Annual Management Report of Fund Performance
As at September
30,
2015
This annaul Management Report of Fund Performance contains financial highlights but does not contain either interim or annual financial statements of the investment fund. You can obtain a copy of the interim or annual financial statements at your request, and at no cost, by calling 1-888-809-3333, by writing us at NEI Investments L.P., 151 Yonge Street Suite 1200, Toronto, ON M5C 2W7 or by visiting our website at www.neiinvestments.com or SEDAR at www.sedar.com. Security holders may also contact us using one of these methods to request a copy of the investment fund's proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.
Management Discussion of Performance
Investment Objective and Strategies
The Fund aims for long-term growth by investing primarily in foreign equity securities across all market capitalizations. The Fund is usually invested in large and medium sized well-capitalized foreign (including the United States) companies, which are listed on principal global stock exchanges. The balance of the Fund’s assets is short-term fixed income securities.
Risk
The risks of investing in the Fund are unchanged from the prior year and remain as discussed in the prospectus. The Fund is suitable for investors with an average tolerance for risk. Since the Fund makes its investments in other currencies, investors are subject to foreign exchange fluctuations. Any changes in the Fund have not affected the overall level of risk of the Fund.
Results of Operations
The NEI Northwest Global Equity Fund’s Series A units returned 7.94% for the twelve months ended September 30, 2015 compared with a return of 13.86% for the benchmark explained below.
Unlike the benchmark return, the Fund’s returns are after the deduction of fees and expenses paid by the Fund. Performance differences between series of units are mainly attributable to management fees charged to each series. Refer to the Past Performance section for the details of returns by series.
Yearly Comparison of Holdings
Comparison Period—September 30, 2014 to September 30, 2015
The following tables summarize material changes, new and exited positions of individual securities within the Fund during the period whereby materiality of changes is defined as 1% of the current year NAV.
Material Changes
Name Change in NAV
Ownership (%) Amdocs 1.08 Banco Santander -1.44 Baxter International -2.26 HeidelbergCement 1.10 Verizon Communications 1.43 Vodafone Group 1.05
New Positions
Name % of Current Year NAVAberdeen Asset Management 1.75 American Express Company 3.15
BASF 2.52 Baxalta 3.81 Bayer 3.47 GEA Group 2.32 Halliburton Company 4.25 IMI 3.44 Kellogg Company 5.46 Koninklijke KPN 2.75 Merck 3.57 Unilever 3.34
Exited Positions
Nutreco Deutsche Boerse D'Ieteren Eli Lilly and Company Lanxess Eni Koninklijke Philips MetLife FamilyMart Kingfisher Merck & Co. NTT DoCoMo Sanofi TRW Automotive Holdings Corp.
Factors That Have Affected Performance
Weak equity markets and volatility were evident over the period, as jittery investors fretted over the extent to which slowing economies worldwide would limit the more positive outlook for the U.S. Recent data revealed slowing demand from emerging markets and a sluggish China was evidenced by an unexpectedly sharp decline in manufacturing activity to a 6 ½ year low. Adding to concern was the precipitous sell-off in the Chinese stock market.
Hopes for advancing global growth increasingly shifted to the U.S. and promising economic data raised expectations that the U.S. Federal Reserve would increase rates at its FOMC September meeting. Key for the Fed was the unemployment rate, which showed improvement, falling to a multi-year low of 5.1%, and a sharp upward revision in second quarter GDP to 3.9% was also supportive. Ultimately, the Fed’s decision to delay its change in policy led market participants to unwind positions and recalibrate the timing of a lift-off in administered rates.
The MSCI World Index C$ posted a double digit 1 year return. Not only were Energy and Materials the only sectors with negative returns, they were the only sectors in the index that did not produce double digit Canadian dollar returns over the period.
For the annual period under review, the NEI Northwest Global Equity Fund achieved a double digit return, but underperformed the MSCI World Index (C$). Sector allocation detracted from performance over the period due to underweights in Utilities and the Consumer Sectors. Stock selection added value on a net basis. The largest contribution came from selection in the Consumer Staples sector, specifically the Fund’s holding in Nutreco, which was subject to two takeover bids and was sold from the portfolio upon achieving the portfolio sub-advisor’s target price.
The Fund’s underweight to U.S. equities relative to the Index detracted value, as U.S. equities outperformed over the annual period. Regional and sector weight changes over the period were driven by the portfolio sub-advisor’s bottom up value stock selection process.
Recent Developments
The recent substantial fall in the MSCI World Index (U$) reflected the continued tug-of-war between the twin positive influences of sustained low interest rates and ample liquidity on one hand, and on the other hand the weight of adverse macro considerations on company revenues. Chief among those top-down concerns are weakness in China, some slippage in recent economic numbers out of Europe, uncertainty over the sustainability of U.S. growth and confusion caused by conflicting messages from the U.S. Federal Reserve. Add to that global pockets of political instability, and it can be of little surprise that some surveys of investor sentiment have recently hit lows not seen since 2011. Frayed nerves led to another notable feature of the quarter: investors massively accelerated the sales of emerging market equities where the strong U.S. dollar has done as much damage to corporate profitability as it has done in the U.S. itself. The positive side of this investor gloom is that it tends to take valuations down (and dividend yields up) to more attractive levels, discounting a meaningful moderation in growth and earnings
expectations. The portfolio sub-advisor believes that is the situation which is developing currently.
While there is no doubt growth in China has slowed significantly, the risk that this might ultimately trigger a global recession is likely very low in the sub-advisor’s opinion For commodity producers and industries tied directly or indirectly to the Chinese economy, conditions are likely to remain weak for some time. But for the more developed countries of the world, lower input costs should continue to benefit domestic sectors in the sub-advisor’s opinion. In the U.S., where the consumer represents 70% of GDP, resilience in these parts of the economy can more than offset weakness in resource and manufacturing industries tied to slowing exports.
The other positive aspect of moderating global growth is the likelihood of continued monetary and fiscal stimulus. Even in the case of the U.S., a rate increase before year end, while possible, is by no means certain. Even if the U.S. Federal Reserve does decide to make an initial increase in rates, they have already telegraphed that any subsequent tightening will be prolonged and gradual. With respect to other developed markets, rate increases are not likely in the near term in the sub-advisor’s opinion. As a result, the overall monetary background should remain supportive of economies and financial markets for some time to come. Bond markets have plainly dictated to equity investors that we persist in a low inflation, low growth world, propped up by stimulative monetary conditions. In this environment, companies need to invest less into their businesses and concentrate on maximizing cash flow, on the same or less capital invested. Those that are adapting accordingly to the benefit of shareholders are found in a range of sectors, but in particular, the more economically sensitive areas. It is among this broader group of global investments that the Fund will find attractive investments.
On September 30, 2015, Eamonn McConnell was removed as a member of the Independent Review Committee. Effective October 1, 2015, William Wood will replace Mr. McConnell as a member of the Independent Review Committee.
Financial Notes
HST
Following the introduction of a single harmonized tax ‘‘HST’’ levy and collection system on July 1st, 2010 Investment Funds had to change the way in which government taxes are charged to the Funds. The new rules require HST to be calculated and charged based on a blended tax rate derived from the residency of the unitholders and the current value of their units. This blended rate is required to be calculated and updated periodically and the table below indicates the current rate being charged until the Fund’s next year end as well as the most recent completed period’s rate for comparison.
NEI Northwest Global Equity Fund
For the Period Ending
September 30, 2015 September 30, 2016 Series A 10.07% 10.06% Series F 10.56% 10.78%
Effective April 1st, 2013, British Columbia replaced the 12% HST with separate PST and GST. A 5% GST rate is applicable going forward. Prince Edward Island introduced a new HST rate of 14%.
On January 1st, 2013, Quebec increased the combined tax rate charged on the QST portion of taxable services from 14.95% to 14.975%.
Accounting Standards
Change in Accounting Framework – Transition to International Financial Reporting Standards (“IFRS”)
The Fund's annual financial statements have been prepared in compliance with International Financial Reporting Standards (“IFRS”), applicable to the preparation of financial statements, including IFRS 1, First-time Adoption of IFRS. The Fund adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Fund prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in Part V of the Chartered Professional Accountants of Canada Handbook (“GAAP”). The Fund has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position as at October 1, 2013 and throughout all years presented, as if these policies had always been in effect. Note 3 of the Fund's annual financial statements includes disclosures of the impact of the transition to IFRS on the Fund's reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Fund's financial statements for the year ended September 30, 2014 prepared under GAAP.
Related Party Transactions
Northwest and Ethical Investments L.P ‘‘NEILP’’ is the Manager, the Trustee, the Fund Manager and the Registrar of the Fund. NEILP is 50% indirectly owned by the Federation des Caisses Desjardins du Quebec (Federation) and 50% owned by five Provincial Credit Union Centrals.
NEILP charges the Funds a fixed administration fee in place of certain variable expenses. NEILP in turn, pays all operating expenses of the Fund, other than specified fund costs (e.g. the fees and expense of the Independent Review Committee, taxes, and brokerage commissions) which include payments to related parties of which the Federation is a significant owner. These services are in the normal course of operations and are measured at an exchange amount that is consistent with other independent parties.
At the end of the period, the accrued expenses payable to related third parties are listed below. Where applicable the amounts received from underlying funds during the period are also presented.
September 2014 September 2015 Accrued Expenses Payable to Related Parties 67,473 65,853
The Fund’s sub advisors may place a portion of their fund transactions with brokerage firms which are affiliates of NEILP; provided that the affiliates trade execution abilities and costs are comparable to those of non-affiliated qualified brokerage firms. The Fund is distributed through Credential Asset Management Inc., Credential Securities Inc., Desjardins Securities Inc., Desjardins Financial Services Firm Inc., Desjardins Financial Securities Investments Inc., and Gestions SFL Inc., and other nonrelated parties by way of shared ownership. NEILP pays to these parties distribution and servicing fees based on a
percentage of the daily values of the units of each held by the dealer’s clients and additionally, in some cases, on the amount of initial purchase.
This document contains forward-looking statements. Such statements are generally identifiable by the terminology used, such as ‘‘plan’’, ‘‘anticipate’’, ‘‘intend’’, ‘‘expect’’, ‘‘estimate’’, or other similar wording. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market and business conditions; fluctuations in securities prices, fluctuation in interest rates and foreign currency exchange rates; and actions by governmental authorities. Future events and their effects on the fund may not be those anticipated by us. Actual results may differ materially from the results anticipated in these forward-looking statements. We do not undertake, and specifically disclaim, any obligation to update or revise any forward-forward-looking information, whether as a result of new information, future developments or otherwise.
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 each of the past five years, as applicable.
Net Assets per Unit
(1)Increase (Decrease) from Operations: Distributions:
Series Period Net Assets, Beginning of Period Total Revenue Total Expenses Realized Gains (Losses) Unrealized Gains (Losses) Commissions and Other Portfolio Transaction Costs(2) Total Increase (Decrease) from Operations(3) From Income (Excluding Dividends) From Dividends From Capital Gains Return of Capital Total Distrib-utions(4,5) Net Assets, End of Period A Sept. 2015 18.60 0.56 -0.69 2.71 -1.05 N/A 1.53 0.00 0.01 0.00 0.00 0.01 20.06 Sept. 2014 16.02 0.55 -0.52 2.50 0.19 -0.03 2.70 0.00 0.04 0.00 0.00 0.04 18.60 Sept. 2013 12.93 0.44 -0.41 1.24 1.96 -0.03 3.20 0.00 0.09 0.00 0.00 0.09 16.02 Sept. 2012 11.42 0.42 -0.34 -0.29 1.88 -0.02 1.65 0.00 0.09 0.00 0.00 0.09 12.93 Sept. 2011 12.14 0.39 -0.34 -0.75 0.23 -0.02 -0.49 0.00 0.04 0.00 0.00 0.04 11.42 Sept. 2010 12.53 0.37 -0.32 0.19 -0.54 -0.02 -0.32 0.00 0.12 0.00 0.00 0.12 12.14 F Sept. 2015 19.26 0.58 -0.43 2.70 -1.97 N/A 0.88 0.00 0.25 0.00 0.00 0.25 20.80 Sept. 2014 16.56 0.58 -0.32 2.69 -0.08 -0.03 2.84 0.00 0.21 0.00 0.00 0.21 19.26 Sept. 2013 13.43 0.45 -0.26 1.24 2.05 -0.03 3.45 0.00 0.32 0.00 0.00 0.32 16.56 Sept. 2012 11.84 0.43 -0.21 -0.30 1.93 -0.02 1.83 0.00 0.20 0.00 0.00 0.20 13.43 Sept. 2011 12.61 0.40 -0.21 -0.79 0.27 -0.02 -0.35 0.00 0.23 0.00 0.00 0.23 11.84 Sept. 2010 13.06 0.37 -0.20 0.20 -0.48 -0.02 -0.13 0.00 0.31 0.00 0.00 0.31 12.61 I Sept. 2015 13.29 0.39 -0.08 1.89 -0.71 N/A 1.49 0.00 0.57 0.00 0.00 0.57 14.16 Sept. 2014 11.41 0.38 0.00 1.75 0.13 -0.02 2.25 0.00 0.33 0.00 0.00 0.33 13.29 Sept. 2013 9.20 0.31 0.00 0.87 1.36 -0.02 2.52 0.00 0.31 0.00 0.00 0.31 11.41 Sept. 2012 8.12 0.30 0.00 -0.23 1.32 -0.01 1.38 0.00 0.29 0.00 0.00 0.29 9.20 Sept. 2011 8.60 0.28 0.00 -0.56 0.04 -0.02 -0.26 0.00 0.25 0.00 0.00 0.25 8.12 Sept. 2010 8.81 0.26 0.00 0.13 -0.31 -0.01 0.07 0.00 0.24 0.00 0.00 0.24 8.60
(1) All per unit figures presented in 2015, other than the net assets beginning of period, are referenced to net assets determined in accordance with IFRS and are derived from the Fund's audited annual financial report for the period ended September 30, 2015. The beginning of period net assets per unit of 2015 and net assets per unit for prior periods were derived from the Fund's audited annual financial statements that were prepared in accordance with Canadian GAAP as defined in Part V of the CPA Handbook for prior periods.
(2) From March 31, 2015, Commissions and other portfolio transaction costs are included in Expenses.
(3) 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.
(4) Distributions were paid in cash or reinvested in additional units of the Fund.
(5) Distributions (if any) that may have been made that included return of capital in excess of short term earnings were made to minimize disruption and provide stability to investors who have elected to take their distributions in the form of cash, and as disclosed in the Simplified Prospectus. These amounts are reviewed at each calendar year-end and management engages in discussions with the sub-advisor to determine the most applicable strategy on a go forward basis and will take any action(s) as needed for the long term stability of the Fund.
Ratios and Supplemental Data
Series Period Total Net Asset Value (000’s of $) Number of Units Outstanding (000’s) Management Expense Ratio (%)(1) Management Expense Ratio before Waivers and Absorptions (%) Trading Expense Ratio (%)(2) Portfolio Turnover Rate (%)(3) Net Asset Value per Unit ($) A Sept. 2015 27,133.08 1,352.42 2.82 2.82 0.20 64.64 20.06 Sept. 2014 26,444.08 1,421.62 2.82 2.82 0.18 49.74 18.60 Sept. 2013 24,828.87 1,549.87 2.82 2.82 0.15 38.19 16.02 Sept. 2012 23,830.86 1,841.64 2.76 2.76 0.16 48.19 12.94 Sept. 2011 28,400.61 2,483.41 2.66 2.66 0.14 50.03 11.44 Sept. 2010 41,718.00 3,435.97 2.66 2.66 0.15 34.34 12.14 F Sept. 2015 609.88 29.33 1.48 1.65 0.20 64.64 20.79 Sept. 2014 275.85 14.32 1.71 1.71 0.18 49.74 19.26 Sept. 2013 245.38 14.82 1.70 1.70 0.18 49.74 16.56 Sept. 2012 256.70 19.09 1.64 1.64 0.16 48.19 13.45 Sept. 2011 315.38 26.60 1.59 1.59 0.14 50.03 11.86 Sept. 2010 495.00 39.24 1.59 1.59 0.15 34.34 12.62 I Sept. 2015 195,728.28 13,826.36 N/A N/A 0.20 64.64 14.16 Sept. 2014 170,873.80 12,858.87 N/A N/A 0.18 49.74 13.29 Sept. 2013 147,701.86 12,944.95 N/A N/A 0.18 49.74 11.41 Sept. 2012 145,041.11 15,771.69 N/A N/A 0.16 48.19 9.20 Sept. 2011 127,894.58 15,727.94 N/A N/A 0.20 50.03 8.13 Sept. 2010 123,045.00 14,309.24 N/A N/A 0.15 34.34 8.60(1) Management expense ratio is based on total expenses (excludeng commissions and other Fund transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period.
(2) The trading expense ratio represents total commissions and other Fund transaction costs expressed as an annualized percentage of daily average net asset value during the period.
(3) The portfolio turnover rate indicates how actively the Fund's subadvisor manages its investment holdings. 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 period. The higher a fund’s portfolio turnover rate in a period, the greater the trading costs payable by the Fund in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between a high turnover rate and the performance of a fund. Certain turnover rates for September 2011 were restated due to a formula inconsistency.
Management Fees
The Manager is responsible for the management, supervision and administration of the Fund. The Manager receives from the Fund management fees, before HST, calculated daily on the net asset value of the Fund at an annual rate shown below. The management fee covers the cost of investment advisory fees, sales, marketing, and distribution expenses of the Fund. In addition, the Manager may pay a trailer fee to dealers out of this management fee. The trailer fee is a percentage of the average daily value of the units of the Fund held by the dealer’s clients.
The following table shows the major services paid for out of management fees as a percentage of the management fee for all series of the Fund:
Management Fee
Investment Advisory and
Other Fees Trailer Fee Series A 2.00% 63.1% 36.9% Series F 1.00% 100.0% N/A(1)
(1) No trailer fees are paid in respect of any Series F units of the Fund
Past Performance
The following charts and tables show the past performance for each series of units of the Fund and will not necessarily indicate how the Fund will perform in the future. The information shown assumes that distributions made by the Fund in the periods shown were reinvested in additional units of the relevant series 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 annual performance for each series of units of the Fund for each period shown and illustrate how the Fund’s performance has varied from period to period. The charts indicate how much an investment made on the first day of each financial period would have grown or decreased by the last day of each financial period.
Series A -10 0 10 20 30 6.93 4.57 -7.16 -2.35 -5.47 14.03 24.59 16.44 7.96 Series F -10 0 10 20 30 7.98 5.73 -6.12 -1.31 -4.33 15.34 25.98 17.73 9.37
Series I -20 -10 0 10 20 30
Dec-06 Dec-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
9.92 7.75 -12.63 -4.62 0.22 -2.70 17.27 28.10 19.74 10.99
Annualized Compound Returns
The following table shows the annual compound returns for all series of the Fund. All returns are in Canadian dollars, on a total return basis, net of all fees. For comparison, the returns for the benchmark are included.
The benchmark index for this fund is the MSCI World Index.
The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance.
While the Fund uses this benchmark for long-term performance comparisons, it is not managed relative to the composition of the Index. As a result, the Fund may experience periods when its performance is not aligned with the Index, either positively or negatively. Please see the "Results of Operations" section of this report for a discussion of recent performance results.
Group/Investment 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception
MSCI World NR USD 13.86 20.37 14.24 6.26 -NEI Northwest Global Equity A 7.94 16.12 11.04 3.78 -NEI Northwest Global Equity F 9.36 17.49 12.34 4.95 -NEI Northwest Global Equity I 10.99 19.41 14.20 6.75
-Summary of Investment Fund as at September
30,
2015
Total Net Asset Value: $223,471,248
Top 25 Positions (Long Positions)
%
1 Kellogg Company 5.5
2 JP Morgan Chase & Co. 4.7
3 Verizon Communications 4.5 4 Halliburton Company 4.3 5 Symantec Corporation 3.9 6 Amdocs 3.9 7 Sky 3.8 8 Baxalta 3.8 9 KCI Konecranes 3.6 10 Merck 3.6 11 Caterpillar 3.5 12 Bayer 3.5 13 Vodafone Group 3.5 14 IMI 3.4 15 Unilever 3.3
16 Compagnie Générale des Établissements Michelin, Class B 3.2
17 Oracle Corporation 3.2
18 TGS-Nopec Geophysical Company 3.2
19 American Express Company 3.2
20 Atea 3.1 21 BB&T Corporation 3.1 22 HeidelbergCement 3.0 23 Baxter International 3.0 24 Koninklijke KPN 2.7 25 BASF 2.5 Total 88.9
There is no short position in this Fund.
"Others" geographic category includes all countries representing less than 5% of the Fund’s net asset value
The Summary of Investment Fund may change due to ongoing Fund transactions of the investment fund.
Drill Down Total Net Asset Value Mix
%
Equities-Foreign 53.9
Equities-U.S. 42.6
Cash and Equivalents 3.5
Total 100.00
Drill Down Sector Allocation
%
Financials 15.0 Information Technology 14.1 Health Care 13.8 Industrials 12.9 Telecommunication Services 10.7 Consumer Staples 8.8 Energy 7.4 Consumer Discretionary 7.0 Materials 6.7
Cash and Equivalents 3.5
Total 100.0
Drill Down Geographic Distribution
%
Other 53.9
United States 42.6
Cash and Equivalents 3.5
