National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from section 2.1(1) of National Instrument 81-102 Investment Funds to permit a global fixed income fund to invest more than 10 percent of net assets in debt securities issued by a foreign government or supranational agency, subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.1(1), 19.1.
October 12, 2018
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
MACKENZIE FINANCIAL CORPORATION
IN THE MATTER OF
LONDON LIFE PATHWAYS GLOBAL CORE PLUS BOND FUND
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) from subsection 2.1(1) of NI 81-102 (the Concentration Restriction) to permit the Fund to invest up to:
(a) 20% of the Fund's net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction in Canada or the government of the United States of America and are rated “AA” by S&P Global Ratings Canada (S&P) or its DRO affiliate (as defined in NI 81-102), or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates; and
(b) 35% of the Fund’s net asset value at the time of the transaction in evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments other than the government of Canada, the government of a jurisdiction in Canada, or the government of the United States of America and are rated “AAA” by S&P or its DRO affiliate, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates
(collectively, the Requested Relief).
The evidences of indebtedness described above are collectively referred to as Foreign Government Securities.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions).
Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation amalgamated under the laws of Ontario with its head office in Toronto, Ontario.
2. The Filer is registered as an investment fund manager, portfolio manager, exempt market dealer and commodity trading manager in Ontario. The Filer is also registered as a portfolio manager and exempt market dealer in all other Canadian provinces and territories and as an investment fund manager in Newfoundland and Labrador and Québec.
3. The Filer is the manager, trustee and portfolio manager of the Fund.
4. The Fund will be an open-ended mutual fund trust established under the laws of Ontario.
5. Securities of the Fund will be offered by simplified prospectus filed in all of the provinces and territories in Canada and, accordingly the Fund will be a reporting issuer in the Jurisdiction and the Other Jurisdictions. A preliminary simplified prospectus was filed for the Fund via SEDAR in all the provinces and territories on August 24, 2018 (the Simplified Prospectus).
6. The Filer and the Fund are not in default of securities legislation in any jurisdiction of Canada.
7. The Fund’s investment objective is expected to be substantially as follows: “The Fund aims to generate income by investing primarily in a diversified portfolio of fixed-income securities issued by companies or governments of any size, anywhere in the world. The Fund also seeks to achieve long-term capital growth by investing in fixed-income securities and other investments. The Fund will employ a flexible approach, allocating assets across credit quality, structures, sectors, currencies and countries.”
8. To achieve the investment objective of the Fund, it is expected that the investment team will employ a flexible approach, allocating assets across credit quality, structures, sectors, currencies and countries. The Fund can invest in all types of fixed-income securities from around the world.
9. Although the Fund aims to invest primarily in a diversified portfolio of fixed-income securities, depending on market conditions, the Fund’s portfolio managers seek the discretion to gain exposure to any one issuer of Foreign Government Securities in excess of the Concentration Restriction.
10. The portfolio managers of the Fund will follow a value investment style, maximizing the relative value for risk around the world. The Fund will invest across all fixed-income credit qualities and in a wide variety of assets from anywhere in the world, including government bonds, high yield bonds and loans. This flexibility extends across structures, sectors, currencies and countries. In following this style, in conjunction with fundamental investment analysis, there may be periods where the portfolio managers believe that Foreign Government Securities are better suited to the Fund’s investment objectives.
11. Allowing the Fund to hold highly rated Foreign Government Securities will enable the Fund to preserve capital in foreign markets during adverse market conditions, to have access to assets with minimal credit risk and will enable the portfolio manager to assess its views on interest rates and duration.
12. The increased flexibility to hold Foreign Government Securities may also yield higher returns than Canadian or U.S. shorter term government fixed-income alternatives.
13. Section 2.1(1) of NI 81-102 prohibits the Funds from purchasing a security of an issuer, other than a “government security” as defined in NI 81-102, if immediately after the purchase more than 10% of the net asset value of the fund, taken at market value at the time of the purchase, would be invested in securities of the issuer.
14. The Foreign Government Securities are not within the meaning of “government securities” as such term is defined in NI 81-102.
15. The Filer believes that the ability to purchase Foreign Government Securities in excess of the limit in subsection 2.1(1) of NI 81-102 will better enable the Fund to achieve its fundamental investment objectives, thereby benefitting the Fund’s investors.
16. The Fund seeks the Requested Relief to enhance its ability to pursue and achieve its investment objectives.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:
1. paragraphs (a) and (b) of the Requested Relief cannot be combined for any one issuer;
2. any security that may be purchased under the Requested Relief is traded on a mature and liquid market;
3. the acquisition of the securities purchased pursuant to this decision is consistent with the fundamental investment objectives of the Fund;
4. the Simplified Prospectus of the Fund discloses the additional risks associated with the concentration of the net asset value of the Fund in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which the issuer is located; and
5. the Simplified Prospectus of the Fund discloses, in the investment strategies section, a summary of the nature and terms of the Requested Relief, along with the conditions imposed and the type of securities covered by this decision.
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission