2020 Semi-Annual Management Report of Fund Performance
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BMO Growth & Income Fund (the “Fund”) For the six-month period ended June 30, 2021 (the “Period”) Manager: BMO Investments Inc. (the “Manager” or “BMOII”) Portfolio Manager: Guardian Capital LP, Toronto, Ontario (the “portfolio manager”) 2021 Semi-Annual Management Report of Fund Performance This semi-annual management report of fund performance contains financial highlights but does not contain the complete semi-annual or annual financial statements of the Fund. If the semi-annual financial statements of the Fund do not accompany the mailing of this report, you may obtain a copy of the semi-annual or annual financial statements at your request, and at no cost, by calling 1-800-668-7327 and 1-800-665-7700, by writing to us at BMO Investments Inc., First Canadian Place, 43rd Floor, 100 King Street West, Toronto, Ontario, M5X 1A1 or by visiting our website at www.bmo.com/gam/ca and www.bmo.com/mutualfunds or SEDAR at www.sedar.com. You may also contact us using one of these methods to request a copy of the Fund’s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. MANAGEMENT DISCUSSION OF FUND PERFORMANCE Results of Operations (WTI) oil prices increased from just under US$49 per barrel During the Period, the Fund’s total net asset value changed at the beginning of the year to over US$73 per barrel by the from approximately $114 million to approximately end of the Period. The strength in oil prices, along with a $120 million. Advisor Series units of the Fund returned rebound in natural gas prices, drove energy equities to 18.00%. Please see the Past Performance section for outperform the broader market. information on the performance returns of the Fund’s For the Period, the S&P/TSX Composite Index returned other series. 17.3%. The best performing sector was in the Energy sector. Canadian equity markets were very strong in the first half of High dividend stocks, as measured by the S&P/TSX 2021. Economies reopened as vaccinations increased and Composite High Dividend Index, returned 25.6%, lockdown measures eased, which drove a rebound in economic outperforming the S&P/TSX Composite. The outperformance activity and corporate earnings that exceeded expectations, by high dividend stocks was largely attributable to a higher further supporting equity markets. Value and cyclical stocks, exposure to Energy, Real Estate and Communication including higher dividend yielding stocks, outperformed the Services sector and lower exposure to the Industrials sector broader market during the Period, despite a resurgence in and gold stocks. growth stocks late in the second quarter of 2021. The portfolio manager’s focus on high quality, high dividend The Government of Canada 10-year bond yield rose from paying stocks was positive during the Period, while both 0.68% to 1.39% during the Period, as expectations for sector allocation and stock selection added value relative the stronger economic growth and higher inflation increased S&P/TSX Composite Index. following positive vaccine rollouts and aggressive stimulus On the positive side, the Energy sector added the most by governments and central banks. However, concerns about value, which was driven by an overweight position in the persistent high inflation moderated toward the end of the sector, along with good stock selection from ARC Resources second quarter of 2021, which caused bond yields and the Ltd., Keyera Corp. and Suncor Energy. The Materials sector price of gold to decline from the highs reached in May. was also a source of value add, driven by solid performance Within the Energy sector, oil prices made a strong move by Nutrien Ltd. and CCL Industries Inc. An underweight higher in the first half of the year, as global inventories position in the Industrials sector, along with strong continued to draw down aggressively amid recovering performance from SNC-Lavalin Group Inc. and Finning demand. Supply also remained disciplined as OPEC+ International Inc. was also positive. Within the Communication successfully managed supply and U.S. production remained Services sector, very strong performance from Shaw well below pre-pandemic levels. West Texas Intermediate BMO Growth & Income Fund Communications Inc. following the long-anticipated takeover As vaccine rollouts become more widespread, both offer by Rogers Communications Inc. added value. Lastly, an consumers and businesses are well positioned to fuel the overweight exposure to the Health Care sector, combined economic recovery. Consumers have accumulated with strong returns from both Bausch Health Companies Inc. significant savings through unprecedented government and Chartwell Retirement Residences were positive. support programs and curbed spending and are poised to unleash those savings. Similarly, many corporates are on On the negative side, an overweight position in the Utilities solid financial footing, while inventory rebuilding and sector was the largest detractor. The Fund’s exposure to the accelerated activity should drive strong earnings growth Financials sector detracted from relative performance, and capital spending. which was driven by underperformance from Element Fleet Management Corp., Manulife Financial Corp. and Intact With price-earnings multiples above long-term averages, Financial Corp. An underweight position in the Consumer the portfolio manager expects market multiples to gradually Staples sector and poor returns from Alimentation Couche- compress moving through 2021, which could temper overall Tard Inc. and Maple Leaf Foods detracted. In addition, an equity returns despite the very strong earnings growth underweight position in the Information Technology sector, outlook. However, the portfolio manager believes some not owning Shopify Inc., and the performance of Celestica sectors remain inexpensive relative to the broader market Inc., were detractors from the Fund's performance. and still have room for multiple expansion. In particular, high dividend stocks continue to be well positioned to be The portfolio manager initiated new positions in Johnson & relative outperformers, following on their strong Johnson and Spin Master Corp. during the Period. Johnson & performance since November of 2020. The portfolio will Johnson offers one of the most diversified exposures within continue to invest in higher quality dividend stocks and the Health Care sector and its stock was highly defensive avoiding lower quality, higher beta stocks. In addition, they with resilient performance during the COVID-19 pandemic. believe Canadian stocks could outperform their U.S. peers Spin Master Corp. is a children’s entertainment company given the Canadian market has a more attractive relative that designs, manufactures and markets toys, games and valuation, higher exposure to global growth and the right entertainment properties. The company has expanded sectors, and better earnings momentum. globally in recent years, while adding new business lines, which is expected to enhance the company’s growth In terms of positioning in within the Energy sector, the prospects while diversifying the business. With net cash on portfolio manager has continued to prudently trim the the balance sheet and an expanded global platform, the Fund’s exposure following the strong absolute and relative company has the resources in place to accelerate both performance of Energy stocks. However, the portfolio organic growth and mergers and acquisitions. manager continues to maintain a sizeable overweight position relative to the S&P/TSX Composite Index. The portfolio manager sold Emera Inc. to fund the purchase of Johnson & Johnson. While the portfolio manager had no Within other sectors, the portfolio manager sees good concerns regarding Emera Inc.’s fundamentals, they thought opportunities in companies and sectors that will continue to it was beneficial to further diversify the portfolio exposure in benefit from the reopening of economies, such as the Real the Health Care sector and the U.S. market. Estate, Industrials and Consumer Discretionary sectors. The Fund has overweight exposure to all of these three sectors. Recent Developments The Fund continues to remain largely underweight in the While some regions continue to struggle against COVID-19, Materials and Industrials sector, as well as have less many countries are successfully rolling out vaccination exposure to the Financials and Technology sectors programs and the global economy continues to rebound compared to the benchmark. from the worst of the pandemic. Equity markets are already reflecting the improving economic environment and sit well above pre-pandemic levels. Uncertainty about the sustainability of high levels of inflation and the potential for materially higher interest rates, along with the potential for a resurgence of infections due to the variants may lead to elevated volatility levels in the near term. However, the portfolio manager would view any pullback as temporary given the expected strong economic recovery as vaccine roll outs accelerate. BMO Growth & Income Fund RELATED PARTY TRANSACTIONS (c) trades in debt securities in the secondary market with BMO Investments Inc., an indirect, wholly-owned subsidiary BMO Nesbitt Burns Inc., an affiliate of the Manager, that of Bank of Montreal (“BMO”), is the Manager of the Fund. is trading with the Fund as principal; and From time to time, the Manager may, on behalf of the Fund, (d) inter-fund trades enter into transactions or arrangements with, or involving, other members of BMO Financial