Scotia Diversified Monthly Income Fund

Transcription

1 Scotia Diversified Monthly Income Fund Semi-Annual Management Report of Fund Performance For the period ended, 2015 This semi-annual management report of fund performance contains financial highlights but does not contain the complete semiannual financial statements of the fund. You may obtain a copy of the semi-annual financial statements at your request, and at no cost, by calling toll-free , by visiting our website or SEDAR at or by writing to us at: 1832 Asset Management L.P., 1 Adelaide Street East, 28th Floor, Toronto, ON M5C 2V9. Securityholders may also contact us using one of these methods to request a copy of the Fund s semi-annual financial statements, proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure Asset Management L.P. is the manager (the Manager ) of the fund. In this document, we, us, our and the Manager refer to 1832 Asset Management L.P. and Fund refers to the Scotia Diversified Monthly Income Fund. Caution Regarding Forward-Looking Statements Certain portions of this report, including, but not limited to, Recent Developments, may contain forward-looking statements about the fund and the underlying funds, as applicable, including statements with respect to strategies, risks, expected performance events and conditions. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as expects, anticipates, intends, plans, believes, estimates, projects and similar forward-looking expressions or negative versions thereof. In addition, any statement that may be made concerning future performance, strategies or prospects and possible future action by the fund is also a forward-looking statement. Forward-looking statements are based on current expectations and projections about future general economic, political and relevant market factors, such as interest rates, foreign exchange rates, equity and capital markets, and the general business environment, in each case assuming no changes to applicable tax or other laws or government regulation. Expectations and projections about future events are inherently subject to, among other things, risks and uncertainties, some of which may be unforeseeable. Accordingly, current assumptions concerning future economic and other factors may prove to be incorrect at a future date. Forward-looking statements are not guarantees of future performance and actual results or events could differ materially from those expressed or implied in any forward-looking statements made by the fund. Any number of important factors could contribute to these digressions, including, but not limited to, general economic, political and market factors in North America and internationally, such as interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government relations, unexpected judicial or regulatory proceedings and catastrophic events. We stress that the above mentioned list of important factors is not exhaustive. Some of these risks, uncertainties and other factors are described in the fund s simplified prospectus, under the heading Specific risks of mutual funds. We encourage you to consider these and other factors carefully before making any investment decisions. Forward-looking statements should not be unduly relied upon. Further, you should be aware of the fact that the fund has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, prior to the release of the next management report of fund performance, and that the forward-looking statements speak only to the date of this management report of fund performance. Management Report of Fund Performance Results of Operations For the six month period ended, 2015 (the period ), the Series A units of the Fund generated a total return of 2.36%. Fund returns are reported net of all management fees and expenses for all series, unlike the returns of the Fund s benchmark, which is based on the performance of an index that does not pay fees or incur expenses. Returns for other series of the Fund will be similar to Series A with any difference in performance being primarily due to different management fees, operating expenses and other expenses that are applicable to that particular series. Please see the Past Performance section for the performance of the Fund s other series. The Fund s broad-based benchmark, the S&P/TSX Composite Index, returned 0.91% during the same period. We have included a comparison to this broad-based index to help you understand the Fund s performance relative to the general performance of the market, but caution that the Fund s mandate may be significantly different from the index shown. The Fund s blended benchmark 50% S&P/TSX Composite Index and 50% FTSE TMX Canada Universe Bond Index, returned 1.71% during the same period. We have included this comparison, which more closely reflects the asset classes in which the Fund invests, to provide a more useful comparative to the performance of the Fund. The Fund performed in-line with the blended benchmark though benefited from an exposure to U.S. equities in particular securities in the consumer discretionary and health care sectors which did well over the period.

2 Global equity markets posted gains over the period, with leadership mostly coming from Japan and Europe. In North America, a frigid winter led to a soft patch in economic data. In addition the U.S economy was impacted by a West Coast port strike and strengthening U.S. dollar, though growth began to pick up momentum in the spring. Canadian economic activity, however, remained subdued as weak commodity prices continued to weigh on the resource heavy market. The European economy began to improve as economic growth strengthened, although concerns of a possible debt default by Greece began to surface in the final months of the period which negatively impacted global markets. The Canadian equity market was relatively flat ov er the period. The impact of depressed oil prices weighed on the energy sector and also led to concerns in industrials, which was the worst performing sector. Meanwhile, strong performance in health care and consumer discretionary had lifted the equity index into positive territory but this was offset by concerns about slowing economic growth and the impact of China on the commodity market. U.S. equities posted modest returns for the period after a slow start to the year. Health care and consumer discretionary were the top performing sectors. Utilities were the worst performing sector affected by the rise in Treasury yields near the end of the period. Energy stocks also underperformed, as companies continued to navigate a difficult operating environment. Early in the year, the Bank of Canada unexpectedly cut rates to offset continued weakness in the economy stemming from depressed oil prices, sending bond yields sharply lower across the yield curve. Global yields also declined as the European Central Bank (ECB) instituted is own version of Quantitative Easing (QE), around the same time Japan introduced further easing. However, yields started to normalize later in the spring as the U.S. Federal Reserve began signalling that it is moving in the direction of rate increases, although mixed data may lead to a more moderate pace than anticipated, and improving data lifted European yields. In Canada GDP growth disappointed in the first quarter and remains subdued, which will keep the Bank of Canada on its back foot and leave the door open for future easing. The Fund remained with a higher weight in equities relative to bonds during the period. The equity allocation was decreased while bonds were increased. There was a modest increase in cash. The equity component of the portfolio had a larger impact on returns than the bonds. Geographically, U.S. equities were the top contributors to performance though the exposure was lowered as profits were taken. Within Canada, the portfolio trimmed the exposure to energy, reducing the weighting in both energy producers and energy infrastructure companies as the sector faced a difficult operating environment. Most other sectors remained unchanged with a small allocation to industrials initiated. In the U.S., the sector exposures were maintained with the exception of consumer discretionary and health care which were reduced as profits were taken. From a sector perspective, the top contributors to performance were consumer discretionary and health care while energy and industrials were the largest detractors. Fixed income overall had a positive impact on returns, primarily through a position Scotia Canadian Corporate Bond Fund. Among equities notable individual contributors included Walt Disney, Brookfield Infrastructure Partners and Comcast Corporation. Detractors from performance were holdings in Union Pacific and TransCanada Corporation. Certain series of the Fund, as applicable, may make distributions at a rate determined by the Manager from time to time. If the aggregate amount of distributions in such series exceeds the portion of net income and net realized capital gains allocated to such series, the excess will constitute a return of capital. The Manager does not believe that the return of capital distributions made by such series of the Fund have a meaningful impact on the Fund s ability to implement its investment strategy or to fulfill its investment objective. The Fund s net asset value increased by 1.6% to $2,828.4 million at, 2015, from $2,783.6 million at, The increase is attributed to investment performance of $65.7 million, offset by net redemptions of $17.3 million and cash distributions of $3.6 million. The investment performance of the Fund includes earned income and expenses which vary year over year due to portfolio activity. The Fund s expenses increased as compared to the previous period mainly as a result of changes in average net assets and portfolio activity. Income decreased as compared to the previous period due to changes in the Fund s income earning investments. Recent Developments Effective June 26, 2015, the Advisor Series of the Fund was closed to any new purchases, including any switches or reclassifications and therefore, no longer available for sale. Effective July 24, 2015, the maximum annual management fees payable by the Advisor Series of Fund to the Manager was reduced from 1.50% to 1.25%. Related Party Transactions The Manager is a wholly-owned subsidiary of The Bank of Nova Scotia ( Scotiabank ). Scotiabank also owns, directly or indirectly, 100% of Scotia Securities Inc. ( SSI ), HollisWealth Advisory Services Inc. and Tangerine Investment Funds Limited, each a mutual fund dealer, and Scotia Capital Inc. ( SCI ), (which includes HollisWealth Inc., ScotiaMcLeod and Scotia itrade), an investment dealer. The Manager, on behalf of the Fund, may enter into transactions or arrangements with other members of Scotiabank or certain other companies that are related or connected to the Manager (each a related party ). All transactions between the Fund and the related parties are in the normal course of business and are carried out at arm s length terms. The purpose of this section is to provide a brief description of any transaction involving the Fund and a related party.

3 The following arrangements listed below are considered related party transactions: Management Fees The Fund pays the Manager a management fee, which may vary for each Series of the Fund. The management fees cover the costs of managing the Fund, arranging for investment analysis, recommendations and investment decision making for the Fund, arranging for distribution of the Fund, marketing and promotion of the Fund and providing or arranging for other services. The Fund incurred a management fee of $17,752,866. Fixed Administration Fee and Operating Expenses Effective August 22, 2014, the Manager began paying certain operating expenses of the Fund. These expenses include regulatory filing fees and other day-to-day operating expenses including, but not limited to, transfer agency and recordkeeping, accounting and fund valuation costs, custody fees, audit and legal fees, administration costs, costs of preparing and distributing annual and semi-annual reports, prospectuses, annual information forms, fund facts, statements, and investor communications. In return, each Series of the Fund pays a fixed administration fee to the Manager (the Fixed Administration Fee ). The Manager is not obligated to pay any other expense, cost or fee, including those arising from new government or regulatory requirements relating to the foregoing expenses, costs and fees. Up to, 2016, the Fixed Administration Fee payable by each Series of the Fund is subject to a transitional adjustment payment, details of which are presented in the Fund s simplified prospectus. Prior to August 22, 2014, the Funds were responsible for operating expenses relating to the carrying on of their business. Each Series of the Funds were allocated its own expenses and its proportionate share of the Fund s expenses that are common to all Series. These expenses included administration cost, examples of which included departmental expenses incurred and paid by the Manager that support the daily operations of the Fund. In addition to the Fixed Administration Fee, each Series of the Fund pays certain operating expenses directly referred to as Other Fund Costs. These include the costs and expenses related to the IRC of the Fund, cost of any new government or regulatory requirements, such as the costs associated with complying with International Financial Reporting Standards or any new fee introduced by a securities regulator or other government authorities based on the assets or other criteria of the Fund, any transaction costs, including all fees and costs related to derivatives, and any borrowing costs, and taxes (including, but not limited to, GST or HST, as applicable), which are detailed in the simplified prospectus of the Fund. Where applicable, the Advisor Series of the Fund paid its proportionate share of the Fund s Operating Expenses and other Fund Costs that are common to all Series throughout the period and will continue to do so. For the period ended, 2015, the Fund paid the Manager, $851,361 in Fixed Administration Fee. The Manager absorbed $1,493 of total expenses during the period. Such absorption may be terminated by the Manager at any time without notice. Custodian Fees Scotiabank is the custodian of the Fund and earns a fee for providing custody and related services. The custodian holds the investments of the Fund and keeps it safe to ensure that they are used only for the benefit of the investors of the Fund. For the period ended, 2015, custodian fee was paid by the Manager in return for the Fixed Administration Fee paid to the Manager by the Fund. Commissions and Related Brokerage Commissions From time to time, the Fund may enter into portfolio securities transactions with SCI or other dealers in whom Scotiabank has a significant interest (the Related Brokers ). These Related Brokers may earn commissions or spreads provided that such trades are made on terms and conditions that are comparable to nonrelated brokers or dealers. During the period, the Fund paid commissions to SCI amounting to approximately $115,155. Other Fees Our affiliates may earn fees and spreads in connection with various services provided to, or transactions with, the Fund, such as banking, brokerage, securities lending, foreign exchange and derivatives transactions. We, or our affiliates, may earn a foreign exchange spread when unitholders switch between Series of funds denominated in different currencies. The Fund also maintains bank accounts and overdraft provisions with Scotiabank for which Scotiabank may earn a fee. Distribution Services Certain registered dealers through which units of the Fund are distributed are related parties to the Fund and the Manager. The Manager pays to these related parties a trailer commission out of its management fees, representing distribution and servicing fees, based on the amount of assets held in the investor s accounts. These fees are paid on the basis and at the same rates that the Manager pays to non-affiliated dealers. Inter-Fund Trades The Fund, from time to time, entered into security trades with other investment funds managed by the Manager. These trades were executed through market intermediaries and under prevailing market terms and conditions. Independent Review Committee The Manager has established the Independent Review Committee (the IRC ) for the Funds in accordance with the requirements of National Instrument Independent Review Committee for Investment Funds ( NI ) in order to review and provide recommendations or approval, as required, regarding certain conflict of interest matters referred to it by the Manager on behalf of

4 the Funds. The IRC is responsible for overseeing the Manager s decisions in situations where the Manager is faced with any present or perceived conflicts of interest, all in accordance with NI The IRC currently consists of five members, all of whom are independent of the Manager. The IRC prepares and files a report to securityholders each fiscal year that describes the IRC and its activities for securityholders which is available on the Manager s website at The compensation and other reasonable expenses of the IRC will be paid out of the assets of the Funds as well as out of the assets of the other investment funds for which the IRC may act as the independent review committee. The main components of compensation are an annual retainer and a fee for each committee meeting attended. The chair of the IRC is entitled to an additional fee. The Fund received the following standing instructions from the IRC with respect to related party transactions: Paying brokerage commissions and spreads to related brokers for effecting security transactions on an agency and principal basis on behalf of the Fund (referred to as Related Brokerage Commissions ); Purchases or sales of securities of an issuer from or to another investment fund managed by the Manager (referred to as Inter-Fund Trades ); Investments in the securities of issuers for which a related underwriter acted as an underwriter during the distribution of such securities and the 60-day period following the completion of such distribution (referred to as Underwriting of Securities ); Executing foreign exchange transactions with Scotia Capital Inc. (a related broker) on behalf of the Fund; Purchases of securities of a related issuer; and Entering into OTC derivatives on behalf of the Fund with The Bank of Nova Scotia (a related counterparty); The Manager is required to advise the IRC of any breach of a condition of the standing instructions. The standing instructions require, among other things, that the investment decision in respect to a related party transaction: (a) is made by the Manager free from any influence by an entity related to the Manager and without taking into account any consideration to any associate or affiliate of the Manager; (b) represents the business judgment of the Manager uninfluenced by considerations other than the best interests of the Fund; and (c) is made in compliance with the Manager s written policies and procedures. Transactions made by the Manager under the standing instructions are subsequently reviewed by the IRC to monitor compliance. 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 for the periods indicated. The information on the following tables is based on prescribed regulations and as a result, is not expected to add down due to the increase (decrease) in net assets from operations being based on average units outstanding during the period and all other numbers being based on actual units outstanding at the relevant point in time. Footnotes for the tables are found at the end of the Financial Highlights section. Following is a description of all the available series of the Fund. Series A units are available to all investors. Advisor Series units are available through authorized dealers and brokers, including ScotiaMcLeod. Series D units are generally only available to investors who have accounts with discount brokers, including Scotia itrade. Series F units are generally available only to investors who have fee-based accounts with authorized brokers or dealers, including ScotiaMcLeod. Presented below are the key financial information for any applicable Series that had units outstanding as of, The Fund s Net Assets per Unit (1) Series A Units Net Assets, beginning of period (1) $ Increase (decrease) from operations: Total revenue $ Total expenses $ (0.09) (0.17) (0.15) (0.15) (0.16) (0.15) Realized gains (losses) for the period $ (0.09) 0.01 Unrealized gains (losses) for the period $ (0.12) (0.12) 0.67 Total increase (decrease) from operations (2) $ (0.00) 0.91 Distributions: From net investment income (excluding dividends) $ (0.02) (0.01) (0.04) (0.05) (0.07) From dividends $ (0.06) (0.16) (0.18) (0.17) (0.16) (0.16) From capital gains $ (0.21) Return of capital $ (0.10) (0.17) (0.15) (0.15) (0.13) Total distributions (3) $ (0.18) (0.37) (0.36) (0.36) (0.36) (0.36) Net Assets, end of period (1) $ The Fund relied on IRC standing instructions regarding related party transactions during the period.

5 Advisor Series Units Net Assets, beginning of period (1) $ Increase (decrease) from operations: Total revenue $ Total expenses $ (0.13) (0.21) (0.20) (0.20) (0.20) (0.20) Realized gains (losses) for the period $ (0.09) 0.01 Unrealized gains (losses) for the period $ (0.06) (0.18) 0.70 Total increase (decrease) from operations (2) $ (0.10) 0.89 Distributions: From net investment income (excluding dividends) $ (0.02) (0.01) (0.04) (0.05) (0.07) From dividends $ (0.03) (0.15) (0.18) (0.17) (0.16) (0.16) From capital gains $ (0.21) Return of capital $ (0.13) (0.17) (0.15) (0.15) (0.13) Total distributions (3) $ (0.18) (0.36) (0.36) (0.36) (0.36) (0.36) Net Assets, end of period (1) $ Series D Units 2015* Net Assets, beginning of period (1) $ Increase (decrease) from operations: Total revenue $ 0.14 Total expenses $ (0.05) Realized gains (losses) for the period $ 0.27 Unrealized gains (losses) for the period $ (0.57) Total increase (decrease) from operations (2) $ (0.21) Distributions: From net investment income (excluding dividends) $ (0.02) From dividends $ (0.04) Fromcapitalgains $ Return of capital $ (0.09) Total distributions (3) $ (0.15) Net Assets, end of period (1) $ 9.67 * The start date of Series D was February 12. Series F Units Net Assets, beginning of period (1) $ Increase (decrease) from operations: Total revenue $ Total expenses $ (0.06) (0.11) (0.11) (0.11) (0.12) (0.11) Realized gains (losses) for the period $ (0.09) 0.01 Unrealized gains (losses) for the period $ (0.23) (0.07) 0.87 Total increase (decrease) from operations (2) $ Distributions: From net investment income (excluding dividends) $ (0.03) (0.01) (0.04) (0.05) (0.07) From dividends $ (0.08) (0.15) (0.18) (0.17) (0.16) (0.16) From capital gains $ (0.21) Return of capital $ (0.07) (0.17) (0.15) (0.15) (0.13) Total distributions (3) $ (0.18) (0.36) (0.36) (0.36) (0.36) (0.36) Net Assets, end of period (1) $ (1) This information is derived from the Fund s semi-annual and audited annual financial statements. The net assets per unit presented in the financial statements may differ from the net asset value calculated for Fund pricing purposes. This difference is due to the requirements of the CPA Handbook ( IFRS ) and may result in a different valuation of securities held by the Fund in accordance with IFRS than the market value used to determine net asset value of the Fund for the purchase, switch and redemption of the fund s units ( Net Asset Value ). The Net Asset Value per unit at the end of the period is disclosed in Ratios and Supplemental Data. Information related to 2012 and prior was prepared in accordance with Part V of the CPA Handbook (Pre-Changeover Accounting Standards) and subsequent to 2012 was prepared in accordance with Part I of the CPA Handbook (International Financial Reporting Standards). (2) Net assets 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. (3) Distributions were paid in cash/reinvested in additional units of the fund, or both. Ratios and Supplemental Data Series A Units Total net asset value (000 s) (1) $ 2,816,146 2,777,542 2,633,280 2,387,354 2,041,352 1,557,766 Number of units outstanding (000 s) (1) 253, , , , , ,867 Management expense ratio (2) % Management expense ratio before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $

6 Advisor Series Units Total net asset value (000 s) (1) $ 3,939 5,033 9,031 4,036 7,652 8,347 Number of units outstanding (000 s) (1) Management expense ratio (2) % Management expense ratio before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ Series D Units Total net asset value (000 s) (1) $ 2 Number of units outstanding (000 s) (1) 0 Management expense ratio (2) % 1.04 Management expense ratio before waivers or absorptions (2) % 1.04 Trading expense ratio (3) % 0.08 Portfolio turnover rate (4) % Net asset value per unit $ 9.67 Series F Units Total net asset value (000 s) (1) $ 1,550 1, Number of units outstanding (000 s) (1) Management expense ratio (2) % Management expense ratio before waivers or absorptions (2) % Trading expense ratio (3) % Portfolio turnover rate (4) % Net asset value per unit $ (1) This information is provided as at the period end of the years shown. (2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) of each series of the Fund and the underlying funds, where applicable, 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 the daily average net asset value and underlying funds, if applicable, during the period. (4) 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 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. Management Fees The management fee is an annualized rate based on the net asset value of each Series of the Fund, accrued daily and paid monthly. The management fee covers the cost of managing the Fund, arranging for investment analysis, recommendations and investment decisions for the Fund, arranging for distribution of the Funds, marketing and promotion of the Fund and providing and arranging for other services as required. The management fees for Series I, if applicable, are negotiated and paid directly by the investor, not by the Fund. The breakdown of services received in consideration of management fees for each series, as a percentage of the management fees, are as follows: Maximum Management Fees (%) Dealer Compensation (%) Other* (%) Series A Advisor Series Series D Series F * Includes all cost related to investment advisory services, marketing services, general administration and other. Past Performance The following show the past performance for all series held and will not necessarily indicate how the Fund will perform in the future. The information shown assumes that all 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 charts show the performance of all series held and illustrates how the Fund s performance, has varied from year to year. The charts show in percentage terms, how much an investment held on the first day of each calendar year would have increased or decreased by the last day of each calendar year for that Series. % Series A Units % % 9.59% 7.73% 5.69% 5.10% % 2.36% 0.26% % Jan. 1 Jun. 30 % Advisor Series Units % % 9.03% 7.18% % 2.09% % Jan. 1 Jun. 30

7 % Series F Units % % 10.10% 8.29% 5.57% % 0.75% % % Jan. 1 Jun. 30 Summary of Investment Portfolio The Summary of Investment Portfolio many change due to ongoing portfolio transactions. A quarterly portfolio update is available to the investor at no cost by calling , or by visiting 60 days after quarter ends, except for, which is the calendar year end, when they are available after 90 days. By Industry/Asset Type (1) % of net asset value (2) Consumer Discretionary 6.5 Consumer Staples 3.1 Energy 7.3 Financials 14.1 Fixed Income Funds 37.8 Health Care 2.1 Industrials 4.2 Information Technology 1.2 Materials 1.2 Telecommunication Services 5.3 Utilities 3.2 Top 25 Holdings Issuer % of net asset value (2) Scotia Canadian Income Fund Series I 21.4 Scotia Private Canadian Corporate Bond Pool Series I 16.3 Cash and Cash Equivalents 11.6 Royal Bank of Canada 3.1 Wells Fargo & Company 2.5 Brookfield Infrastructure Partners LP 2.1 Loblaw Companies Limited 2.0 Enbridge Inc. 1.9 Honeywell International Inc. 1.9 TELUS Corporation 1.7 Walt Disney Company, The 1.6 Comcast Corporation, Class A 1.6 Pembina Pipeline Corporation 1.5 NIKE, Inc., Class B 1.5 BCE Inc. 1.5 Verizon Communications Inc. 1.4 Union Pacific Corporation 1.4 TransCanada Corporation 1.4 Home Depot Inc., The 1.3 Agrium Inc. 1.2 Bank of Nova Scotia, The 1.0 Canadian Imperial Bank of Commerce 1.0 Great-West Lifeco Inc. 1.0 Canadian National Railway Company 0.9 Fortis, Inc. 0.9 (1) Excludes other net assets (liabilities) and derivatives. (2) Based on Pricing NAV, therefore, weighting presented in the Schedule of Investment will differ for the ones disclosed above.

8 Registered trademarks of The Bank of Nova Scotia, used under licence.