Financial Statements December 31, 2015
March 24, 2016 Independent Auditor s Report To the Unitholders and Trustee of CC&L High Yield Bond Fund (the Fund) We have audited the accompanying financial statements of the Fund, which comprise the statements of financial position as at and the statements of comprehensive income, changes in net assets attributable to holders of redeemable units and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP 18 York Street, Toronto, Ontario, Canada M5J 0B2 T: +1 416 863 1133, F: +1 416 365 8215 PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as at and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants
Statements of Financial Position As at December 31 2015 2014 Assets Current assets Cash $ 136,898 $ - Short-term investments 3,895,372 1,797,298 Financial assets at fair value through profit or loss 107,903,227 63,487,550 Unrealized appreciation on forward contracts 3,827 233,462 Subscriptions receivable - 200 Due from broker 240,093 - Interest receivable 1,776,326 803,384 113,955,743 66,321,894 Liabilities Current liabilities Bank indebtedness - 37,113 Management fees payable 1,902 4,472 Accrued expenses 27,801 19,355 Distributions payable - 3 Unrealized depreciation on forward contracts 920,051 1,966 Redemptions payable 101,537-1,051,291 62,909 Net Assets attributable to holders of redeemable units $ 112,904,452 $ 66,258,985 Net Assets attributable to holders of redeemable units for each class Class A $ 8,673,964 $ 11,402,159 Class F $ 3,527,600 $ 3,951,791 Class I $ 100,702,888 $ 50,905,035 Redeemable units outstanding (note 7) Class A 980,744 1,151,334 Class F 401,427 405,116 Class I 10,764,191 4,938,743 Net Assets attributable to holders of redeemable units per class Class A $ 8.84 $ 9.90 Class F $ 8.79 $ 9.75 Class I $ 9.36 $ 10.31 Approved by the Manager Director Director The accompanying notes are an integral part of these financial statements.
Statements of Comprehensive Income For the years ended December 31 2015 2014 Income Other income $ 1,178 $ - Net foreign exchange gain (loss) on cash (275,068) 21,443 Net gain (loss) on investments Dividends - 15,925 Interest for distribution purposes 6,721,713 4,135,906 Income from income trusts 8,604 - Net realized gain (loss) on investments 1,326,241 2,822,377 Net realized gain (loss) on forward contracts (11,840,250) (4,606,796) Net change in unrealized appreciation (depreciation) on investments 22,295 2,330,833 Net change in unrealized appreciation (depreciation) on forward contracts (1,147,720) (78,840) Total net gain (loss) on investments (4,909,117) 4,619,405 Total income (loss), net (5,183,007) 4,640,848 Expenses (note 9) Management fees 245,614 314,559 Audit fees 15,925 15,876 Custodial fees 67,277 63,191 Legal fees 3,314 8,399 Filing fees 19,434 26,894 Fundserv fees 1,177 2,727 Independent Review Committee fees 5,902 7,045 Interest expense 2,349 2,127 Securityholder reporting fees 15,321 17,368 Total operating expenses 376,313 458,186 Withholding taxes (16,753) (11,236) Increase (decrease) in Net Assets attributable to holders of redeemable units from operations $ (5,576,073) $ 4,171,426 Increase (decrease) in Net Assets attributable to holders of redeemable units for each class Class A Class F Class I $ (538,877) $ 629,443 $ (209,889) $ 227,602 $ (4,827,307) $ 3,314,381 Weighted average units 1 Class A 1,095,579 1,388,105 Class F 438,371 405,201 Class I 8,781,474 4,926,830 Increase (decrease) in Net Assets attributable to holders of redeemable units per unit Class A Class F Class I $ (0.49) $ 0.45 $ (0.48) $ 0.56 $ (0.55) $ 0.67 1 based on weighted average number of units outstanding during the year. The accompanying notes are an integral part of these financial statements.
Statements of Changes in Net Assets Attributable to Holders of Redeemable Units For the years ended December 31 Class A Class F Class I Total 2015 2015 2015 2015 Net Assets attributable to holders of redeemable units - Beginning of year $ 11,402,159 $ 3,951,791 $ 50,905,035 $ 66,258,985 Increase (decrease) in Net Assets attributable to holders of redeemable units from operations (538,877) (209,889) (4,827,307) (5,576,073) Redeemable unit transactions Proceeds from redeemable units issued 647,894 1,857,812 63,308,133 65,813,839 Reinvestments of distributions to holders of redeemable units 432,649 119,757 5,549,309 6,101,715 Redemption of redeemable units (2,709,299) (1,961,417) (8,679,814) (13,350,530) Net increase (decrease) from redeemable unit transactions (1,628,756) 16,152 60,177,628 58,565,024 Distributions to holders of redeemable units From net investment income (560,562) (230,454) (5,552,468) (6,343,484) Total distributions to holders of redeemable units (560,562) (230,454) (5,552,468) (6,343,484) Increase (decrease) in Net Assets attributable to holders of redeemable units during the year (2,728,195) (424,191) 49,797,853 46,645,467 Net Assets attributable to holders of redeemable units - End of year $ 8,673,964 $ 3,527,600 $ 100,702,888 $ 112,904,452 Class A Class F Class I Total 2014 2014 2014 2014 Net Assets attributable to holders of redeemable units - Beginning of year $ 14,972,702 $ 4,299,727 $ 61,618,363 $ 80,890,792 Increase (decrease) in Net Assets attributable to holders of redeemable units from operations 629,443 227,602 3,314,381 4,171,426 Redeemable unit transactions Proceeds from redeemable units issued 1,445,064 1,152,541 9,215,297 11,812,902 Reinvestments of distributions to holders of redeemable units 515,731 75,742 2,739,815 3,331,288 Redemption of redeemable units (5,457,585) (1,588,482) (23,243,006) (30,289,073) Net increase (decrease) from redeemable unit transactions (3,496,790) (360,199) (11,287,894) (15,144,883) Distributions to holders of redeemable units From net investment income (703,196) (215,339) (2,739,815) (3,658,350) Total distributions to holders of redeemable units (703,196) (215,339) (2,739,815) (3,658,350) Increase (decrease) in Net Assets attributable to holders of redeemable units during the year (3,570,543) (347,936) (10,713,328) (14,631,807) Net Assets attributable to holders of redeemable units - End of year $ 11,402,159 $ 3,951,791 $ 50,905,035 $ 66,258,985 The accompanying notes are an integral part of these financial statements.
Statements of Cash Flows For the years ended December 31 2015 2014 Cash flows from (used in) Operating activities Increase (decrease) in Net Assets attributable to holders of redeemable units from operations $ (5,576,073) $ 4,171,426 Adjustments to reconcile to operating cash flows: Net foreign exchange (gain) loss on cash 275,068 (21,443) Net realized (gain) loss on investments (1,326,241) (2,822,377) Net change in unrealized (appreciation) depreciation on investments (22,295) (2,330,833) Net change in unrealized (appreciation) depreciation on forward currency contracts 1,147,720 78,840 Proceeds from investments sold 134,130,825 125,757,752 Purchase of investments (179,536,133) (105,883,036) (Increase) decrease in interest receivable (972,942) 48,531 Increase (decrease) in management fees payable (2,570) (15,817) Increase (decrease) in accrued expenses 8,446 (10,331) Net cash flows from (used in) operating activities (51,874,195) 18,972,712 Cash flows from (used in) Financing activities Proceeds from redeemable units issued 65,814,039 11,860,902 Distributions paid to holders of redeemable units, net of reinvestments (241,772) (327,512) Redemption of redeemable units (13,248,993) (30,536,816) Net cash flows from (used in) financing activities 52,323,274 (19,003,426) Increase (decrease) in cash (bank indebtedness) Net foreign exchange gain (loss) on cash (275,068) 21,443 Net increase (decrease) in cash 449,079 (30,714) Cash (bank indebtedness), beginning of year (37,113) (27,842) Cash (Bank indebtedness) end of year $ 136,898 $ (37,113) Dividends received, net of withholding taxes* $ - $ 4,689 Interest received* 5,732,018 4,184,437 Interest paid* 2,349 2,127 *included in operating activities The accompanying notes are an integral part of these financial statements.
Schedule of Investment Portfolio As at December 31, 2015 Coupon Rate (%) Maturity Date Number of Shares or Par Value Average Cost $ Fair Value $ Percentage of Net Assets % Short-Term Investments Bankers' Acceptances (December 31, 2014: 2.71%) Bank of Montreal 0.773% 20-Jan-16 200,000 199,848 199,848 Canadian Imperial Bank of Commerce 0.754% 08-Jan-16 900,000 899,037 899,037 Canadian Imperial Bank of Commerce 0.752% 19-Jan-16 250,000 249,708 249,708 National Bank of Canada 0.765% 26-Jan-16 400,000 399,671 399,671 Royal Bank of Canada 0.753% 02-Feb-16 1,900,000 1,897,423 1,897,423 Toronto-Dominion Bank 0.745% 11-Jan-16 250,000 249,685 249,685 Total Short-Term Investments 3,895,372 3,895,372 3.45 Bonds Canada - Canadian Dollar (December 31, 2014: 14.31%) Air Canada 7.625% 01-Oct-19 1,600,000 1,726,000 1,677,333 AutoCanada Inc. 5.625% 25-May-21 2,615,000 2,610,000 2,557,252 Brookfield Residential Properties Inc. 6.125% 15-May-23 2,810,000 2,810,000 2,669,500 DirectCash Payments Inc. 8.125% 08-Aug-19 4,225,000 4,347,131 4,246,125 GFL Environmental Corp. 7.500% 18-Jun-18 500,000 500,000 497,188 Parkland Fuel Corp. 5.500% 28-May-21 2,900,000 2,922,500 2,881,875 Parkland Fuel Corp. 6.000% 21-Nov-22 2,040,000 2,047,500 2,042,975 Rogers Communications Inc. 4.000% 13-Mar-24 1,000,000 1,057,495 1,048,720 Sirius XM Canada Holdinigs Inc. 5.625% 23-Apr-21 515,000 520,253 507,918 Telus Corp. 3.350% 01-Apr-24 600,000 615,362 602,729 TransAlta Corp. 5.000% 25-Nov-20 2,850,000 2,681,050 2,608,559 Videotron Ltd. 5.625% 15-Jun-25 3,405,000 3,513,744 3,406,451 Wajax Corp. 6.125% 23-Oct-20 360,000 363,417 350,850 25,714,452 25,097,475 22.23 Canada - US Dollar (December 31, 2014: 11.40%) ATS Automation Tooling Systems Inc. 6.500% 15-Jun-23 1,850,000 2,275,691 2,608,385 Brookfield Residential Properties Inc. 6.125% 01-Jul-22 1,645,000 1,908,085 2,125,116 GFL Environmental Inc. 7.875% 01-Apr-20 2,640,000 3,367,363 3,648,891 HudBay Minerals Inc. 9.500% 01-Oct-20 3,895,000 5,199,830 3,990,280 Lundin Mining Corp. 7.500% 01-Nov-20 3,150,000 3,973,047 4,113,128 Norbord Inc. 5.375% 01-Dec-20 3,750,000 4,294,856 5,235,175 21,018,872 21,720,975 19.24 Cayman Islands - US Dollar (December 31, 2014: 4.39%) United States of America - US Dollar (December 31, 2014: 65.72%) Avis Budget Car Rental LLC 5.500% 01-Apr-23 3,830,000 4,480,752 5,353,509 Bank of America Corp. 8.125% 15-May-18 2,945,000 3,697,090 4,167,607 Citigroup Inc. 6.300% 15-May-24 2,230,000 2,627,315 3,024,125 Citigroup Inc. 6.125% 31-Dec-49 1,900,000 2,249,294 2,695,377 Clear Channel Worldwide Holdings Inc. 6.500% 15-Nov-22 2,185,000 2,703,562 2,970,688 Constellation Brands Inc. 4.250% 01-May-23 3,256,000 4,285,849 4,534,221 Frontier Communications Corp. 10.500% 15-Sep-22 3,822,000 5,087,829 5,302,508 General Electric Co. 4.200% 31-Dec-49 4,967,214 5,209,209 6,874,088 Global Partners LP 6.250% 15-Jul-22 4,200,000 5,197,092 4,696,551 Great-West Life & Annuity Insurance Capital LP II 7.153% 16-May-46 1,920,000 2,172,648 2,700,413 Men's Wearhouse Inc. 7.000% 01-Jul-22 4,035,000 4,941,704 4,035,617 Morgan Stanley 5.450% 31-Dec-49 4,245,000 4,992,964 5,764,058 United Rentals North America Inc. 6.125% 15-Jun-23 3,657,000 4,297,519 5,219,641 The accompanying notes are an integral part of these financial statements.
Schedule of Investment Portfolio As at December 31, 2015 Coupon Rate (%) Maturity Date Number of Shares or Par Value Average Cost $ Fair Value $ Percentage of Net Assets % Westmoreland Coal Co. 8.750% 01-Jan-22 3,125,000 3,661,377 2,691,383 55,604,204 60,029,786 53.17 Total Bonds 102,337,528 106,848,236 94.64 Common Stocks Canada - Canadian Dollar (December 31, 2014: 0.00%) BMO Laddered Preferred Share Index ETF 99,340 1,051,044 1,054,991 0.93 Canada - US Dollar (December 31, 2014: 0.00%) Banro Corp., Warrants 02-Mar-17 10,000 328 - - Total Common Stocks 1,051,372 1,054,991 0.93 Total Investments 107,284,272 111,798,599 99.02 Total unrealized appreciation on forward contracts (Schedule 1) 3,827 - Total unrealized depreciation on forward contracts (Schedule 1) (920,051) (0.81) Other Assets Less Liabilities 2,022,077 1.79 Net Assets Attributable to Holders of Redeemable Units 112,904,452 100.00 The accompanying notes are an integral part of these financial statements.
Foreign Currency Forward Contracts (Schedule 1) As at December 31, 2015 Description * Currency Code Amount Sold Currency Code Amount Bought Maturity Date Unrealized Appreciation/ (Depreciation) $ Foreign Currency Forward Contracts USD (285,000) CAD 397,689 18-Mar-16 1,873 Foreign Currency Forward Contracts USD (309,000) CAD 431,101 18-Mar-16 1,954 3,827 Foreign Currency Forward Contracts USD (58,255,000) CAD 79,990,814 18-Mar-16 (913,273) Foreign Currency Forward Contracts USD (452,000) CAD 622,607 18-Mar-16 (5,129) Foreign Currency Forward Contracts USD (192,000) CAD 265,804 18-Mar-16 (846) Foreign Currency Forward Contracts USD (181,000) CAD 250,570 18-Mar-16 (803) (920,051) (916,224) * All counterparties have a rating of AAA. The accompanying notes are an integral part of these financial statements.
1 General information The CC&L High Yield Bond Fund (the Fund ) is an open-ended mutual fund trust established under the laws of Ontario and is governed by the Declaration of Trust dated May 1, 2012 (the Declaration of Trust), as amended from time to time. The Fund commenced operations on May 1, 2012. The address of the Fund s registered office is 300 181 University Avenue, Toronto, Ontario, Canada, M5H 3M7. The investment activities of the Fund are managed by Connor, Clark & Lunn Funds Inc. (the Manager ). The Trustee of the Fund is RBC Investor Services Trust. The investment objective of the Fund is to construct a diversified portfolio of primarily high-yield bonds or other income producing securities issued primarily by foreign issuers with an opportunity for capital appreciation over the longer term. The financial statements were authorized for issue by the Manager on March 24, 2016. 2 Basis of presentation (a) Statement of compliance: These annual financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). (b) Functional and presentational currency: The Fund s subscriptions, redemptions and certain operating activities are denominated in Canadian dollars, which is also its functional and presentation currency. 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Financial instruments: The Fund s investments in debt and equity securities are designated at fair value through profit or loss ( FVTPL ) at inception. The Fund s derivatives and its securities sold short, where applicable, are categorized as held for trading. As a result of such designation and categorization, the Fund s investments and derivatives are measured at FVTPL. The Fund s obligation for Net Assets attributable to holders of redeemable units is presented at the redemption amount. All other financial assets and liabilities are initially recognized at fair value and subsequently measured for at amortized cost. Under this method, financial assets and liabilities reflect the amounts required to be received or paid, discounted when appropriate, at the financial instrument s effective interest rate. The fair values of the Fund s financial assets and liabilities that are not carried at FVTPL approximate their carrying amounts due to their short-term nature. The Fund s accounting policies for measuring the fair value of its investments and derivatives are identical to those used in measuring its published Net Asset Value (NAV) for transactions with unitholders. The NAV per unit is determined by dividing the aggregate market value of the net assets of the Fund by the total number of units of the Fund outstanding before giving effect to redemptions or subscriptions to units on that day. As at, there were no differences between the Fund s NAV per unit and its net assets per unit calculated in accordance with IFRS.
The interest for distribution purposes shown on the Statements of Comprehensive Income represents the coupon interest received by the Fund accounted for on an accrual basis. The Fund does not amortize premiums paid or discounts received on the purchase of fixed income securities except for zero coupon bonds which are amortized on a straight line basis. Dividends are recognized as income on the ex-dividend date. Distributions from income trusts and pooled funds are recognized when the Fund has earned the right to receive payment of the distributions. The cost of investments is determined using the average cost method. Financial assets and liabilities are offset and the net amount reported in the Statements of Financial Position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. In the normal course of business, the Fund may enter into various master netting agreements or similar agreements that do not meet the criteria for offsetting in the Statements of Financial Position but still allow for the related amounts to be set off in certain circumstances, such as bankruptcy or termination of the contracts. In all other situations, they are presented on a gross basis. (b) Fair value measurement: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and marketable securities) is based on quoted market prices at the close of trading on the reporting date. The Fund uses the last traded market price for both financial assets and financial liabilities where the last traded price falls within that day s bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, the Manager determines the point within the bid-ask spread that is most representative of fair value based on the specific facts and circumstances. The Fund s policy is to recognize transfers into and out of the fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer. The fair value of financial assets and liabilities that are not traded in an active market, including over-thecounter derivatives, is determined using valuation techniques. The Fund uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques include the use of comparable recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other models commonly used by market participants and which make the maximum use of observable inputs. (c) Redeemable units of the Fund: The Fund s redeemable units are classified as financial liabilities and presented at the redemption amount. Investors have the right to require redemption, subject to available liquidity, for cash at a unit price based on the Fund s valuation policies at each redemption date. Unitholders are entitled to distributions when declared. (d) Increase (decrease) in net assets attributable to holders of redeemable units per class unit: The increase (decrease) in net assets attributable to holders of redeemable units per unit is calculated by dividing the increase (decrease) in net assets attributable to holders of redeemable units by the weighted average number of units outstanding during the period. (e) Cash: (f) Cash is comprised of deposits with financial institutions. Short-term investments: Short-term investments consist of debt investments with maturities of less than one year on acquisition. (g) Foreign exchange: Foreign denominated investments and other foreign denominated assets and liabilities are translated into Canadian dollars using the exchange rates prevailing on each valuation date. Purchases and sales of investments, as well as income and expense transactions denominated in foreign currencies, are translated using
exchange rates prevailing on the date of the transaction. Foreign currency gains and losses on foreign denominated assets and liabilities other than investments are presented as Net foreign exchange gain (loss) in the Statements of Comprehensive Income. Foreign currency gains and losses on investments are included in the realized gain (loss) on investments and change in unrealized appreciation (depreciation) on investments. (h) Income and expense allocation: (i) (j) Realized gains/losses, changes in unrealized appreciation (depreciation) on investments, income and expenses that are common to the Fund as a whole are allocated daily to each class based on the proportionate share of the net asset value of the class. The proportionate share of each class is determined by adding the current day's net unitholder subscriptions of the class to the prior day's net asset value of the class. Any income or expense amounts that are unique to a particular class (for example, management fees) are accounted for separately in that particular class so as not to affect the net asset value of the other classes. Income taxes: The Fund qualifies as a unit trust under the Income Tax Act (Canada). All of the Fund s net income for tax purposes and sufficient net capital gains realized in any period are required to be distributed to unitholders such that no income tax is payable by the Fund. As a result, the Fund does not record income taxes. Since the Fund does not record income taxes, the tax benefit of capital and non-capital losses has not been reflected in the Statements of Financial Position as a deferred income tax asset. Transaction costs: Transaction costs such as brokerage commissions incurred in the purchase and sale of securities are expensed as incurred and are recognized in the Statements of Comprehensive Income. (k) New standards and interpretations not yet adopted: The final version of IFRS 9, Financial Instruments, was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of a Fund s own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however is available for early adoption. In addition, the Fund s own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The Fund is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 4 Critical accounting estimates and judgments The preparation of financial statements in conformity with IFRS requires the Manager to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. In determining whether the Fund exhibits instances of control or significant influence, IFRS 10 Consolidated Financial Statements provides an exception to any financial statement consolidation requirements for entities that meet the definition of an investment entity. Amongst other factors, the Fund meets the definition of investment entity as it obtains funds from one or more investors for the purpose of providing those investor(s) with professional investment management services and commit to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation,
investment income or both. The Fund measures and evaluates the performance of substantially all of its investments on a fair value basis. The Fund holds financial instruments that are not quoted in active markets, including derivatives. Fair values of such instruments are determined using valuation techniques and may be determined using reputable pricing sources (such as pricing agencies) or indicative prices from market makers. Broker quotes as obtained from the pricing sources may be indicative and not executable or binding. Where no market data is available, the Fund may value positions using its own models, which are usually based on valuation methods and techniques generally recognized as standard within the industry. The models used to determine fair values are validated and periodically reviewed by experienced personnel of the Manger, independent of the party that created them. The models used for private equity securities are based mainly on earnings multiples adjusted for a lack of marketability as appropriate. Models use observable data, to the extent practicable. However, areas such as credit risk (both own and counterparty), volatilities and correlations require the Manager to make estimates. Changes in assumptions about these factors could affect the reported fair values of financial instruments. The Fund considers observable data to be market data that is readily available, regularly distributed and updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. Refer to Note 5 for further information about the fair value measurement of the Fund s financial instruments. In classifying and measuring financial instruments held by the Fund, the Manager is required to make significant judgments about whether or not the business of the Fund is to invest on a total return basis for the purposes of applying the fair value option for financial assets under IAS 39, Financial Instruments Recognition and Measurement (IAS 39). The most significant judgments made include the determination that certain investments are held-for-trading and that the fair value option can be applied to those which are not. 5 Fair value of financial instruments (a) Fair value hierarchy: The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fund classifies fair value measurements within a hierarchy which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are: Level 1: Level 2: Level 3: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Inputs other than quoted prices included within Level 1 that are observable either directly or indirectly; and Inputs that are unobservable. The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Fund determines fair values using other valuation techniques. Fair value measurement of derivatives and securities not quoted in an active market For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The Fund uses widely recognized valuation models for determining the fair value of common and more simple financial instruments such as future, option, forward and swap contracts that use only observable market data and require little management judgment and estimation. Observable prices and model inputs are usually
available in the market for listed debt and equity securities, and exchange-traded derivatives, such as futures and options, and OTC derivatives such as forward contracts and swaps. The availability of observable market prices and model inputs reduces the need for management judgment and estimation and reduces the uncertainty associated with the determination of fair values. If inputs of different levels are used to measure an asset s or liability s fair value, the classification within the hierarchy is based on the lowest level input that is significant to the fair value measurement. Classification and measurement of investments and application of the fair value option The tables below illustrate the classification of the Fund s financial instruments measured at fair value at the reporting date. The amounts are based on the values recognized in the Statements of Financial Position. As at December 31, 2015: Assets at Fair Value Level 1 Level 2 Level 3 Total Short-term investments $ - $ 3,895,372 $ - $ 3,895,372 Canadian bonds - 46,818,450-46,818,450 Foreign bonds - 60,029,786-60,029,786 Canadian equities 1,054,991 - - 1,054,991 Forwards - 3,827-3,827 $ 1,054,991 $ 110,747,435 $ - $ 111,802,426 Liabilities at Fair Value Level 1 Level 2 Level 3 Total Forwards $ - $ 920,051 $ - $ 920,051 $ - $ 920,051 $ - $ 920,051 As at December 31, 2014: Assets at Fair Value Level 1 Level 2 Level 3 Total Short-term investments $ - $ 1,797,298 $ - $ 1,797,298 Canadian bonds - 17,030,840-17,030,840 Foreign bonds - 46,456,710-46,456,710 Forwards - 233,462-233,462 $ - $ 65,518,310 $ - $ 65,518,310 Liabilities at Fair Value Level 1 Level 2 Level 3 Total Forwards $ - $ 1,966 $ - $ 1,966 $ - $ 1,966 $ - $ 1,966 There were no transfers of financial assets between Level 1, Level 2 and Level 3 for the years ended December 31, 2015 and 2014. All fair value measurements above are recurring. Equity positions (including income trusts, exchange-traded funds and limited partnerships) are classified as Level 1 when the security is actively traded and a reliable price is observable. If equities do not trade frequently and observable prices are not available, fair value is determined using observable market data (e.g. transactions for similar securities of the same issuer) and the fair value is classified as Level 2, unless the determination of fair value requires significant unobservable data, in which case the measurement is classified as Level 3. Bonds include primarily government and corporate bonds, which are valued using models with inputs including interest rate curves, credit spreads and volatilities. The inputs that are significant to valuation are generally observable and therefore the Fund s bonds have generally been classified as Level 2. Short-term investments are classified as Level 2, since they are stated at amortized cost, which approximates fair value. Derivative assets and liabilities consist of foreign currency forward contracts which are valued based primarily on the contract notional amount, the difference between the contract rate and the forward market rate for the
same currency, interest rates and credit spreads. Contracts for which counterparty credit spreads are observable and reliable, or for which the credit-related inputs are determined not to be significant to fair value are classified as Level 2. (b) Financial instruments measured at amortized cost: The carrying values of balances due from broker, subscriptions receivable, interest receivable, bank indebtedness, distributions payable, management fees payable, redemptions payable, daily variation margin (liability) and accrued expenses approximate their fair value given their short-term nature. 6 Financial instruments by category The following table presents the net gains (losses) on financial instruments at FVTPL by category for the years ended : Category Net gains (losses) 2015 2014 Financial Assets and Liabilities at FVTPL: Held-for-Trading (12,987,970) (4,685,636) Designated at inception 8,078,853 9,305,041 Total (4,909,117) 4,619,405 7 Redeemable units of the Fund The Fund has authorized an unlimited number of series of redeemable units and may issue an unlimited number of redeemable units of each series. All issued redeemable units are fully paid and have been recorded in the official listing of unitholders maintained by the Fund's trustee RBC Investor Services Trust. The Fund redeemable units are sold, and are redeemable at the holder s option, in accordance with the provisions of the declaration of trust at the prevailing net asset value per unit. The Fund has no restrictions or specific capital requirements on the subscription and redemption of units. The relevant movements are shown on the Statements of Changes in Net Assets. In accordance with the objectives and risk management policies outlined in Note 11, the Fund endeavours to invest subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions. Liquidity is supported by the disposal of marketable securities when necessary. The Fund's redeemable units are classified as financial liabilities on the Statements of Financial Position as the fund has multiple series of units and holders of redeemable units have the right to receive distributions in cash such that the ongoing redemption feature is not the only contractual obligation related to the units. The Fund has three classes of units available for issue, namely Class A, Class F and Class I. Class A units are available to all investors who purchase through dealers and who invest the minimum amount. Class F units are available to investors who participate in fee based programs through their dealer. Class I units are available to institutional and other comparable investors as the Manager may determine from time to time who invest $1 million or such lesser amount as the Manager may agree.
For the years ended, changes in outstanding redeemable units were as follows: Balance - Beginning Redeemable units Redeemable units Redeemable units Balance - 2015 of year issued reinvested redeemed End of year Class A 1,151,334 65,148 45,836 (281,574) 980,744 Class F 405,116 189,635 12,809 (206,133) 401,427 Class I 4,938,743 6,120,126 565,650 (860,328) 10,764,191 2014 Class A 1,496,632 142,385 50,970 (538,653) 1,151,334 Class F 440,644 115,473 7,634 (158,635) 405,116 Class I 6,029,570 873,723 262,096 (2,226,646) 4,938,743 8 Taxation of the Fund As at December 31, 2015 the Fund has unused capital losses of $15,416,822 (2014 - $4,591,591). There were $Nil (2014 - $Nil) unused non-capital losses available for tax purposes. The Fund currently incurs withholding taxes imposed by certain countries on investment income and capital gains. Such income and gains are recorded on a gross basis and the related withholding taxes are shown separately in the Statements of Comprehensive Income. 9 Related party transactions and other expenses Management fees Connor, Clark & Lunn Funds Inc. is the Manager of the Fund. The Manager is responsible for managing the investment portfolio, providing investment analysis and recommendations, making investment decisions, making brokerage arrangements relating to the purchase and sale of the investment portfolio and making arrangements with registered dealers for the purchase and sale of units of the Funds by investors. The Fund pays a management fee, which is accrued daily and paid monthly. The annual management fee rates, exclusive of taxes, are 1.85% for Series A and 0.85% for Series F. For Series I, fees are negotiable and charged outside the Portfolios, but may not exceed 1.85%. Independent Review Committee fees In accordance with National Instrument 81-107, the Fund has in place an Independent Review Committee (IRC). The IRC acts for all of the applicable CC&L funds. The Fund pays a share of expenses of the IRC, as the IRC provides oversight for conflict of interest matters for the Fund. The cost of the IRC is shared amongst the funds for which the IRC provides governance. Other expenses Unless otherwise noted in these Notes, the Fund is responsible for the payment of all expenses relating to its operation. Operating expenses include accounting, legal, audit, transfer agent, custodian, administrative and trustee fees, and investor servicing costs (such as semi-annual reports, annual reports and prospectus reports) and IRC fees.
10 Brokerage commissions and soft dollars The Manager may select brokers who charge commission in soft dollars if they determine in good faith that the commission is reasonable in relation to the order execution and research services utilized. Soft dollars represent a means of paying for products or services provided by brokerage firms (e.g., research reports) in exchange for direction transactions (e.g., trade execution) to the brokerage. Fund managers may use soft dollars allocated by brokerages to pay for a portion of the total commissions owed to the brokerage. The Fund paid $Nil (2014 - $Nil) in brokerage commissions and other transactions costs for portfolio transactions during the year. The soft dollars paid during the year were approximately $Nil (2014 - $Nil). 11 Financial risk management The Fund may be exposed to a variety of financial risks which are described below. The Fund s exposure to these risks is concentrated in its investment holdings including derivative instruments where applicable. In determining the risks that apply, and the extent to which they apply, reference should be made to the Schedule of Investment Portfolio and supporting schedules that group securities by asset class, market segment and geographic region (when securities are held in multiple currencies). The Manager aims to manage the potential effects of these financial risks on the Fund s performance by employing and overseeing professional and experienced portfolio managers that regularly monitor the Fund s holdings, market events and overall economic conditions. The portfolio managers use a variety of means to monitor the Fund including the measurement of specific financial and economic variables pertinent to the Fund. The Fund s risk management program is based on monitoring compliance against investment guidelines contained in the Statement of Investment Policy ( SIP ). The SIP is an internal document that outlines how the Fund is managed. The SIP states the investment objective of the Fund and the investment guidelines. The guidelines include permitted investments, acceptable levels of diversification and the permitted uses of derivatives. Securities are selected with the intent of maximizing returns within the risk parameters defined in the SIP. On a daily basis, these guidelines and other restrictions are monitored against the positions in the Fund using an electronic compliance system to confirm there are no violations and to ensure market movements do not leave the Fund s portfolio holdings outside specified ranges. Corrective action is taken when necessary and any guideline violations are reported to the Manager. Currency risk Currency risk is the risk that the value of monetary assets and liabilities denominated in currencies other than the Canadian dollar (the functional and presentational currency of the Fund) will fluctuate due to changes in foreign exchange rates. The Schedule of Investment Portfolio and supporting schedules identify all investments and derivative instruments denominated in foreign currencies. Bonds and short-term investments issued in foreign countries are exposed to that country s currency unless otherwise noted. Bonds, short-term investments and derivatives denominated in foreign currencies are exposed to currency risk as prices are converted to the Fund s functional currency in determining fair value. Foreign equities are not exposed to currency risk since they are considered non-monetary investments. Changes in the market value of these securities due to fluctuations in exchange rates are considered a component of other price risk (see below). The tables below summarize the Fund s exposure to foreign currencies as at in Canadian dollars. Amounts shown are based on the fair value of monetary assets (including cash and cash equivalents) as well as the underlying principal amounts of forward foreign currency contracts, as applicable. Other
financial assets such as interest and dividends receivable and amounts due to or from broker that are denominated in foreign currencies do not expose the Fund to significant currency risk. As at December 31, 2015: Monetary Derivative Net % of Currency Securities ($) Contracts ($) Exposure ($) Net Assets US Dollar 83,451,453 (82,893,153) 558,300 0.5 Total 83,451,453 (82,893,153) 558,300 0.5 As at December 31, 2014: Monetary Derivative Net % of Currency Securities ($) Contracts ($) Exposure ($) Net Assets US Dollar 55,599,532 (55,946,950) (347,418) (0.5) Total 55,599,532 (55,946,950) (347,418) (0.5) As at, had the Canadian dollar strengthened or weakened by 5% in relation to all foreign currencies, with all other factors remaining constant, net assets attributable to holders of redeemable units would have increase or decrease by approximately $28,000 (2014 - $17,000). In practice, actual results may differ from this sensitivity analysis and the difference could be material. Interest rate risk Interest rate risk is the risk that the fair value of the Fund s interest-bearing investments will fluctuate due to changes in prevailing interest rates. The longer the term to maturity, all else being equal, the more sensitive a security is to interest rate risk. Long-term bonds with maturity dates more than ten years in the future are considered the most sensitive, while discounted short-term investments that mature in less than one year are considered the least sensitive. The Fund s exposure to interest rate risk is concentrated in its investment in debt securities (such as bonds and short-term investments) and interest rate derivative instruments (if any). Other assets and liabilities are shortterm in nature and non-interest bearing. The tables below summarize the Fund s exposure to interest rate risk as at. Amounts shown are based on the carrying values of debt instruments and exclude cash, short-term investments and preferred shares. December 31, 2015: Total % of Debt Instruments Grouped by Maturity Date $ Net Assets Less than 1 year 3,895,372 3.5 1 to 3 years 4,664,795 4.1 3 to 5 years 25,870,342 22.9 Greater than 5 years 76,313,099 67.6 Total 110,743,608 98.1 December 31, 2014: Total % of Debt Instruments Grouped by Maturity Date $ Net Assets Less than 1 year 1,797,298 2.7 3 to 5 years 8,643,160 13.0 Greater than 5 years 54,844,390 82.8 Total 65,284,848 98.5
If prevailing interest rates had been raised or lowered by 1.0%, assuming a parallel shift in the yield curve, with all other factors remaining constant, net assets attributable to holders of redeemable units would have decreased or increased by approximately $4,810,000 (2014 - $3,361,000). In practice, actual results may differ from this sensitivity analysis and the difference could be material. Other price risk Other price risk is the risk that the fair value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from currency risk or interest rate risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in a market. Other assets and liabilities are monetary items that are short-term in nature and not subject to other price risk. As at, other price risk was negligible as the Fund had no significant exposure to investments subject to market fluctuations. Credit risk Credit risk is the risk that a loss could arise when a security issuer or counterparty to a financial instrument is unable to meet its financial obligations. To maximize the credit quality of its investments, the Fund s portfolio manager performs ongoing credit evaluations of debt issuers and monitors their credit ratings on a daily basis. The fair value of debt securities includes consideration of the credit worthiness of the debt issuer. Credit risk can also arise with counterparties on forward contracts. Credit risk exposure for over-the-counter derivative instruments is based on the Fund s unrealized gain of the contractual obligations with the counterparty as at the reporting date. The credit exposure of other assets is represented by their carrying amount. The tables below summarize the Fund s exposure to credit risk as at. Amounts shown are based on the carrying values of debt instruments and the unrealized gain on derivative instruments outstanding with counterparties. Credit ratings are determined from a composite of bond rating services such as Standard & Poor s, Moody s and Dominion Bond Rating Services. December 31, 2015: Total % of Debt and Counterparty Credit Ratings $ Net Assets AAA 3,295,852 2.9 AA 7,273,759 6.4 A 2,700,413 2.4 BBB 4,260,008 3.8 BB 55,717,860 49.3 B 33,260,251 29.5 CCC 4,035,617 3.6 Not rated 199,848 0.2 Total 110,743,608 98.1
December 31, 2014: Total % of Debt and Counterparty Credit Ratings $ Net Assets AAA 1,347,835 2.0 AA 449,463 0.7 A 6,438,027 9.7 BBB 5,700,264 8.6 BB 23,962,415 36.2 B 27,386,844 41.3 Total 65,284,848 98.5 Liquidity risk Liquidity risk is the risk that the Fund may not be able to settle or meet its obligations on time or at a reasonable price. The Fund s exposure to liquidity risk is concentrated in the daily cash redemptions of redeemable units, which are due on demand. The liquidity of some securities held by the Fund, which may need to be disposed of in order to meet immediate or short-term obligations, are susceptible to rapid negative movements in credit markets; in particular non-government issued fixed income securities found on the Schedule of Investments Portfolio. Like all fixed income securities, the market value of these securities is based on a credit risk premium or spread. The greater the credit risk associated with a security, the greater the spread demanded by holders. There is a negative correlation between the size of the spread and the value or price of the underlying security. To mitigate this risk, the Fund retains sufficient cash, cash equivalents and marketable securities that can be readily disposed of to maintain liquidity. Liquidity risk is considered negligible. The Fund s financial liabilities are all short-term in nature and are expected to mature within three months of the December 31, 2015 financial statement date, with the exception of redeemable units, which are due on demand. All of the Fund s financial liabilities as at December 31, 2014 matured within three months of the financial statement date. Concentration risk Concentration risk arises as a result of the concentration of exposures within the same category, whether it is geographic region, asset type or sector. The Schedule of Investment Portfolio provides detailed information on the Fund s concentration risk exposure as at. Capital risk management Units issued and outstanding are considered to be capital of the Fund. The Fund does not have any specific capital requirements on the subscription and redemption of units, other than certain minimum subscription requirements. Each unit is redeemable at the option of the unitholder in accordance with the Declaration of Trust and entitles the unitholder to a pro rata share of the Fund s NAV. Unitholders are entitled to distributions when declared. Distributions on units of the Fund are reinvested in additional units of the Fund or at the option of the unitholder, paid in cash.
12 Offsetting of financial instruments In the normal course of business, the Fund may enter into various master netting arrangements or other similar agreements that do not meet the criteria for offsetting in the Statements of Financial Position but still allow for the related amounts to be set off in certain circumstances, such as bankruptcy or termination of the contracts. The following table presents the recognized financial instruments that may be offset, or subject to enforceable master netting agreements or other similar agreements, but that are not offset on the Statements of Financial Position, as at. The Net column shows what the impact on the Fund s Statements of Financial Position would be if all set-off rights were exercised. Financial assets and liabilities Amounts not offset Amounts offset Net Gross assets/liabilites Gross assets/liabilities offset Net amounts presented Financial instruments Cash collateral received ($) ($) ($) ($) ($) ($) December 31, 2015 Derivative assets 3,827 (3,827) - - - - Derivative liabilities (920,051) 3,827 (916,224) - - (916,224) December 31, 2014 Derivative assets 233,462-233,462 (1,966) - 231,496 Derivative liabilities (1,966) - (1,966) 1,966 - - The Fund is subject to enforceable master netting arrangements in the form of ISDA agreements with the counterparties to its derivative contracts. Under the terms of certain of these agreements, offsetting of derivative contracts is permitted for same day settlements when contracts with the same counterparty mature simultaneously, and in other cases only in the event of bankruptcy or default of either party to the agreement. The Fund s arrangement with its broker also permits offset of amounts receivable and payable in respect of securities purchased or sold in the normal course of business.