) (1.57) (1.79) (1.17) ,302 8,732 10,318 11,768 11, (1) This information is derived from the Fund s audited annual financial statements. The net assets per note presented in the financial statements differs from the net asset value calculated for Fund pricing purposes. An explanation of these differences can be found in the notes to the financial statements or in footnote (7) below. (2) Net assets per note and distributions per note are based on the actual number of notes outstanding at the relevant time. The increase (decrease) in net assets from operations per note is based on the weighted average number of notes outstanding over the fiscal year. (3) Distributions were paid in cash. (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 asset value 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 noteholder residency and can be different from 13%. For any particular year, the rate shown will be prorated based on the different rates in effect during that year. 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. (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 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 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 year, excluding cash and short-term investments maturing in less than one year, by the average of the monthly fair value of investments during the year. (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 year. (7) Section 14.2 of National Instrument requires the net assets of an investment fund to be calculated using the fair value of the fund s assets and liabilities. Canadian GAAP requires a different valuation method for calculating net assets for financial reporting purposes. For the purpose of processing noteholder transactions, net assets are calculated based on the closing market price (referred to as Net Asset Value ), while for financial statement purposes net assets are calculated based on bid/ask price (referred to as Net Assets ).

6 Past Performance This section describes how the Fund s Series A Notes have 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 years shown were reinvested in additional Series A Notes 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 annual performance of the Series A Notes for each of the years shown, and illustrates how the performance has changed from year to year. In percentage terms, the chart shows how much an investment made on the first day of each financial year would have grown or decreased by the last day of each financial year, except where noted * Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec *This figure is for the period from July 18, 2003 to December 31, Annual Compound Returns The following table shows the Fund s annual compound returns for each period indicated, compared to the Merrill Lynch U.S. High Yield Cash Pay Total Return Index, the J.P. Morgan Emerging Markets Bond Global Total Return Index, Barclays Capital Global Aggregate Bond Total Return Index, and the Blended Index composed of: 33% - Merrill Lynch U.S. High Yield Cash Pay Total Return Index, 33% - J.P. Morgan Emerging Markets Bond Global Total Return Index, and 34% - Barclays Capital Global Aggregate Bond Total Return Index. The Merrill Lynch U.S. High Yield Cash Pay Total Return Index is an unmanaged index that tracks the performance of below investment grade U.S. dollar denominated corporate bonds publicly issued in the U.S. domestic market. Qualifying bonds must have at least one year remaining to maturity, a minimum amount outstanding of $100 million and a fixed coupon schedule. The J.P. Morgan Emerging Markets Bond Global Total Return Index is an unmanaged index which tracks the performance of external debt instruments (external meaning foreign currency denominated debt instruments) in emerging markets. The Index includes debt instruments like Brady bonds, loans, Eurobonds and U.S. dollar-denominated local market instruments. The Barclays Capital Global Aggregate Bond Total Return Index provides a broad-based measure of the global investment grade fixed-rate debt markets. The Index contains three major components: the U.S. Aggregate Index (USD 300 million), the Pan-European Aggregate Index (EUR 300 million), and the Asian-Pacific Aggregate Index (JPY 35 billion). The Index includes Global Treasury, Eurodollar, Euro-Yen, Canadian and Investment Grade 144A index-eligible securities not already included in the three regional aggregate indices. A discussion of the performance of the Series A Notes as compared to the benchmarks is found in the Results of Operations section of this report. Since 1 Year 3 Year 5 Year Inception Skylon Global Yield Fund Limited, Series A (%) Blended Index (%) Merrill Lynch U.S. High Yield Cash Pay Total Return Index (%) J.P. Morgan Emerging Markets Bond Global Total Return Index (%) Barclays Capital Global Aggregate Bond Total Return Index (%)

7 Summary of Investment Portfolio as at December 31, 2012 Portfolio Breakdown* Percentage of Category Net Asset Value (%) Asset allocation: Corporate Bonds & Notes 56.7 Sovereign Issues 23.1 Short-Term Instruments 3.4 Mortgage-Backed Securities 4.2 Municipal Bonds & Notes 4.3 Other 8.3 Top 25 Holdings* Percentage of Security Name Net Asset Value (%) Fannie Mae 5.5% 01/01/ /01/ Spain Government International Bond 4.0% 07/30/ Italy Buoni Poliennali Del Tesoro 4.5% 07/15/ PIMCO Short-Term Floating NAV Portfolio 3.0 Fannie Mae 3.5% 11/01/ U.S. Treasury Notes 1.375% 02/28/ Italy Buoni Poliennali Del Tesoro 3.75% 08/01/ Spain Government International Bond 4.4% 01/31/ Fannie Mae 4.0% 08/01/ /01/ Russia Government International Bond 7.5% 03/31/ South Africa Government International Bond 8.0% 12/21/ Australia Government CPI Linked Bond 4.0% 08/20/ Intesa Sanpaolo SpA 2.831% 02/24/ Petrobras International Finance Co % 01/27/ Ecopetrol S.A % 07/23/ Canada Housing Trust 3.8% 06/15/ Petroleos Mexicanos 5.5% 06/27/ Australia Government CPI Linked Bond 3.0% 09/20/ IPIC GMTN Ltd. 5.0% 11/15/ Top 25 Holdings* (cont d) Percentage of Security Name Net Asset Value (%) Petroleos de Venezuela S.A. 5.5% 04/12/ Petroleos de Venezuela S.A 8.5% 11/02/ Brazil Notas do Tesouro Nacional 6.0% 8/15/ Morgan Stanley 7.3% 05/13/ Merrill Lynch & Co., Inc % 04/25/ Barclays Bank PLC 10.0% 05/21/ Total Net Asset Value (thousands of dollars) $8,402 * These are portfolio breakdowns and holdings of the PIMCO Diversified Income Fund as at September 30, The summary of investment portfolio may change due to ongoing portfolio transactions and updates are 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 forwardlooking 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.