scotia asset management (jamaica) ltd. unit …...foreign exchange the jamaican dollar vis-a-vis the...

Scotia Asset Management (Jamaica) Ltd.

UNIT TRUSTS ANNUAL REPORT 2016

General Manager’s Report 2

Economic Review 5

Gross Domestic Product (GDP) 6

Fiscal Accounts 7

Inflation 9

Foreign Exchange 9

Money and Capital Markets Review 11

Domestic Money Market 12

Stock Market 12

Fund Performance 14

Scotia Premium Money Market Fund (SPMMF) 15

Scotia Premium Fixed Income Fund (SPFIF) 16

Scotia Premium Growth Fund (SPGF) 17

Scotia Premium US Dollar Indexed Fund (SPUIF) 18

Audited Financial Statements 19

Scotia Premium Money Market Fund (SPMMF) 20

Scotia Premium Fixed Income Fund (SPFIF) 49

Scotia Premium Growth Fund (SPGF) 77

Scotia Premium US Dollar Indexed Fund (SPUIF) 109

CONTENTS

UNIT TRUSTS ANNUAL REPORT 2016 | 1

MANAGERScotia Asset Management (Jamaica) Limited7 Holborn RoadKingston 10Tel: 876-960-6700/960-6699Email: [email protected]: www.scotiainvestmentsjm.com

General Manager: Mr. Brian O. Frazer

BOARD OF DIRECTORSBarbara Alexander - ChairpersonLissant Mitchell - DirectorAudrey Richards - DirectorAngela Fowler - DirectorFrederick Williams - Director

TRUSTEEJCSD Trustee Services Limited40 Harbour StreetKingston

AUDITORSKPMGChartered Accountants6 Duke StreetKingston

BANKERSThe Bank of Nova Scotia Jamaica Limited86 Slipe RoadKingston 5

ATTORNEYS-AT-LAW

Hart Muirhead Fatta Harrison and Harrison

53 Knutsford Boulevard 16 Hope Road

Kingston 5 Kingston 10

SUB-ADMINISTRATOR, REGISTRAR & TRANSFER AGENTInternational Fund Services (N.A.) L.L.C.1290 Avenue of the Americas, 10th FloorNew York, NY 10104

GENERAL MANAGER’S REPORT


General Manager’s Report

Dear Unit Holder,

The local unit trust market continues to see significant growth and remains very competitive as companies focus on growing their assets under management to replace income typically generated from on balance sheet products.

Scotia Asset Management continues to have a significant share of the local unit trust industry with approximately 19% as at October 31, 2016. Of note, the Scotia Premium US Dollar Indexed Fund (SPUIF) was successfully launched in January 2016 and boasts a NAV of $2.2 billion as at October 31, 2016. The Scotia Premium Money Market Fund (“SPMMF”) continued to experience robust growth over the year and achieved a Net Asset Value (NAV) of J$14.76 billion. This represents a growth of approximately 13% from October 2015 to October 2016. The Scotia Premium Growth Fund (“SPGF”) continued to report strong returns as the local equities market continued to perform well over the year. With these milestones, SAMJ’s Assets under Management (AUM) increased by 15.81% over the prior year to $34.35 billion. SAMJ contributed $611 million to the revenues of Scotia Investments Jamaica Limited which represents a 10% increase compared to $554 million the previous year.

The Fund Manager will continue to invest according to its asset allocation and diversification principles in order to meet the long term objectives of your fund.

4 | Scotia Asset Management (Jamaica) Ltd.

In closing, I would like to thank the Board of Directors for their guidance and the entire team at Scotia Asset Management (Jamaica) for their hard work over the past year and I look forward to their support as we continue to grow your funds and deliver credible investment performance.

Sincerely,

SCOTIA ASSET MANAGEMENT (JAMAICA) LIMITED

Brian Frazer

GENERAL MANAGER

ECONOMIC REVIEW


Gross Domestic Product (GDP)

During the period October 2015 – September 2016 the Jamaican economy recorded consistent levels of growth for all quarters ranging from a low of 0.7% to a high of 2.0%. This was reflective in a rebound in the Agriculture, improvements in Electricity & Water Supply, Tourism and Manufacture industries. For the first nine months of 2016 the economy expanded by 1.4% relative to the same period of 2015, with the Goods Producing Industry being 3.6% higher and the Services Industry growing by 0.8%. Varied reforms undertaken throughout the review period improved the business environment; additionally greater levels of certainty stemming from the success of the fiscal consolidation programme on the part of the Government of Jamaica (GoJ) pushed business and consumer confidence to record levels.

For the final quarter of 2015 the economy expanded by 0.7% with the Goods Producing Industry being the main driver of growth improving by 4.6% as the Services Industry grew by 0.7%. Growth in the Goods Producing Industry stemmed primarily from Manufacturing and Construction. However, Agriculture fell-off reflecting the lagged impact of drought conditions which prevailed during the previous quarter, while growth in Mining slumped in light of depressed commodity prices. For the Services Industry the star performers were Electricity & Water (up 4.5%), Other Services (up 1.1%) and Hotel & Restaurants (up 0.9%).

There was a slight uptick in growth for Q1 2016 moving to 0.8% with improvement stemming from the Electricity & Water sub-industry (up 5.3%), Agriculture (up 3.0%) and Hotels & Restaurants (up 2.4%). Improved weather conditions and an uptick in stopover arrivals and lower global commodity prices supported these positive out-turn. For the second and third quarters of 2016 the economy improved by 1.4% and 2.0% respectively, twice the amount that was recorded for the previous quarters. The positive out-turn stemmed primarily from the stellar performance in the Agriculture, Electricity & Water Supply, Hotels & Restaurants and Financing & Insurance Services. Mining rebounded in Q3 2016 while Construction had its first downturn since the last quarter of 2012. This emanated from a reduction in civil engineering activities and the completion of the North South link of Highway 2000. Producers of Government Services industry was the only sub-industry that consistently declined throughout the entire review period.


Based on the performance of the economy to date, real GDP growth is forecasted to be within the range of 1.5%-2.0% for calendar year 2016. Growth is predicated on improvements in the Agriculture, Tourism and Real Estate & Business activities. With greater levels of certainty in the economy and a stable macroeconomic environment supported by low interest rates and greater fiscal predictability we expect record levels of investment in the Business Processing Operations segment. The lowering of the primary surplus target provides additional fiscal space to increase capital expenditures for government operations.

Fiscal Accounts

Over the review period there have been improvements in Jamaica’s fiscal accounts. The Government of Jamaica (GoJ) successfully completed 13 reviews under the International Monetary Fund (IMF) Extended Fund Facility (EFF), meeting all structural benchmarks and quantitative targets as stipulated under the programme. The primary surplus target was revised downwards to 7.0% for the 2016/17 budget year from 7.25%, presenting additional fiscal space for the GoJ to increase capital expenditure which has been constrained under the austerity programme. The fiscal deficit for FY2015/16 was 0.3%, lower than the outcome for the previous year of 0.5%. In light of the robust primary surplus and the declining fiscal balance, and the pay down of the PetroCaribe debt, the overall debt to GDP ratio declined significantly from 137.6% to 120.2% at the end of FY2015/16. The IMF EFF would have ended in March 2017, however the GoJ entered a new 3 year Precautionary Stand-By Agreement with the IMF in November 2016. This SBA has brought even greater levels of certainty to the market of consistent fiscal predictability.


Based on central government operations for April – November 2016, the primary surplus is ahead of target by roughly J$25.1 billion, while the fiscal deficit was better than budget by J$24.2 billion. This performance was attributed to stronger total revenues which was J$13.8 billion above budget (and year over year growth of 8.2%) while total expenditures was lower that expectation by J$10.5 billion. The movement in the former stemmed from a J$6.9 billion increase in tax revenue above initial targeted levels with the main drivers of this performance being PAYE (up J$2.1 billion), Customs Duty (up J$0.94 billion) and Corporate Income Tax (up J$0.91 billion). General Consumption Tax (GCT) has fallen off due in part to increased GCT related incentives or tax expenditures. Non-tax revenue has been performing well and was J$4.3 billion above target, followed by Grants which was J$2.5 billion ahead relative to the J$3.1 billion downturn that was posted for the same period of FY2014/15. However, Capital Revenue has fallen off marginally by J$63 million over the April-November 2016 period.

With improved confidence from both consumers and businesses, there are higher growth expectations from which we anticipate greater revenue potential. For the upcoming fiscal year there appears to be a smoother debt path as the GoJ has embarked on lengthening its debt profile by moving debt from the shorter end of the curve to the longer end of the curve. Additionally, the debt re-financing framework that is being proposed by the IMF should provide stability to the debt maturity profile going forward.


Inflation

Inflation rate for the 12-month period ending October 2016 was recorded at 1.8% compared to 3.1% for the corresponding 2015 period. The main drivers of lower inflation rate this year were lower global commodity prices, primarily oil prices, reduced exchange rate pass-through to domestic prices and continued fiscal restraint and prudent monetary policy adjustment.

It is expected that for the next 12 months inflation should fall within the range of 4%-6%. This increase is predicated on stronger domestic demand and higher cost of oil (nevertheless tempered relative to previous years) in light of the impending production cuts by OPEC and other oil producing countries. However, possible downside risks include adverse weather conditions, stronger than anticipated demand, and higher than projected foreign exchange rate pass-through.

Foreign Exchange

The Jamaican dollar vis-a-vis the US dollar ended October 2016 at an average selling rate of J$129.11/US$1, with the Jamaican dollar losing 7.65% of its value relative to its US counterpart. This depreciation was partly fueled by increased demand for the currency due to increased levels of offering of USD investments and need for business to satisfy payments associated with greater demand for non-fuel exports.

The Pound Sterling did not have the same fate as the Jamaican dollar appreciated by 14.55% relative to its British counterpart. This movement in the JMD against

Oct 2016 – 1.8% (PTP)

Oct 2016 – 0.2% (MoM)


the Sterling emanated from the levels of uncertainties surrounding the Brexit vote in June 2016. We expect further gains against the sterling in the near term, as effects of the Brexit continue to materialize.

For the financial year the JMD lost 6.5% relative to its Canadian counterpart. The Canadian dollar is a commodity driven currency due to oil being its chief export. Therefore, as oil prices strengthen, primarily toward the latter half of 2016 the value of the Canadian dollar improved. The Canadian dollar is set to improve going forward given that there is an agreement to cut production going into 2017, hence an uptick in oil prices.

November 2015 October 2016 % Change

POUND 179.81 156.01 -14.55

CAD 88.15 96.33 6.35

NET INTERNATIONAL RESERVES

The net international reserve at the start of the financial year was US$2,343.34 million representing 21.90 weeks of goods and services imports, however, it improved to US$2,443.23 million as at end October 2016. The NIR has been robust against the backdrop of consistent remittance inflows, strong tourism receipts and an improving current account position. At such levels the NIR as at end October 2016 is adequate to purchase 20.49 weeks of imported goods and services.

MONEY AND CAPITAL MARKETS REVIEW


Domestic Money Market

Over the period November 2015-October 2016, the Bank of Jamaica (BoJ) reduced its interest rate on its 30-day open market instrument by 25 basis points to 5.00%. Market determined interest rates, as measured by the Treasury bill yields also declined against the backdrop of increased liquidity stemming from the maturity of the GoJ bonds in February 2016. Over the financial period the 180-Day, 90-day and 30 day Treasury bill decreased by 26, 45 and 13 basis points, respectively. Rates fell significantly within the 5.0% region (record lows). The BoJ also announced in August 2016 that in an effort to strengthen the relationship between the policy rates and money market rate and effect more direct linkage to inflation, it would begin using the overnight interest rate to signal monetary policy. The rate on overnight deposit was increased in September 2016 to 3.0% from 0.25% which was at levels that was consistent with market norms and reflecting interest rate neutrality relative to the signal 5.0% payable on 30-Day CDs which was previously being used.

It is expected that in the coming months with the redemption of some BoJ CDs there will be adequate levels of liquidity which should maintain local interest rate at relatively low levels. Low interest rates is also consistent with GoJ’s policy perspective to spur private sector credit and by extension economic growth.

Stock Market

During the financial year to October 31, 2016, the Jamaica Stock Exchange (JSE) Main Index and the JSE Junior Market increased by 26% and 81% respectively. Though growth is considered to be relatively high in comparison to regional and


international markets, it is tempered in comparison to the similar period last year. Lower interest rates, inflation rates and unemployment levels, alongside growth of companies’ earnings and increased investors’ confidence as the country continues to meet and exceed fiscal targets under its IMF programme were among the main factors supporting the growth of the local stock market.

With interest rates expected to remain subdued, and the positive growth trajectory expected to continue for the economy, our outlook for both indices remain positive.

FUND PERFORMANCE


Scotia Premium Money Market Fund (SPMMF)

The SPMMF continues to be a good investment option for retail clients as the Fund outperformed its benchmark (the1 Month T-Bill) over the 12 month period on a gross return basis. Consequently, purchases into the Fund primarily contributed to the 12.7% year over year growth with the NAV ending the year at $14.7 billion. The Fund remained competitive with a 12-month net return to October 31, 2016 of 5.1%.


Scotia Premium Fixed Income Fund (SPFIF)

During the year, as the JMD depreciated and local interest rates fell, some unit holders rebalanced their portfolios from the SPFIF in pursuit of funds with USD exposure, particularly the recently launched Scotia Premium US Dollar Indexed Fund and our suite of Scotiabank Mutual Funds. Notwithstanding, the SPFIF continued to deliver competitive returns to its investors with a 12-month return of 7.15% and a calendar year to date return of 6.09% and positive real return of 5.32% and 4.26% respectively. Additionally, the Fund outperformed its benchmark on a gross return basis over the 12 month period. During the year, the Fund Managers continued to diversify the Fund by increasing its exposure to corporate bonds, fixed rate securities and foreign currency denominated assets which benefitted the Fund and contributed to its competitive yield at the end of the year.


Scotia Premium Growth Fund (SPGF)

The Scotia Premium Growth Fund ended the year at $2.72 billion, commanding 18.2% of the equity-based unit trust market.

The Fund Managers increased the Fund’s exposure to both local and international equities during the 12-month period to October 31st. The local equities indices continued to move higher as investors remained confident in the Jamaican economy. The global equities market showed periods of volatility over the year as investors weighed the potential impact of the “Brexit” vote, the impending US election results, the initial fears of successive rate hikes by the US Federal Reserve, and the significant movements in oil prices.

The SPGF’s returns were 27.5% for the 12-month period and 13.3% for calendar year-to-date. Notwithstanding this strong performance, the benchmark returns for the same periods were ahead at 32.36% and 14.61%, respectively. This under performance relative to the benchmark was largely due to an underweight position at the start of the year in select junior market stocks which rallied significantly as well as an overweight position in US equities which had a lower rate of return than local equities.


Scotia Premium US Dollar Indexed Fund (SPUIF)

The Scotia Premium US Dollar Indexed Fund was successfully launched on January 15, 2016. The Fund has shown significant NAV growth over the 9-month period from January to October 2016 and ended the financial year with a NAV in excess of $2 billion and a yield of 3.54%. This exemplary growth reflects high customer demand for US dollar linked investment products.

DISCLAIMERS: Important information about the unit trust funds are contained in the respective Fund’s Offering Circular. Please read the Fund’s Offering Circular before investing. Offering Circulars are available from your local Investment Advisor, the Bank of Nova Scotia and affiliates’ branches. Always consult your professional tax and legal advisors with respect to your particular circumstances. Nothing herein is intended to constitute an offer or solicitation to transact business for either products or services in any jurisdiction where such an offer or solicitation would be unlawful. Unit values and investment returns for the Funds will fluctuate. Past performance is no guarantee of future performance and may not be repeated. Unit trust funds are not covered by your local Deposit Insurance Corporation or other government deposit insurer. Unit trust funds are not insured by, nor guaranteed by, The Bank of Nova Scotia or its affiliates.

AUDITED FINANCIAL STATEMENTS

SCOTIA PREMIUM MONEY MARKET FUND


INDEPENDENT AUDITORS’ REPORT

To the Trustees of


We have audited the financial statements of Scotia Premium Money Market Fund (“the Fund”), set out on pages 23 to 48 which comprise the statement of financial position as at October 31, 2016, statements of profit or loss and other comprehensive income, changes in net assets attributable to holders of redeemable units and cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation of financial statements that give a true and fair view 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.

Auditors’ Responsibility

Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether or not the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence relating to the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including our assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation of financial statements that give a true and fair view 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.


INDEPENDENT AUDITORS’ REPORT (CONTINUED)

To the Trustees of


Auditors’ Responsibility (continued)

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements give a true and fair view of the financial position of the Fund as at October 31, 2016, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Chartered Accountants

Kingston, Jamaica

December 7 , 2016

SCOTIA PREMIUM FIXED INCOME FUND



To the Trustees of


We have audited the financial statements of Scotia Premium Fixed Income Fund (“the Fund”), set out on pages 52 to 76, which comprise the statement of financial position as at October 31, 2016, the statements of profit or loss and other comprehensive income, changes in net assets attributable to holders of redeemable units and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.





An audit involves performing procedures to obtain audit evidence relating to the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including our assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation of financial statements that give a true and fair view 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.



To the Trustees of



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.


Opinion

In our opinion, the financial statements give a true and fair view of the financial position of the Fund as at October 31, 2016, and of its financial performance and cash flows for the year then ended, in accordance with International Financial Reporting Standards.


Kingston, Jamaica

December 7 , 2016

SCOTIA PREMIUM GROWTH FUND



To the Trustees of


We have audited the financial statements of Scotia Premium Growth Fund (“the Fund”), set out on pages 80 to 108 which comprise the statement of financial position as at October 31, 2016, the statements of profit or loss and other comprehensive income, changes in net assets attributable to holders of redeemable units and cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information.





An audit involves performing procedures to obtain audit evidence relating to the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including our assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation of financial statements that give a true and fair view 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.



To the Trustees of


Auditors’ Responsibility (Continued)



Opinion

In our opinion, the financial statements give a true and fair view of the financial position of the Fund as at October 31, 2016, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.


Kingston, Jamaica

December 7 , 2016

SCOTIA PREMIUM US DOLLAR INDEXED FUND



To the Trustees of


We have audited the financial statements of Scotia Premium US Dollar Indexed Fund (“the Fund”), set out on pages 112 to 135 which comprise the statement of financial position as at October 31, 2016, the statements of profit or loss and other comprehensive income, changes in net assets attributable to holders of redeemable units and cash flows for the period then ended and notes comprising a summary of significant accounting policies and other explanatory information.





An audit involves performing procedures to obtain audit evidence relating to the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including our assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.



To the Trustees of



In making those risk assessments, we consider internal control relevant to the entity’s preparation of financial statements that give a true and fair view 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.



Opinion

In our opinion, the financial statements give a true and fair view of the financial position of the Fund as at October 31, 2016, and of its financial performance and cash flows for the period then ended in accordance with International Financial Reporting Standards.


Kingston, Jamaica

December 7 , 2016

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