nexus north american income fund · 2015-07-13 · nexus north american income fund statement of...

Nexus North American Income FundFinancial StatementsFor the Year Ended December 31, 2013

INDEPENDENT AUDITORS' REPORT

To the Unitholders of Nexus North American Income Fund

We have audited the accompanying financial statements of Nexus North American Income Fund, which comprise the

statements of net assets and investment portfolio as at December 31, 2013 and the statements of operations and

changes in net assets for the year then ended and 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 withCanadian generally accepted accounting principles, and for such internal control as management determines isnecessary to enable the preparation of financial statements that are free from material misstatement, whether due tofraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our auditin accordance with Canadian generally accepted auditing standards. Those standards require that we comply withethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financialstatements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks ofmaterial 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 financialstatements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating theappropriateness 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 is sufficient and appropriate to provide a basis for our auditopinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Nexus NorthAmerican Income Fund as at December 31, 2013, and its financial performance and its changes in net assets for theyear then ended in accordance with Canadian generally accepted accounting principles.

Licensed Public AccountantsChartered AccountantsFebruary 28, 2014Toronto, Ontario

Nexus North American Income FundStatement of Net AssetsAs at December 31

2013 2012

Assets

CurrentInvestments 239,239,800$ 200,619,450$

Cash 144,581 261,295

Interest receivable 1,223,381 1,023,988

Dividends receivable 104,797 119,023

240,712,559 202,023,756

Liabilities

CurrentAccounts payable and accrued liabilities 37,350 35,135

Distributions payable (Note 7) 1,535,855 3,869,705

1,573,205 3,904,840

Net assets (Note 8) 239,139,354$ 198,118,916$

Net assets per unit (Notes 4 and 8) 11.68$ 11.53$

Approved by the Manager, Nexus Investment Management Inc.

___________________________ ________________________

Director - Geoffrey Gouinlock Director - John Stevenson

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Nexus North American Income FundStatement of OperationsYear ended December 31

2013 2012

IncomeDividends 1,120,420$ 1,053,085$

Interest 4,890,335 5,006,792

Investment trust income distributions 280,758 175,944

6,291,513 6,235,821

Expenses (Note 5)

Audit fees 11,465 11,527

Custodial expenses 51,691 47,131

Other expenses 17,165 15,856

Trustee expenses 5,000 5,013

Unitholder reporting costs 45,946 43,255

Valuation fees 11,500 12,032

142,767 134,814

Net investment income 6,148,746 6,101,007

Realized and unrealized gain (loss) on investments and foreign currency and transaction costsRealized gain on sale of investments 3,067,293 6,077,374

Foreign exchange gain (loss) 18,438 (666)

Transaction costs (12,573) (14,874)

Change in unrealized appreciation (depreciation) of investments 444,765 (994,042)

Net gain (loss) on investments 3,517,923 5,067,792

Increase in net assets from operations 9,666,669$ 11,168,799$

Increase in net assets from operations per unit 0.51$ 0.67$

Weighted average number of units outstanding during the period 18,855,357 16,790,422

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Nexus North American Income FundStatement of Changes in Net AssetsYear ended December 31

2013 2012

Increase in net assets from operations 9,666,669$ 11,168,799$

Distributions to investors (Note 7)

From net investment income (6,196,748) (6,068,762)

From net realized capital gains (962,772) (3,361,366)

(7,159,520) (9,430,128)

Capital unit transactions (Note 4)

Proceeds from issuance of units 67,355,995 31,895,904

Units issued on reinvestment of distributions 6,876,335 3,569,789

Value of units redeemed (35,719,041) (27,344,748)

38,513,289 8,120,945

Increase in net assets 41,020,438 9,859,616

Net assets, beginning of period 198,118,916 188,259,300

Net assets, end of period 239,139,354$ 198,118,916$

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Nexus North American Income FundStatement of Investment PortfolioAs at December 31, 2013

Shares, Units Maturity Fairor Par Value Date Cost* Value

Short-term Holdings (8.1%)4,000,000 Bank of Nova Scotia Jan. 03, 2014 3,996,120$ 3,999,612$

500,000 First Bank Jan. 16, 2014 499,635 499,742

800,000 National Bank Jan. 24, 2014 799,320 799,380

6,500,000 Royal Bank of Canada Mar. 03, 2014 6,482,450 6,486,760

3,000,000 Royal Bank of Canada Jun. 02, 2014 2,962,200 2,984,568

4,000,000 Royal Bank of Canada Sep. 15, 2014 3,952,520 3,964,204

600,000 Toronto-Dominion Bank Feb. 06, 2014 599,328 599,328

19,291,573 19,333,594

Canada Bonds (13.7%)325,000 Canada Housing Trust 2.45% Dec. 15, 2015 324,090 332,888

4,500,000 Canada Housing Trust 1.70% Dec. 15, 2017 4,482,975 4,468,747

12,500,000 Canada Housing Trust 1.75% Jun. 15, 2018 12,317,750 12,334,010


750,000 Canada Housing Trust 2.65% Mar. 15, 2022 758,490 733,569


6,000,000 Canada Housing Trust 3.15% Sep. 15, 2023 6,059,940 5,978,640

33,132,825 32,828,510

Provincial Bonds (15.0%)3,275,000 Province of Alberta 1.60% Jun. 15, 2018 3,267,206 3,201,048

1,000,000 Province of Alberta 2.55% Dec. 15, 2022 993,600 943,957

5,750,000 Province of British Columbia 2.25% Mar. 01, 2019 5,754,235 5,726,120

4,000,000 Province of British Columbia 4.10% Dec. 18, 2019 4,036,914 4,346,596

1,800,000 Province of British Columbia 3.25% Dec. 18, 2021 1,837,084 1,825,190

800,000 Province of British Columbia 3.30% Dec. 18, 2023 801,200 790,287

3,325,000 Province of Manitoba 3.85% Dec. 01, 2021 3,561,444 3,490,725

2,000,000 Province of Manitoba 2.55% Jun. 02, 2023 1,992,420 1,853,492

750,000 Province of New Brunswick 4.50% Jun. 02, 2020 748,163 823,627

4,000,000 Province of Nova Scotia 4.15% Nov. 25, 2019 4,518,400 4,327,466

6,540,000 Province of Nova Scotia 4.10% Jun. 01, 2021 7,231,647 6,983,296

1,500,000 Province of Ontario 1.90% Sep. 08, 2017 1,508,889 1,497,033

36,251,202 35,808,837

Corporate Bonds (43.9%)1,450,000 Alimentation Couche‑Tard Inc. 3.319% Nov. 01, 2019 1,450,000 1,412,140

2,750,000 Bank of Montreal 2.24% Dec. 11, 2017 2,740,940 2,721,304

2,500,000 Bank of Nova Scotia 2.37% Jan. 11, 2018 2,534,750 2,484,478

4,000,000 Bank of Nova Scotia 3.036% Oct. 18, 2024 4,000,000 3,949,756

1,000,000 Bell Canada 4.40% Mar. 16, 2018 999,160 1,055,366

300,000 Bell Canada 3.35% Mar. 22, 2023 299,493 277,240

575,000 BHP Billiton Finance Ltd 3.248% May. 15, 2023 574,661 535,781

450,000 BMW Canada Inc. 2.11% May. 26, 2016 449,865 452,769

1,300,000 BP Capital Markets PLC 3.497% Nov. 09, 2020 1,300,000 1,291,466

1,000,000 Canadian Imperial Bank of Commerce 3.40% Jan. 14, 2016 997,970 1,031,751

2,000,000 Canadian Imperial Bank of Commerce 2.65% Nov. 08, 2016 1,999,860 2,035,173

500,000 Canadian Utilities Ltd. 3.122% Nov. 09, 2022 500,000 473,630

1,550,000 Canadian Western Bank 3.049% Jan. 18, 2017 1,557,670 1,582,990

* Cost includes transaction costs

See accompanying notes 4


Shares, Units Maturity Fairor Par Value Date Cost* Value

Corporate Bonds (43.9%) (continued)2,000,000 Caterpillar Financial Services Ltd. 2.63% Jun. 01, 2017 1,999,540 2,022,479

2,900,000 Caterpillar Financial Services Ltd. 2.29% Jun. 01, 2018 2,844,674 2,847,284

2,300,000 CHIP Mortgage Trust 4.49% Aug. 04, 2015 2,299,264 2,383,418

9,200,000 CHIP Mortgage Trust 3.973% Feb. 01, 2016 9,368,555 9,515,465

450,000 Cogeco Cable Inc. 4.175% May. 26, 2023 450,329 431,554

1,500,000 Enbridge Inc. 4.53% Mar. 09, 2020 1,499,760 1,600,592

1,600,000 Enbridge Inc. 3.94% Jun. 30, 2023 1,600,000 1,577,171

1,150,000 Enbridge Pipelines Inc. 4.49% Nov. 12, 2019 1,149,080 1,242,420

1,725,000 Enbridge Pipelines Inc. 2.93% Nov. 30, 2022 1,724,707 1,625,119

1,000,000 Enbridge Pipelines Inc. 3.79% Aug. 17, 2023 999,670 994,855

2,500,000 General Electric Capital 4.40% Feb. 08, 2018 2,755,250 2,669,680

600,000 Glacier Credit Card Trust 2.755% Nov. 20, 2018 600,000 595,886

850,000 Honda Canada Finance Inc. 2.35% Jun. 04, 2018 850,000 838,249

1,950,000 HSBC Bank of Canada 2.938% Jan. 14, 2020 2,004,015 1,924,993

750,000 Inter Pipeline Ltd. 3.448% Jul. 20, 2020 750,000 747,828

5,000,000 JPMorgan Chase & Co. 2.92% Sep. 19, 2017 5,039,025 5,028,558

6,825,000 Kreditanstalt für Wiederaufbau 1.75% Jul. 15, 2016 6,821,042 6,857,282

500,000 Manufacturers Life Insurance Company 2.926% Nov. 29, 2023 500,000 495,034

1,000,000 Manulife Bank of Canada 2.383% Oct. 17, 2016 1,000,000 1,006,115

5,000,000 Master Credit Card Trust 2.626% Jan. 21, 2017 5,028,700 5,081,079

800,000 Master Credit Card Trust II 2.723% Nov. 21, 2018 800,000 795,638

2,410,000 Municipal Financial Authority of British Columbia4.15% Jun. 01, 2021 2,654,856 2,559,830

1,500,000 National Bank of Canada 2.689% Aug. 21, 2017 1,500,000 1,513,145

1,000,000 NAV Canada 1.949% Apr. 19, 2018 1,000,000 978,234

400,000 Royal Bank of Canada 3.03% Jul. 26, 2016 399,836 410,890

1,800,000 Royal Bank of Canada 2.26% Mar. 12, 2018 1,799,586 1,774,237

1,840,000 Royal Bank of Canada 2.98% May. 07, 2019 1,840,000 1,842,215

850,000 Sobeys Inc. 3.52% Aug. 08, 2018 849,652 857,253

1,000,000 Swedish Export Credit Corporation 4.45% Mar. 15, 2019 998,620 1,069,453

1,500,000 TELUS Corporation 3.35% Mar. 15, 2023 1,538,850 1,399,897

750,000 Thomson Reuters Corporation 3.369% May. 23, 2019 750,000 747,362

1,025,000 Toronto-Dominion Bank 2.171% Apr. 02, 2018 1,025,000 1,009,155

3,000,000 Toyota Credit Canada Inc. 2.20% Oct. 19, 2017 2,963,805 2,970,864

3,850,000 Toyota Credit Canada Inc. 2.75% Jul. 18, 2018 3,858,881 3,855,537

2,000,000 TransCanada PipeLines Limited 3.69% Jul. 19, 2023 1,999,840 1,962,748

4,000,000 Union Gas Limited 3.79% Jul. 10, 2023 4,016,120 3,944,836

325,000 Veresen Inc. 3.95% Mar. 14, 2017 324,812 335,980

1,200,000 VW Credit Canada Inc. 2.45% Nov. 14, 2017 1,197,864 1,196,185

2,175,000 Wells Fargo Canada Corp. 2.944% Jul. 25, 2019 2,175,000 2,161,023

5,000,000 Wells Fargo Canada Corp. 3.46% Jan. 24, 2023 4,833,750 4,823,244

105,214,452 104,996,631

Canadian Securities (15.5%)110,000 Allied Properties Real Estate Investment Trust 3,231,762 3,600,300

60,000 Bank of Nova Scotia 2,887,535 3,984,000

55,000 Brookfield Infrastructure Partners L.P. 781,932 2,289,650

60,000 Enbridge Inc. 1,132,466 2,783,400




Shares, Units Fairor Par Value Cost* Value

Canadian Securities (15.5%) (continued)160,000 H&R Real Estate Investment Trust 2,234,841 3,420,800

135,000 Progressive Waste Solutions Ltd. 1,543,626 3,545,100

45,000 Rogers Communications Inc., Class B Non‑Voting 1,543,178 2,162,250

50,000 Royal Bank of Canada 2,373,318 3,570,000

65,000 TELUS Corporation 1,294,278 2,376,400

80,000 Thomson Reuters Corporation 2,397,566 3,213,600

40,000 Toronto-Dominion Bank 2,517,090 4,003,600

45,000 TransCanada Corporation 1,407,664 2,182,050

23,345,256 37,131,150

Foreign Securities (3.8%)40,000 General Electric Company 998,142 1,191,271

110,000 Microsoft Corporation 3,157,678 4,371,108

110,000 Pfizer Inc. 2,050,750 3,578,699

6,206,570 9,141,078

Total Cost and Fair Value of Investments 223,441,878 239,239,800

Transaction Costs (43,088) -

Total Investments 223,398,790$ $239,239,800



Nexus North American Income Fund Notes to Financial Statements December 31, 2013

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1. THE FUND

The Nexus North American Income Fund (the "Fund") is an open-ended mutual fund trust established in September 2002 under the laws of Ontario by way of Declaration of Trust dated July 31, 1997.

2. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Fund conform with Canadian generally accepted accounting principles (“Canadian GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting period. Significant estimates include the valuation of investments. Actual results could differ from those estimates. The significant policies are summarized below:

Valuation of Investments

(a) Securities listed upon a recognized public stock exchange are valued at their bid prices on the valuation date. Securities with no available bid prices are valued at the closing sale prices.

(b) Securities not listed upon a recognized public stock exchange are valued using valuation techniques, on such basis and in such manner established by the Manager.

(c) Short-term notes, treasury bills and bonds are valued at the average bid quotations from recognized investment dealers.

Transaction Costs

Transaction costs are expensed and are included in the Statement of Operations. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of an investment, which include fees and commissions paid to agents, advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties.

Investment Income

Interest income is presented using the effective interest method in the Statement of Operations. The effective interest method is the rate that exactly discounts estimated future cash payments or receipts through the expected life of a financial instrument. Dividends and investment trust income distributions are recognized on the accrual basis. Distributions from investment trusts that are treated as a return of capital for income tax purposes reduce the average cost of the underlying investment. Dividend income is recorded on the ex-dividend date.

Investment Transactions

Investment transactions are recognized on the date the order to buy or sell is executed. The average cost basis (effective interest rate method for bonds) is used in determining realized gains or losses on sale of investments and unrealized appreciation or depreciation on investments.

Valuation of Fund Units for Transaction Purposes

Net asset value per unit is calculated on the 15th and last days of each month (unless such day is not a business day, in which case the last business day prior to such day is used) (each a “valuation day") by dividing the net asset value ("Transactional NAV") by the number of outstanding units. The net asset value is computed by calculating the fair value of the Fund’s assets less the Fund’s liabilities.


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In addition, at the reporting period date for financial statement purposes only, the net assets ("GAAP NAV") are determined in accordance with CICA Handbook Section 3855 ("Section 3855"). A reconciliation between the Transactional NAV and GAAP NAV is described in Note 8.

Foreign Currencies

Purchases and sales of foreign investments and income and expenses earned in a foreign currency have been translated into Canadian dollars at the rate of exchange prevailing on the respective dates of such transactions. Investments in foreign currencies held at year end have been translated into Canadian dollars at the year-end exchange rate.

Increase (decrease) in Net Assets from Operations per Unit

Increase (decrease) in net assets from operations per unit is calculated using the weighted average number of units outstanding during the year.

Fair Value

Financial instruments measured at fair value can be categorized into one of three hierarchy levels, described below, for disclosure purposes. Each level is based on the transparency of the inputs used to measure the fair values of assets and liabilities.

Level 1 – inputs are unadjusted quoted prices of identical instruments in active markets.

Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – one or more significant inputs used in a valuation technique are unobservable in determining fair values of the instruments.

The breakdown of the Fund's financial instruments into the three-level hierarchy is provided in Note 9.

Distributions

Distributions are recorded by the Fund on the business day immediately following the record date.

Other Assets and Liabilities

Cash, interest receivable and dividends receivable are designated as loans and receivables and are recorded at amortized cost. Similarly, accounts payable and accrued liabilities and distributions payable are designated as other financial liabilities and are recorded at amortized cost.

3. RECENT ACCOUNTING PRONOUNCEMENT

The Fund will be required to adopt International Financial Reporting Standards (“IFRS”) for the basis of preparing financial statements for the fiscal year beginning January 1, 2014, with a transition date of January 1, 2013. At the transition date and for the prior fiscal year, the Fund’s financial statements will require restatement to IFRS for comparative purposes. The Fund will prepare its first financial statements under IFRS for the interim period ending June 30, 2014, along with comparative data reported under IFRS and an opening Statement of Net Assets as at January 1, 2013.

Major differences identified include the mandatory inclusion of a statement of cash flows, consolidation of investees, the measurement basis of fair value, the classification and presentation of security holders’ equity, as well as more extensive note disclosure requirements. The transitional considerations described above and below are based on Canadian GAAP and


9

IFRS that are in effect as of the date of these audited financial statements and should therefore not be considered an exhaustive summary of the significant accounting changes when the Fund adopts IFRS.

IFRS 10 – Consolidated financial statements:

The standard defines criteria for an entity to qualify as an investment entity and exempts such entity from consolidation requirements. The Fund is expected to meet the definition of an investment entity, and, as such, will not be required to consolidate its investments, but rather measure them at fair value through profit or loss, regardless of whether those investments are controlled.

IFRS 13 – Fair value measurement:

IFRS 13 Fair Value Measurement sets out the measurement and disclosure principles applicable for fair value measurements. If an asset or liability measured at fair value has a quoted bid and ask price, fair value must be determined based on a price within the bid-ask spread, whichever is most representative of fair value. The standard permits an investment fund to choose a policy of using bid, ask, mid-market pricing or other pricing conventions that are used by market participants. Thus this standard may impact the Net Assets per unit for financial statement reporting purposes but will have no impact on the Net Asset Value (“NAV”) for transactional purposes. The Fund is currently assessing the Fund’s fair value measurement policy choices to determine the impact on the Fund’s Net Assets.

IAS 7 – Statement of cash flows:

The Fund will be required to present a Statement of Cash Flows in accordance with the requirement of IAS 1 Presentation of Financial Statements and prepared in accordance with IAS 7 Statement of Cash Flows.

IAS 32 – Presentation of puttable instruments:

The criteria contained within the IAS 32 Financial Instruments: Presentation may require unitholders’ equity to be classified as a liability within the Fund’s Statement of Net Assets, and distributions treated as an expense on the Fund’s Statement of Operations, unless certain conditions are met. In circumstances where the conditions are met to reflect unitholders’ equity as equity, the Fund will also be required to separately disclose retained earnings, other reserves and unitholders’ paid up capital. The Fund has assessed the unitholder structure and has determined the equity treatment is the most appropriate classification.

4. UNITS ISSUED AND OUTSTANDING

Units issued and outstanding represent the capital of the Fund. The Fund is authorized to issue an unlimited number of units. Generally, the Fund has no restrictions or specific capital requirements, except for the minimum subscriptions and redemptions as outlined in the Declaration of Trust. The relevant changes pertaining to subscription and redemption of the Fund's units are disclosed in the Statement of Changes in Net Assets. In accordance with the objectives and risk management polices outlined in Note 9, the Fund endeavours to invest subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions through disposal of investments when necessary.

The Fund's units are redeemable at the unitholder's option at the net asset value per unit of the Fund in the manner outlined in the Declaration of Trust. The following units were issued and redeemed at net asset value during the year ended December 31,


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2013 2012

Outstanding, beginning of period 17,177,577 16,477,704

Issued on sale of units 5,775,504 2,747,577

Issued on reinvestment of distributions 593,034 308,147

Redeemed (3,073,922) (2,355,851)

Outstanding, end of period 20,472,193 17,177,577

5. EXPENSES

Management fees are paid by the individual unitholders, through redemption of units from their accounts. The Fund is therefore not charged for management fees.

The Fund is responsible for the payment of all direct expenses related to its operations, such as brokerage commissions and fees, taxes, audit and legal fees, safekeeping and custodial fees and other expenses.

6. INCOME TAXES

The Fund is not subject to income taxes on its net investment income or its net taxable capital gains since it distributes and allocates its taxable income annually to its unitholders.

There are no non-capital or net capital losses which can be carried forward in the Fund.

7. DISTRIBUTIONS PAYABLE

Under the Declaration of Trust, the Fund distributes its net investment income quarterly and net realized capital gains annually to the unitholders. All distributions will automatically be reinvested in additional units of the Fund. A total distribution of $1,535,855 was declared for unitholders of record on December 31, 2013 (2012 – $3,869,705), at a rate of $0.08 per unit (2012 – $0.23), being $573,083 from net investment income (2012 – $508,339) and $962,772 from capital gains (2012 – $3,361,366). Subsequent to year-end the Fund issued 110,204 additional units (2012 – 316,746) and $246,794 cash (2012 – $212,038) in satisfaction of this distribution payable.

8. RECONCILIATION OF NET ASSET VALUE

In accordance with the decision made by the Canadian securities regulatory authorities, a reconciliation between the net asset value and the net assets of an investment fund is required for all financial reporting periods. For investments that are traded in an active market where quoted prices are readily and regularly available, Section 3855 requires the use of bid prices (for investments held) and ask prices (for investments sold short) for the fair valuation of investments, rather than closing sale prices as currently used for the purpose of determining net asset value. For investments that are not traded in an active market, Section 3855 requires the use of specific valuation techniques, rather than the use of valuation techniques by virtue of general practice in the investment funds industry. These changes account for the difference between Transactional NAV and the GAAP NAV.

The impact of the adoption of Section 3855 as at December 31, 2013 is as follows:

Net Asset ValueSection 3855Adjustment Net Assets Net Asset Value

Section 3855Adjustment Net Assets

239,382,920$ (243,566)$ 239,139,354$ 11.69$ (0.01)$ 11.68$

Total Per Unit


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The impact of the adoption of Section 3855 as at December 31, 2012 is as follows:

Net Asset ValueSection 3855Adjustment Net Assets Net Asset Value

Section 3855Adjustment Net Assets

198,360,601$ (241,685)$ 198,118,916$ 11.55$ (0.02)$ 11.53$

Total Per Unit

9. FINANCIAL INSTRUMENTS AND RISK DISCLOSURES

Fair Value

Financial instruments consist of investments, cash, interest receivable, dividends receivable, accounts payable and accrued liabilities, and distributions payable. There are no significant differences between the carrying values of these instruments and their estimated fair values. Investments are carried at their fair value as described in Note 2.

The following tables present the Fund's financial instruments measured at fair value classified by the fair value hierarchy set out in CICA Handbook Section 3862:

As at December 31, 2013

Level 1 Level 2 Level 3 Total

Short-term holdings -$ 19,333,594$ -$ 19,333,594$

Canada bonds - 32,828,510 - 32,828,510

Provincial bonds - 35,808,837 - 35,808,837

Corporate bonds - 104,996,631 - 104,996,631

Canadian Mortgage-backed securities - - - -

Canadian securities 37,131,150 - - 37,131,150

Foreign securities 9,141,078 - - 9,141,078

46,272,228$ 192,967,572$ -$ 239,239,800$

As at December 31, 2012:

Level 1 Level 2 Level 3 Total

Short term holdings -$ 7,743,962$ -$ 7,743,962$

Canada bonds - 35,331,749 - 35,331,749

Provincial bonds - 18,186,660 - 18,186,660

Corporate bonds - 93,818,296 - 93,818,296

Canadian mortgage‑backed securities - 4,977,357 - 4,977,357

Canadian securities 33,263,005 - - 33,263,005

Foreign securities 7,298,421 - - 7,298,421

40,561,426$ 160,058,024$ -$ 200,619,450$

There have been no transfers between level 1 and level 2 during the years ended December 31, 2013 and 2012.

Risk Management and Disclosures

The Fund is exposed to various types of risks that are associated with its investment strategies, financial instruments and the markets in which it invests. The most important risks include market risk (equity and other price risk, interest rate risk and foreign exchange risk), credit risk and liquidity risk. These risks and related risk management practices employed by the


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Fund are discussed below. The sensitivity analysis shown in the notes to the statements may differ from actual trading and the difference could be material.

The Manager seeks to minimize potential adverse effects of these risks on the Fund's performance by employing professional, experienced portfolio advisers, by daily monitoring of the Fund's positions and market events, and by diversifying the investment portfolios within the constraints of the investment objectives. To assist in managing risks, the Manager also uses internal guidelines that identify the target exposure for each type of risk, maintains a governance structure that oversees the Fund's investment activities and monitors compliance with the Fund's stated investment strategies and securities regulations.

(a) Market Risk

Equity and other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market price (other than those arising from interest rate or foreign exchange risk). The investments of the Fund are subject to normal market fluctuations and the risks inherent in investment in financial markets. The maximum risk resulting from financial instruments held by the Fund is determined by the fair value of the financial instruments. The Manager moderates this risk through a careful selection of securities within specified limits and the Fund's other price risk is managed through diversification of the investment portfolio. The Investment Manager monitors the Fund's overall market positions on a daily basis and positions are maintained within established ranges. As at December 31, 2013, approximately 19.3% of the Fund's net assets are subject to equity and other price risk (2012 – 20.5%).

For the Fund, the most significant exposure to other price risk arises from its investments in equity securities. As of December 31, 2013, had the prices on the respective stock exchanges for these securities increased or decreased by 10%, with all other variables held constant, net assets would have increased or decreased, respectively, by approximately $4,600,000 (2012 - $4,100,000).

Interest rate risk

The Fund invests in fixed income securities which bear interest at fixed rates of interest, and accordingly, is subject to interest rate price risk resulting from changes in fair value from market fluctuations in interest rates.

The tables below summarize the Fund's exposure to interest rate risk by remaining term to maturity. The tables also illustrate the potential impact on the Fund's net assets as a result of a 100 basis point change in interest rates, assuming a parallel shift in the yield curve with all other variables held constant.


Less than 1 year 1-5 years 6-10 years >10 years Total

PotentialImpact onNet Assets

19,333,593$ 90,756,995$ 78,927,227$ 3,949,757$ 192,967,572$ 8,900,000$


Less than 1 year 1-5 years 6-10 years >10 years Total

PotentialImpact onNet Assets

7,743,962$ 88,122,960$ 60,148,420$ 4,042,682$ 160,058,024$ 7,200,000$


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Foreign exchange risk

The Fund, in the normal course of operations, will invest in securities in a foreign currency. Consequently, some of the assets and revenues are exposed to foreign exchange fluctuations.

The tables below indicate the foreign currencies to which the Fund has a significant exposure as at period end in Canadian dollar terms. The tables also illustrate the potential impact to the Fund's net assets as a result of a 5% change in these currencies relative to the Canadian dollar, the functional currency, with all other variables held constant.


CurrencyFair

Value%

Net Assets

PotentialImpact

on Net Assets

United States Dollars 9,222,887$ 3.9% 500,000$


CurrencyFair

Value%

Net Assets

PotentialImpact

on Net Assets

United States Dollars 7,403,854$ 3.7% 400,000$

(b) Credit Risk

Funds that invest in fixed income securities are subject to credit risk. This means that the value of these securities depends, in part, upon the ability of borrowers to pay all amounts owed to their lenders. Fixed income securities issued by borrowers with a high credit rating are considered to be less risky and therefore are generally worth more than securities issued by borrowers with a low credit rating.

The Fund limits its exposure to credit risk by placing its cash and short-term investments with high credit quality borrowers. To maximize the credit quality of its investments, the Fund Manager performs ongoing credit evaluations based upon factors surrounding the credit risk of customers, historical trends and other information. The carrying amounts of other assets also represent the maximum credit risk exposure as they will be settled in the short term.

All transactions in listed securities are settled upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made upon receipt of payment from the broker. Payment is made on a purchase once the securities have been delivered by the broker. The trade will fail if either party fails to meet its obligation.

The maximum exposure to any one debt issuer as of December 31, 2013 was to Canada Housing Trust, representing 13.7% of the net assets of the Fund (2012 - Canada Housing Trust, representing 17.8% of the net assets of the Fund).

The Fund invests in financial assets, which carry an investment grade rating as determined by Standard & Poor's. Ratings for securities that subject the Fund to significant credit risk at are noted below.¨


14

2013 2012

Portfolio by rating category

RatingShort-Term HoldingsR-1 High 100.0% 100.0%

Total 100.0% 100.0%

Long-Term HoldingsAAA 44.6% 50.9%

AA 18.8% 12.1%

A 30.1% 27.9%

BBB 6.5% 9.1%

Total 100.0% 100.0%

(c) Liquidity Risk

The Fund's investments are considered readily realizable and highly liquid. Therefore the Fund's liquidity risk is considered minimal.

In addition, the Fund has financial liabilities outstanding including accounts payable and accrued liabilities and distribution payable. These financial liabilities are all current and are due within 12 months.

10. STATEMENT OF PORTFOLIO TRANSACTIONS

A statement of portfolio transactions (unaudited) for the year ended December 31, 2013 will be provided without charge by writing to:

Nexus Investment Management Inc. 111 Richmond Street West, Suite 801 Toronto, Ontario M5H 2G4

11. FILING EXEMPTION

The Fund will rely on the financial statement filing exemption provided in section 2.11 of NI 81-106 for the financial year ending December 31, 2013.

nexus north american income fund · 2015-07-13 · nexus north american income fund statement of...

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