Bank of N T Butterfield & Son : Butterfield Money Market Fund (CAD Class A) - 2024 Financials

Published: 2024-11-28 12:30:06 ET NTB

Butterfield Money Market Fund Limited

FINANCIAL STATEMENTS

FOR THE YEAR ENDED

JUNE 30, 2024

JUNE 2024 ANNUAL REPORT

USD CLASS

As the financial year began, the Federal Open Market Committee ("FOMC") was coming to the end of a tightening cycle. It completed one more 25bps hike in July and then paused for the duration of the year with the interest rate topped out at the 5.25% - 5.50% range. The state of the economy had improved and the Federal Reserve System ("Fed") believed that conditions allowed for the observation of the impact of the previous series of rate hikes over the past several months. Indeed, the consumer still proved resilient and GDP numbers were decent. Some job seekers had negotiated higher wages because of the tightening cycle. This was a beneficial move as their new salary was high enough to absorb the impact of rising costs in the near term. Inflation was on the path back to target range and unemployment was very low. All signs that a soft landing may actually occur as the central bank hoped. As we entered 2024, markets forecasted an impending recession and subsequently priced in several rate cuts throughout the calendar year. This proved to be a very aggressive and misguided forecast. As always, US consumers found ways to spend their income. GDP slowed but failed to reach negative. The FOMC was still uncertain about the potential for a reacceleration of inflation and therefore, was not ready to cut the Federal Funds rate with inflation above target at 3.3% to end the financial year. However, the labor market had begun to weaken with unemployment slowly rising with every print.

The Class A yield climbed a little further before levelling out due to the hold status of the FOMC for the majority of the period. Short-term rates are directly influenced by the Federal Funds rate and hence, the Fund benefitted from the highest annual yields in more than a decade. Higher yields also generated subscriptions into the Fund and the Class size rose from $1.4 billion to $1.6 billion over the financial year. The uneasiness created by bank collapses earlier in 2023 had subsided as headlines of bank failures stopped appearing in the news. The Fund did not hold investments in any of the failed banks, but the portfolio was positioned cautiously to avert the fall out. Holdings in banks were reduced and with that, Treasury bill exposure increased. This benefitted the Class through improvement in the credit quality as the A-1+ percentage rose to over 80% and also boosted the liquidity of the Class. By the end of 2023, Treasury bills no longer offered competitive yields and maturities were reinvested into commercial paper where possible. Further, the calls for a recession dramatically inverted the yield curve in the short end. This led to shortening the maturities within the portfolio as to not lock in rate cuts that never materialized. That, in turn, resulted in average life hovering below or at neutral for most of the period. Average life by June 2024 was only 25 days.

While recession calls were overdone at the end of 2023, the markets have returned to forecasting an easing cycle for the next financial year with several rate cuts to come. This time though, the call is more justified and has a greater possibility of actually happening. The labor market continues to weaken and unemployment is one of the Fed's dual mandates. With every deteriorating labor metric, the central bank becomes more dovish. In contrast, inflation fell back within the target range. While there is still a risk that inflation takes off again, the trends in the labor market overshadow the possibilities of inflation. The FOMC will have a balancing act to ensure neither get out of control. Calls for recession are ongoing as well, although GDP shows no evidence of this actually occurring. The Class yield will fall between lower reinvestment rates, with the expectation of rate cuts, and realized shifts in monetary policy over the financial year. The positive note for Money Markets is that this easing cycle is unlikely to result in a race to zero like the previous one. Instead, the more likely outcome is a reduction to the economy's new run rate which will leave Money Market Funds with a positive yield and able to smoothly operate at the new ideal level.

Canadian Dollar Class

This financial year looked completely different from the prior year. The year started with the Bank of Canada ("BoC") engaged in a tightening cycle. There was tremendous focus on inflation which exceeded their target range. However, it was becoming apparent that higher yields were taking their toll on consumers and business alike, and concern was also mounting regarding pressure within the housing market. July of 2023 would prove to be the last hike in that cycle, topping out the overnight lending rate at 5%. From here, the central bank decided to observe the progression of the economy. There is a natural lag between the execution of monetary policy and the time it takes to actually feel the impact of those decisions. Trickier still, inflation re-accelerated in August of 2023 adding to concerns that inflation could still be a problem while noticing that the economy struggled to grow and may need some support instead. GDP for the third quarter of 2023 was negative, lending to fears that maybe they continued the hiking cycle too long and that a recession was upon them. The BOC certainly needed to be prudent in their decision-making so as not to tip the scales in either direction. With all this to consider, the overnight lending rate was held at 5% for several months. By Q4 of 2023, growth was flat, an unsettling development given the negative print from the prior quarter. Inflation was still above 3% and the unemployment rate began to trend upwards. The start of 2024 showed a little more promise on the growth front, meanwhile inflation was finally receding within the target range. With the threat of inflation subsiding, yet growth clearly needing a boost, the BoC cut the rate in time for the end of the financial year in June.

At the beginning of the financial year, the Fund was benefitting from a tightening cycle. Rising short-term rates fed directly into the yields for the Class, and were the highest in more than a decade. Better yields also encouraged investment in the Class and the Class size climbed to C$34 million from the C$22 million to start the financial year. The composition of the portfolio was mainly Provincial Notes and Treasury bills. Following the bank failures in 2023, markets became nervous on the viability of all banks. Because of this, bank exposure within the Class was limited in 2023. As time passed and no news emerged of further bank failures, bank paper was once again added to the portfolio. Banks offer higher yields than government securities whilst Canadian banks are well-capitalized and have proven time and again the ability to weather any economic disturbances. The overnight deposit was also held at a minimal level because the offered yield was not competitive. Instead, liquidity is achieved through the Treasury bills and this ensures the smooth operation of the Class. Duration was shortened as the expectations of rate cuts into 2024 inverted the yield curve. Fortunately, the severity of cuts priced in did not materialize this financial year. Short duration ensured that these artificially low rates were not incorporated into the portfolio.

The BoC cut in June was the start of an easing cycle. Growth has not meaningfully picked up but closer looks at the composition of GDP revealed that recent prints were bolstered by exports. The US is their main trading partner and the outlook for consumer spending in the US is extremely uncertain. This creates the case for further rate cuts to stimulate growth domestically and not rely solely on external help like exports. Additionally, the close ties between the two countries means that the central bank does not like to diverge too far away from US monetary policy. In that regard, the US has also entered an easing cycle which removes one cause for objection to the current path of rates. The medium term does seem more optimistic. Inflation is returning to the 2% target as desired and Canada has averted a recession for now. Business sentiment has improved and with reduced pressure on mortgages and the consumer, the future looks promising. The central bank will be watching unemployment intently for signs of improvement in that area as well. Similar to the US, the overnight lending rate is expected to bottom out at a new operating level, potentially near 2.5% as opposed to a return to zero rates as was the case during the pandemic.

Sterling Class

Compared to the prior financial year, this one was far less eventful and monetary policy could be directly linked to the economic situation as opposed to other influences. The Bank of England ("BoE") was determined to bring inflation under control. Indeed, the central bank has struggled over numerous years to contain inflation and this challenge was a major obstacle in 2023 as well. Given the history, the BoE's tenacity led to a split voting committee. Some members felt that they should stay the course and continue the tightening cycle to ensure that inflationary pressures subside. However, others were considering that growth had slowed tremendously. In fact, by the end of 2023 the UK was in a technical recession. Further, the recession was barely noticed as the prolonged period of sluggish growth meant it felt the same for struggling consumers. They were feeling the pinch of higher mortgage and energy costs so slight dips in and out of negative territory didn't change much from their perspective. However, forecasts from economists and businesses alike were that the UK economy would pick up in 2024 and that was exactly what happened. Growth rebounded to a strong 0.7% for the first quarter followed by a solid 0.5% for the second quarter. Better still, inflation did actually fall back toward the 2% target by May of 2024, an amazing development considering inflation began the year at 7.9%. Ironically, the unemployment rate started and ended the year at 4.2%, despite the movement in between. It peaked at 4.3% in July 2023 before declining to 3.8% at the end of December. With the dawn of 2024, the unemployment rate changed course and grew to 4.4% by May of 2024 before the small drop to June's level. However, the BoE's focus on inflation first and the technical recession second meant that the deviations in the unemployment rate were largely overlooked.

With a single hike at the meeting following the last financial year end, the BoE has been on hold at 5.25%. Therefore, the Class yield climbed only a little further before levelling off. The technical recession fueled speculation by market participants of an aggressive easing cycle for 2024. This translated into lower reinvestment rates and maturities were kept short. Duration on this Class began and ended the financial year a little above the neutral of 30 days. The credit quality of the portfolio was outstanding throughout the period and the level of A-1+ securities was 100% for the majority of the financial year. Bank exposure was kept to a minimum following the sudden sale of Credit Suisse to UBS, that added a European concern to what had previously been a US regional bank issue. Credit Suisse was not a holding in this Class at the time, but our commitment to maintain the safety of principal guided our decision-making. Aside from the utilization of overnight deposits which are incorporated as part of our main strategy, bank exposure only accounted for a few percentage points of the entire portfolio. Instead, UK Treasury bills were the main component of the portfolio. This year was deemed a successful year for Money Markets as the elevated level for the base rate encouraged investment into the Class. Starting from £18 million, the Class size jumped to nearly £30 million by June 2024.

Inflation ending the year at 2% was a relief for the central bank. After combatting excessively high inflation for the past 3 years, it is now under control and the BoE can turn their attention to other aspects of the economy. Of course, they will be intently observing for re-acceleration but for now, the economy is faring well overall. Growth has resumed and is expected to trend at this level over the next financial year. With inflation and growth out of the way temporarily, the unemployment rate will now take its place as the metric to watch. A weakening labor market will forebode trouble with consumer spending and ultimately lead to a return to slow growth in the medium term. Therefore, the central bank will have to consider the extent of easing warranted to keep financial stability on track. At the moment, the forecast is for a mild easing cycle. A few rate cuts will take some of the pressure off from a high base rate, but ultimately concerns surrounding medium-term inflation along with the relatively smooth operating environment is unlikely to require steep or swift cuts in the base rate.

Jeffrey Abbott, CFA

Chairman/Director

Butterfield Money Market Fund Limited

October 25, 2024

Ernst & Young Ltd.

Tel: +1 441 295 7000

3 Bermudiana Road

Fax: +1 441 295 5193

Hamilton HM 08

ey.com

P.O. Box HM 463

Hamilton HM BX

BERMUDA

Independent Auditor's Report

The Board of Directors

Butterfield Money Market Fund Limited, comprising US$ Class, CDN$ Class and GBP£ Class

Opinion

We have audited the financial statements of Butterfield Money Market Fund Limited, comprising US$ Class, CDN$ Class and GBP£ Class (collectively referred to as the Fund), which comprise the statement of financial position as at June 30, 2024, and the statement of comprehensive income, statement of changes in net assets attributable to shareholders and statement of cash flows for the year then ended, and notes to the financial statements, including material accounting policy information.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Fund as at June 30, 2024, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Fund in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other Information Included in the Fund's 2024 Annual Report

Management is responsible for the other information. The other information comprises the information, other than the financial statements and our auditor's report thereon, in the Annual Report.

Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

We obtained the Annual Report prior to the date of this auditor's report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor's report. We have nothing to report in this regard.

Responsibilities of Management and Those Charged With Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, 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.

In preparing the financial statements, management is responsible for assessing the Fund's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Fund's financial reporting process.

A member firm of Ernst & Young Global Limited

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this independent auditor's report is Silverious Bakurumpagi.

October 25, 2024

A member firm of Ernst & Young Global Limited

Butterfield Money Market Fund Limited

DIRECTORS

David Ware

Dawn Griffiths (alternative: Elizabeth Denman)

Jeffrey Abbott (alternative: Jody Feldman) Nigel Garrard

Dwayne Outerbridge (resigned on October 12, 2023) Andrew Rossiter (appointed on October 23, 2023)

INVESTMENT ADVISER

Butterfield Asset Management Limited

65 Front Street

Hamilton HM 12

Bermuda

CUSTODIAN

The Bank of N.T. Butterfield & Son Limited

65 Front Street

Hamilton HM12

Bermuda

REGISTRAR, TRANSFER AGENT AND ADMINISTRATOR

MUFG Fund Services (Bermuda) Limited

Cedar House, 4th Floor North 41 Cedar Avenue Hamilton HM 12

Bermuda

AUDITORS

Ernst & Young Ltd.

3 Bermudiana Road

Hamilton HM 08

Bermuda

Butterfield Money Market Fund Limited

STATEMENT OF FINANCIAL POSITION

As at June 30, 2024

US$ CLASS

June 30, 2024

June 30, 2023

Notes

US$

Assets

2 h)

222,302

202,745

Cash and cash equivalents

Financial assets at fair value through profit or loss

3, 4

1,663,081,902

1,416,822,641

Interest receivable

243,828

17,321

Prepaid expenses

54,152

117,353

Total assets

1,663,602,184

1,417,160,060

Liabilities

1,247,586

Accrued expenses

6, 7

1,439,107

Total liabilities (excluding net assets attributable

to shareholders)

1,247,586

1,439,107

Net assets attributable to shareholders

1,662,342,598

1,415,708,953

Organisational shares

12,000

Total liabilities and equity (including

net assets attributable to shareholders)

1,663,602,184

1,417,160,060

Net assets available to shareholders - Sub-Class A

902,359,905

634,451,287

Number of redeemable shares in issue - Sub-Class A

32,386,533

23,893,938

Net asset value per redeemable share - Sub-Class A

27.8622

26.5528

Net assets available to shareholders - Sub-Class B

759,982,693

781,257,666

Number of redeemable shares in issue - Sub-Class B

26,700,073

28,829,677

Net asset value per redeemable share - Sub-Class B

28.4637

27.0991

The accompanying notes are an integral part of these financial statements

Butterfield Money Market Fund Limited

STATEMENT OF FINANCIAL POSITION (CONTINUED)

As at June 30, 2024

CDN$ CLASS

June 30, 2024

June 30, 2023

Notes

CDN$

Assets

21,110

Cash and cash equivalents

2 h)

Financial assets at fair value through profit or loss

3, 4

34,423,672

22,653,203

Interest receivable

347

Prepaid expenses

43,544

48,234

Total assets

34,488,326

22,701,784

Liabilities

Bank overdraft

2 h)

371,884

Accrued expenses

6, 7

13,522

17,381

Total liabilities

13,522

389,265

Net assets attributable to shareholders

34,474,804

22,312,519

Net assets available to shareholders - Sub-Class A

34,452,392

22,291,076

Number of redeemable shares in issue - Sub-Class A

1,848,035

1,248,483

Net asset value per redeemable share - Sub-Class A

18.6427

17.8545

Net assets available to shareholders - Sub-Class B

22,412

21,443

Number of redeemable shares in issue - Sub-Class B

1,168

Net asset value per redeemable share - Sub-Class B

19.1884

18.3528

The accompanying notes are an integral part of these financial statements

Butterfield Money Market Fund Limited

STATEMENT OF FINANCIAL POSITION (CONTINUED)

As at June 30, 2024

GBP£ CLASS

June 30, 2024

June 30, 2023

Notes

GBP£

Assets

14,251

Cash and cash equivalents

2 h)

Financial assets at fair value through profit or loss

3, 4

29,746,714

20,559,776

Interest receivable

665

4,500

Prepaid expenses and receivables

52,778

46,961

Total assets

29,814,408

20,611,237

Liabilities

Bank overdraft

2 h)

1,952,145

Accrued expenses

6, 7

12,953

11,950

Total liabilities

12,953

1,964,095

Net assets attributable to shareholders

29,801,455

18,647,142

Net assets available to shareholders - Sub-Class A

29,052,788

17,842,236

Number of redeemable shares in issue - Sub-Class A

1,323,895

851,094

Net asset value per redeemable share - Sub-Class A

21.9449

20.9639

Net assets available to shareholders - Sub-Class B

748,667

804,906

Number of redeemable shares in issue - Sub-Class B

33,357

37,578

Net asset value per redeemable share - Sub-Class B

22.4441

21.4196

The accompanying notes are an integral part of these financial statements

Disclaimer

Bank of N. T. Butterfield & Son Limited published this content on November 28, 2024, and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on November 28, 2024 at 17:29:09.554.