Bloom Select Income Fund : 2021 Annual Report - English

BLOOM SELECT INCOME FUND

BLB.UN

2021 ANNUAL REPORT

FORWARD-LOOKING STATEMENTS

Some of the statements contained herein including, without limitation, financial and business prospects and financial outlook may be forward-looking statements which reflect management's expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as "may," "will," "should," "could," "anticipate," "believe," "expect," "intend," "plan," "potential," "continue" and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, changes in general economic and market conditions and other risk factors. Although the forward-looking statements contained herein are based on what management believes to be reasonable assumptions, we cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof, unless otherwise indicated, and we assume no obligation to update or revise them to reflect new events or circumstances.

MANAGEMENT REPORT OF FUND PERFORMANCE

This annual management report of fund performance for Bloom Select Income Fund (the "Fund") contains financial information but does not contain the audited annual financial statements of the Fund. The audited annual financial statements follow this report. You may obtain a copy of any of the Fund's annual or interim reports, at no cost, by calling 1-855-BLOOM18(1-877-256-6618) or by sending a request to Unitholder Information, Bloom Investment Counsel, Inc., Suite 1710, 150 York Street, Toronto, Ontario, M5H 3S5, or by visiting our website at www.bloomfunds.ca or SEDAR at www.sedar.com. Unitholders 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, Independent Review Committee's report, or quarterly portfolio disclosure.

In accordance with investment fund industry practice, all figures presented in this management report of fund performance, unless otherwise noted, are based on the Fund's calculation of its net asset value, which is in accordance with the terms of the Fund's declaration of trust and annual information form, and is based on closing market prices of investments. Figures presented in the financial statements and in the Financial Highlights section of this management report of fund performance are based on net assets calculated using International Financial Reporting Standards which require the use of a price between the last bid and ask prices for investment valuation, which may differ from the closing market price.

BLOOM SELECT INCOME FUND - 2021 ANNUAL REPORT

MANAGEMENT DISCUSSION OF FUND PERFORMANCE

THE FUND

Bloom Select Income Fund is a closed-end investment trust managed by Bloom Investment Counsel, Inc. ("Bloom" or the "Manager"). Bloom provides administrative services to the Fund and actively manages the Fund's portfolio. The units of the Fund trade on the Toronto Stock Exchange ("TSX") under the symbol BLB.UN. The units of the Fund are RRSP, DPSP, RRIF, RESP, RDSP and TFSA eligible. This Fund has a distribution reinvestment plan ("DRIP") allowing unitholders to automatically reinvest their monthly distributions in additional units of the Fund.

INVESTMENT OBJECTIVES AND STRATEGIES

The Fund's investment objectives are to provide unitholders with an investment in an actively managed portfolio comprised primarily of Canadian dividend paying equities (common shares, real estate investment trusts (REITs) and income trusts) that exhibit low volatility at the time of investment, monthly cash distributions that have a large component of Canadian eligible dividends, and the opportunity for capital appreciation.

RECENT DEVELOPMENTS

COVID-19

The ongoing effects of the global pandemic caused by the COVID-19, a novel coronavirus, and new infection waves caused by new virus variants continue to negatively impact companies worldwide. Successful vaccination initiatives in some regions contrast with vaccine hesitancy and vaccine undersupply in others, and uncertainty around the spread and effects of new virus variants continues. The pandemic continues to have the potential to have an adverse effect on global stock markets for an indeterminate length of time. This could affect the valuation of the Fund's investment portfolio and consequently the net asset value and net asset value per unit of the Fund. The negative effects on the Fund of this coronavirus and any other epidemics and pandemics that may arise in the future could be complex and cannot necessarily be foreseen at the present time. The Manager continues to monitor events as they unfold and has successfully implemented an enhanced business continuity plan to ensure the seamless operation of the Manager in its roles as manager and portfolio advisor of the Fund during periods of pandemic related lockdown and continued work-from-home. This plan has facilitated uninterrupted work and communication from home as well as the Manager's interaction with the Fund's various service providers.

Inflation and interest rates

Canadian investment markets displayed some concerns about rising inflation in the latter part of the year, with associated concerns around interest rate hikes. Late in the year, the Bank of Canada somewhat softened its position on inflation and an increase in interest rates is expected in Spring of 2022. The Fund's focus on low volatility dividend paying Canadian equities places it in a position to respond to these events, given that dividends often keep pace with inflation. These matters are further discussed in the Investment Manager's Report below.

Russian invasion of Ukraine

In February 2022, Russian forces invaded Ukraine, resulting in an armed conflict and economic sanctions on Russia. Price volatility, trading restrictions, including the potential for extended halting of Russian market trading, and general default risk has impacted Russian securities. Disruption of Russian exports, most notably energy, could cause global energy and food prices to rise. The conflict may contribute to an increase in short-term market volatility, with European markets being most at risk. It is uncertain how long the conflict, economic sanctions and market instability will continue and whether they will escalate further. The manager is actively monitoring the situation.

INVESTMENT MANAGER

The manager was established in 1985 and specializes in the management of segregated investment portfolios for wealthy individuals, foundations, corporations, institutions and trusts. In addition to its conventional investment management business, the Manager currently manages specialty high-income equity portfolios comprised of dividend paying common equity securities, income trusts and REITs for three TSX listed closed end funds.

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BLOOM SELECT INCOME FUND - 2021 ANNUAL REPORT

INVESTMENT MANAGER'S REPORT

JANUARY 3, 2022

Fund Performance

The Fund returned, net of fees and expenses, 12.4% for the year. Remembering that the Fund is mandated as a low beta (low volatility) Fund, it performed well albeit with a lower return than that of the S&P/TSX High Dividend Total Return Index and the S&P/TSX Composite Total Return Index. This is largely due to the Fund's lack of oil & gas investments all of which are high beta after their extreme volatility over the last five or more years. For the year, positions in Bank of Nova Scotia, Park Lawn Corporation and Toronto Dominion Bank were the greatest contributors to performance. The strongest performing sectors for the Fund were Financials, Consumer Discretionary and Real Estate.

The most recent measure of Active Share for Bloom Select Income Fund was a very high 77.9%. Active Share is a measure of the percentage of stock holdings in a manager's portfolio that differs from the benchmark index. We believe this high Active Share gives the Fund a greater ability to take advantage of upside opportunities or protect against downside risk very distinctly in comparison to the great number of less active managers with performance that closely follows the benchmark.

Canadian Economy

Just as we thought the world was getting back to normal, we are now facing the Omicron-driven fourth wave of the seemingly never ending pandemic. While the outlook is now clouded by the uncertainty surrounding the Omicron variant and how it will impact the economy, one thing is certain - the economy was on a solid footing heading into the Fall. With the latest release of GDP figures it appears that growth in Q3 was much stronger than anticipated coming in at 5.4% annualized. This follows second quarter results which were revised downwards and came in much worse than previously thought, showing a contraction of 3.2% in that period compared to the previous expectation of growth of 1.1%. Strength in Q3 came from the goods and services sectors in addition to the trade sector. The services sector has room to grow as it is still 4% below pre-pandemic highs.

Canada's recovery thus far remains in an enviable position compared to other G7 countries. Similar to most G7 countries, GDP in the third quarter remained below its pre-pandemic level in real terms. However, in nominal terms it was the second best performance in the G7, exceeding pre-pandemic levels by 6.7% largely fueled by a jump in resource prices. October's real GDP came in at 0.8%, but it is expected that November figures will be negatively impacted by the B.C. floods and Omicron will weigh heavily on December figures. Despite these setbacks the economy appears to have a solid footing and is on track to post some decent gains in the final quarter of the year. With renewed pandemic restrictions across Canada the expectation is for GDP to remain flat in the first quarter of 2022. Nevertheless, while still early days, GDP in 2022 is estimated to grow around 4% with some of the economic recovery now being pushed out to 2023 when GDP is estimated to grow 3.5%.

Following four months of a slowdown, housing starts showed strength once again in November rising to 301,000 annualized units. This was slightly short of a record set earlier in the year and well above the historical average. Multi-unit properties led the surge in November with most of the strength coming from Ontario, however, only three provinces (Newfoundland, Nova Scotia and PEI) experienced declining housing starts in November.

The housing market continues to thrive on the low interest rate environment with price growth continuing to accelerate. Over the past three months prices have increased 32% on an annualized basis and 22% over the past six months, with price increases across all markets. New listings rose 3.3% in November and are now 3% above the 2019 average with the sales- to-new listings ratio soaring to 77% after a slight decline in the month. All eyes are on interest rates and their impact on the housing market. Expectations are that any increase in rates will dampen the housing market; however, a 100 basis point increase in rates may not be sufficient to do so given the strong job market, increase in wage growth and remaining low mortgage rates. It is therefore expected that in 2022 the housing market will remain robust and compare well to historical levels.

With a labour force participation rate essentially at pre-pandemic levels (65.3%) and strong employment numbers in November it is safe to say that Canada's job market is running on all cylinders. November marked the sixth straight monthly employment increase in Canada bringing the unemployment rate down to 6%. Gains in the service sector once again led the way with healthcare, trade and professional services also showing strong gains. Only two sectors declined: educational services and other services. This data implies that the government's termination of the pandemic unemployment support programs in October drove workers to take jobs that perhaps were not as appealing previously.

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BLOOM SELECT INCOME FUND - 2021 ANNUAL REPORT

In its final meeting of 2021, as expected, the Bank of Canada (BoC) left its overnight rate target unchanged at 0.25%. In a more dovish statement than expected, the BoC downplayed the impacts of inflation but no longer referred to inflation as transitory and did mention that it expects that the supply chain issues will take some time to work through.

The takeaway for Canadian markets is that the BoC will be less focused on a 2% inflation rate and more tolerant of inflation being in the range of 1-3%. With the acknowledgement from both the government and the BoC that it is their joint responsibility to achieve the inflation target while keeping an eye on employment it is possibly a signal that the government recognizes its need to focus a bit less on fiscal stimulus. It is now expected that the first rate hike will not be until the spring, likely March or April, with two rate hikes around that time and two subsequent rate hikes in the latter part of 2022.

Canadian Investment Markets

As we close in on almost two years since the pandemic started, we continue to believe that equities and more specifically, dividend paying equities, are the superior asset class in the current low rate environment. After the initial shock of the pandemic in March 2020, equities have demonstrated a certain level of resilience in navigating this unpredictable environment backed by low interest rates. At this point and as demonstrated since the recent emergence of the Omicron variant, it appears that the markets have been less "reactive" with each new variant.

The Fed's and the recent more dovish BoC's announcements caused the yield curve to further flatten. Short-term yields edged higher while long-term yields declined. The market did not expect such a dovish tone given the uncertainty surrounding Omicron and its possible impact on the economy. At the end of 2021 the gap between the 10 year bonds and the 2 year bonds rate continued to narrow, reminiscent of the beginning of 2021, but as 2022 begins a reversal of this trend is expected.

Throughout October until mid-November, both the S&P 500 and the S&P/TSX Indices continued to reach new all-time highs. With the emergence of Omicron, global markets started to cool due to the uncertainty surrounding this new variant. However, it is important to recognize that the Canadian economy remains on a solid footing as do many global economies. This will have a direct impact on companies' earnings providing a strong backdrop for continued corporate growth. While there is lots of chatter regarding valuation of equities, one can look to the forward P/E multiple for the S&P/TSX Composite Index which is in line with its historical average unlike its U.S. counterpart where the forward P/E multiple of the S&P 500 Index is trading over one standard deviation above its historical normal range suggesting that overall there are better investment opportunities in Canadian equities.

Most sectors of the Canadian equity market had positive returns for the year in 2021. The two sectors that struggled were:

1. Materials (+4.0%) where copper was strong, but gold somewhat lost its luster as a safe haven given the broader risk-on tone of markets; and 2. Health Care (-19.6%) with a delay in legalization of cannabis south of the border and increased cannabis supply placing pressure on pricing. Financials (+36.5%), Information Technology (+18.5%) and Energy sectors (+48.9%) represent around 55% of the S&P/TSX Composite Index and were 3 of the best performing sectors in 2021. The Energy sector performance was aided by WTI crude climbing over 45% after it fell more than 30% last year amid a global energy crisis. This strength in energy occurred against the backdrop of the reopening of the economy in the middle of the year and demand optimism from the global rollout of vaccines. The sector's buoyancy was tempered during the last couple of months of the year with the arrival of the Omicron variant and the associated global restrictions. The Information Technology sector gained strength in the second half of the year, increasing 41% before selling off in late November with the expectation of higher interest rates on the horizon which tend to have a negative impact on growth sectors. The relatively small Real Estate sector was also exceptionally strong this year (+37.4%) largely driven by a lower interest rate environment, strong housing and rental market and hopes for a continued reopening of the economy.

For the year the S&P/TSX Composite Total Return Index had a return of 25.1% and the S&P/TSX High Dividend Total Return Index had a return of 36.1% largely driven by the substantial increase in the Energy sector.

Returns from Canadian bonds in 2021 substantially lagged that of the S&P/TSX Composite Total Return Index with long-term(30-year) Government of Canada Bonds returning -8.8% for the year. In the last quarter, however, they returned 7.9% outperforming the equity market. Mid-term(10-year) bonds provided a negative 4.6% return for the year, while short-term(5-year) bonds returned a negative 2.3% return for the same period. 90-Day Treasury Bills returned 0.1% for the year.

The Canadian dollar against its U.S. counterpart ended the quarter 0.5% stronger than it began and in the last twelve months the Loonie appreciated 0.4% against the Greenback. This annual change is one of the smallest in many years, but it does hide some amount of volatility during the twelve month period.

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BLOOM SELECT INCOME FUND - 2021 ANNUAL REPORT

Outlook

The extreme volatility that we witnessed earlier in the pandemic appears to have subsided for the time being. At present, the market appears to be more focused on the possible impact from fiscal and monetary measures than the pandemic. Our strategy of taking a longer term approach has benefitted the Fund in the past and we believe that it will result in continued strength going forward.

We continue to see "value" oriented stocks gain momentum despite a slight cooling off in the latter part of the last quarter due to market frenzy over inflation. This sector of the market remains to be somewhat undervalued and with increased focus on an economic recovery we believe these stocks will gain momentum. As pandemic restrictions are eased across the country and Canadians have increased mobility we expect the economy to positively react to these changes, leading us to remain cautiously optimistic for the coming year.

RESULTS OF OPERATIONS

Distributions

During the year ended December 31, 2021 distributions totaled $0.50 per unit. The 2021 distribution reflects a monthly rate per unit of $0.041666, in accordance with the targeted distribution rate of 5% per annum on the subscription price of $10 per unit as disclosed in the Fund's Prospectus. Since inception on April 20, 2012 the Fund has paid total cash and reinvested distributions of $4.848606 per unit.

Increase in Net Assets from Operations

The Fund's net investment income was $1.9 million ($1.38 per unit) for the year ended December 31, 2021, arising from average portfolio investments during the year of $12.1 million. The income was comprised primarily of a $1.1 million net change in unrealized appreciation on investments, $0.5 million dividend and distribution income and $0.3 million in net realized gains on sales of investments during the year.

Expenses were $0.4 million ($0.27 per unit) for the year, the major components being management fees of $181,037 and other administrative expenses of $78,285.

Net Asset Value

The net asset value per unit of the Fund was $9.66 at December 31, 2021, up by 6.7% from $9.05 at December 31, 2020. The aggregate net asset value of the Fund increased to $12.9 million as at December 31, 2021 from $12.3 million at December 31, 2020, primarily due to the net investment income of $1.9 million, net of redemption of units of $0.3 million, cash distributions to unitholders of $0.6 million (net of reinvested distributions) and expenses of $0.4 million.

Liquidity

To provide liquidity for unitholders, units of the Fund are listed on the TSX under the symbol BLB.UN.

Investment Portfolio

The Fund has established a portfolio comprised primarily of Canadian common equities, income trusts and REITs, each of which was selected to achieve the investment objectives of the Fund. The investment objectives of the Fund include the requirement that the Fund only invests in stocks with a beta (measurement of volatility) of less than 1.0 at the time of purchase, which affects the selection of investments.

On a sector basis, the Financials sector increased from 15.3% to 18.1% of the portfolio (equities plus cash and cash equivalents) over the year, due to the strong performance of the stocks held in the sector. Similarly, the Fund's investment in the Real Estate sector increased from 11.2% to 13.2% of the portfolio, due to the strong performance of the stocks held in that sector. The Telecommunications Services sector increased from 4.7% to 7.3% of the portfolio, mainly due the increase in the Fund's position in Rogers Communications Inc. The Fund's cash and cash equivalents holdings have decreased from 11.0% of the portfolio to 7.5%, as the Manager has taken advantage of favorable prices by investing in several stocks during the year, creating a new position in Aecon Group Inc. and increasing the Fund's holdings in Barrick Gold Corp. and Rogers Communications Inc. The Fund's investment in the Utilities sector decreased from 9.2% to 6.8% due to the decline in share prices for both stocks in this sector held by the Fund. Lastly, the Consumer Discretionary sector decreased from 12.3% to 10.4% of the portfolio over the year, reflecting the sale of part of the Fund's positions in Cineplex Inc. and Transcontinental Inc.

The Fund had unrealized appreciation of $1.8 million in its portfolio as at December 31, 2021, with gains in most sectors, most notably the Financial Services, Utilities, Consumer Staples and Real Estate sectors, offset by significant unrealized losses in the Materials sector.

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