Bloom Select Income Fund : 2022 Annual Report

BLOOM SELECT INCOME FUND

INTERIM REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2022

FORWARD-LOOKING STATEMENTS

BLB.UN

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 interim management report of fund performance for Bloom Select Income Fund (the "Fund") contains financial information but does not contain the interim or audited annual financial statements of the Fund. The interim 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(1-855-256-6618) or by sending a request to Unitholder Information, Bloom Investment Counsel, Inc., Yonge Eglinton Centre, Suite 1710, 2300 Yonge Street, Toronto, Ontario, M4P 1E4, 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 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 - INTERIM REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2022

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.

RECENT DEVELOPMENTS

Inflation, interest rates and recession concerns

Canadian investment markets continue to display concerns about rising inflation and the possibility of a recession. Associated concerns around interest rate hikes were realized when the Bank of Canada raised rates as expected in Spring of 2022, with further increases expected. 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 and many dividend paying companies are able to raise prices to respond to increasing costs. 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 and Ukrainian exports, most notably energy and grain, has contributed to global energy and food price increases. The conflict may continue to 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.

COVID-19

The ongoing effects of the global pandemic caused by the COVID-19, a novel coronavirus, and new infection waves caused by virus variants continue to negatively impact companies worldwide, including adverse effects on supply chains and labor supply in many sectors. 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 work-from-home as well as its current hybrid work arrangement. This plan has facilitated uninterrupted work and communication as well as the Manager's interaction with the Fund's various service providers.

INVESTMENT MANAGER

For over 35 years, the Manager has been managing 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 real estate investment trusts, for three TSX listed closed end funds.

INVESTMENT MANAGER'S REPORT

JULY 1, 2022

Canadian Economy

Those who still believed that inflation was transitory were proven very wrong this quarter. Inflation has clearly become a serious global issue with even Switzerland surprising markets with an aggressive rate increase in June, its first such rate

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BLOOM SELECT INCOME FUND - INTERIM REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2022

hike in 15 years. The effect from the reopening of the global economy post-COVID has now been tempered by the Russian- Ukrainian conflict and high levels of inflation. The biggest question remaining is whether the Canadian economy will be able to avoid a recession and experience a soft landing.

Annual headline inflation rose to 7.7% year-over-year in May. The 1.4% increase in May marked the fastest pace of inflation growth since 1983. A 12% increase in gasoline prices in May helped drive the increase in inflation; however, one cannot ignore the fact that inflation excluding energy was still close to 6% in May and excluding food and energy it was up just over 5%, almost double the Bank of Canada's (BoC) target range. Data suggests that this could be a sign of a possible inflationary spiral - increased wages in a tight labor market combined with increased prices for goods as an offset to dampen the impact on profitability. It is a little early to tell whether inflation peaked in the second quarter as June inflation figures are expected to show further increases with continued gas price increases. However, in a slowing global economy, consumer prices should be dampened in the back half of the year with global commodity prices falling.

Canadian real GDP in the first quarter came in well below expectations at 3.1% compared to an expected 5%. While the Canadian economy continues to look more resilient than other global economies, it is expected that growth for the year will be in the 3-4% range. Domestic demand in Q1 was exceptionally strong; however, international trade negatively impacted growth in the quarter. With a continued tight labor market, employees were able to benefit from strong wage growth. Employee compensation rose an annualized 16.1% representing the largest quarterly increase in over 40 years.

Housing starts and building permits surprised to the upside in May with supply remaining tight. While certain commodity prices such as lumber and metal have declined from their peak, they remain elevated on a historical basis. It is expected that further interest rate hikes will have a negative impact on demand in the resale market, providing for some moderation in the coming year with housing starts slowing in 2023.

Canadian retail sales were slightly higher than expected in April with sales increasing 0.9% compared to the 0.8% expected. Interestingly, sales of building materials and supplies were down 4.3% in April marking their first decline of the year. Auto sales declined 0.3% in the month, their third consecutive month of decline. Early indications for May are for retail sales to increase 1.6%; however, it is expected that over the next few months retail sales will moderate due to an impact from both increasing prices (inflation) and higher interest rates.

Canadian employment remains strong with May figures representing a fourth consecutive monthly increase. The strongest growth comes from Alberta with Quebec, British Columbia and Ontario experiencing steady employment figures in May. A continuation of a recovery in certain pandemic sensitive sectors remained with increased employment in accommodation and food services, wholesale and retail trade and recreation. With May's figures, the unemployment rate dropped very slightly from 5.2% to 5.1% - the lowest jobless rate in over 40 years. However, with inflation impacting wages we could witness limited hiring in the coming months as employers are faced with the combination of increased wages and input costs. A marked economic slowdown or recession would also cause unemployment to rise.

It came as no surprise that the BoC raised its key overnight rate by 50 basis points to 1.00% in mid-April. That day both New Zealand and Canada raised their rates by 50 basis points marking the first such hikes by any major central bank in around twenty years. The BoC followed this with another 50 basis point hike to 1.50% less than a month later. This is a clear indication that rates were left too low for too long. A more hawkish statement followed this increase indicating that the BoC is willing to continue along this path of rate increases in order to curb inflation back down to its 2-3% target. However, with the U.S Federal Reserve (Fed) acting more aggressively with its most recent rate increase of 75 basis points in June, a similar rate hike by the Fed and by the BoC is by no means off the table in July. This could be followed by additional 50 basis point hikes in September.

The issue the BoC faces is the lag in available data on the impact of its monetary policy decisions. There is roughly a 2-month lag between such decisions and receiving key economic indicators such as inflation and GDP data, making its September decision on rate hikes even more challenging with the full effects of the BoC's actions possibly not being felt until the beginning of next year. If this is the case, we could actually see rate cuts towards the end of next year and into 2024.

Canadian Investment Markets

After hitting an all-time high in late March, the S&P/TSX Index has since declined 14.6%. Markets are of the expectation that economic growth will slow, an expectation which is reinforced by a drop in a wide variety of commodity prices including oil. With the Canadian market's strong reliance on commodities, in addition to rising bond yields and early signs of slowing earnings growth, this pullback combined with the weaker global growth outlook has somewhat dampened the outlook in general for the Canadian market.

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BLOOM SELECT INCOME FUND - INTERIM REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2022

For markets to resume their upward trend, more confidence is needed that inflation has peaked. With multiple rate hikes expected for the remainder of the year, confidence is not quite at the level needed to translate into renewed strength in equities. In addition, increased confidence that both the Canadian and U.S. economies can avoid a recession in the near future would be a positive catalyst for markets.

Both the BoC and the Fed have a difficult task ahead of them to avoid a recession and instead to orchestrate a soft landing. Historically the Fed has managed to do this in each of 1965, 1984 and 1994 and Canada had a similar outcome in 1984/85 and in 1994/95. At this point Bloom is not convinced that a recession will be totally avoided.

While the market remains volatile, it is important to remember that over the long term, stocks have always been and continue to be the best asset class to help investment portfolios tolerate such high levels of inflation. Bloom continues to believe that dividend paying companies, especially ones that have the ability to offset rising costs with price increases to protect their margins, have a strong competitive advantage.

During the quarter, the S&P/TSX Composite Total Return Index declined 13.2% with the S&P/TSX High Dividend Total Return Index declining 9.2%. Year-to-date, the S&P/TSX Composite Total Return Index declined 9.9% and the S&P/TSX High Dividend Total Return Index increased 1.3% driven by the substantial increase in the Energy sector during the first quarter.

Growth stocks remain "out of favor" with continued increases in inflation and the expectation for more rate hikes over the back half of the year both impacting the valuation of these stocks. This was once again evident by the 30.7% decline in the Information Technology sector in the quarter. The Health Care sector remained under pressure in the quarter (-49.6%) largely driven by weakness in the cannabis sector. Materials, which are typically linked to the economic cycle, was the third worst performing sector in the quarter.

The top performing sectors in the quarter were: Energy (-1.9%), Utilities (-3.5%) and Consumer Staples (-6.2%). The Energy sector significantly benefitted earlier in the year from supply constraints due to the Eastern European conflict, however, now the focus has shifted more to concerns surrounding inflation and a possible recession. Given its more defensive nature, the Utilities sector performed relatively well in the quarter. Consumer Staples, while generally viewed as a more defensive sector during an economic downturn, can be negatively impacted by inflation as consumers become more price conscious.

During the quarter the Canadian bond market continued to be negatively impacted by higher inflation and expectations of even higher inflation and interest rate hikes to come. Returns for the last quarter again underperformed those of the S&P/TSX Composite Total Return Index for the long-term(30-year) Government of Canada Bonds which returned -14.7% and have now for the year-to-date delivered an astounding -26.7%. However, shorter duration bonds while providing negative returns did manage to outperform that index. Mid-term(10-year) bonds provided a -6.2% return for the quarter, while short-term(5-year) bonds returned -2.5 for the same period. 90-Day Treasury Bills returned 0.1% for the last quarter as they have for the year-to-date.

The Canadian dollar against its U.S. counterpart has been depreciating for most of this year. At current levels it is close to its weakest levels since late 2020 and this trend is expected to remain until it is evident that there is some relief in U.S. inflation. The Canadian dollar ended the second quarter 3.1% weaker than it began against the U.S. dollar. In the last twelve months the Loonie has depreciated 4.0% against the Greenback.

Fund Performance

Remembering that the Fund is mandated as a low beta Fund, for the first six months of the year, the Fund outperformed the S&P/TSX Composite Total Return Index but underperformed the S&P/TSX High Dividend Total Return Index. This underperformance is largely due to the Fund's lack of oil and gas investments, all of which are high beta after their extreme volatility over the last five or more years. For the first half of the year, positions in Intertape Polymer Group Inc., LifeWorks Inc. and Boralex Inc. were the greatest contributors to performance. The strongest performing sectors for the Fund were Real Estate, Consumer Discretionary and Financials.

Outlook

Despite these volatile markets our investment philosophy remains the same with a focus on quality dividend companies in sectors that Bloom believes can withstand the current economic environment. Bloom remains sensitive to valuations despite some stocks on the TSX experiencing material declines from their highs. Now, more than ever, both prudence and patience are required - both of which are basic tenets of our long-term investment philosophy. With close to 40 years of investment experience, our firm has successfully managed investment portfolios through all market cycles and Bloom remains cautious yet optimistic for the remainder of the year.

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BLOOM SELECT INCOME FUND - INTERIM REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2022

RESULTS OF OPERATIONS

Distributions

During the six months ended June 30, 2022 distributions totaled $0.25 per unit. The 2022 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 $5.098602 per unit.

Decrease in Net Assets from Operations

The Fund's net investment loss was $0.4 million ($0.31 per unit) for the six months ended June 30, 2022, arising from average portfolio investments during the period of $11.4 million. The loss was comprised primarily of $1.2 million negative net change in unrealized appreciation/depreciation offset by $0.6 million in realized gains on sale of investments and $0.2 million in dividend and distribution income during the period.

Expenses were $0.2 million ($0.14 per unit) for the period, the major components being management fees of $87,584 and other administrative expenses of $43,035.

Net Asset Value

The net asset value per unit of the Fund was $8.96 at June 30, 2022, down by 7.2% from $9.66 at December 31, 2021. The aggregate net asset value of the Fund decreased to $12.0 million at June 30, 2022 from $12.9 million at December 31, 2021, due primarily to net investment loss of $0.4 million, cash distributions to unitholders of $0.3 million (net of reinvested distributions) and expenses of $0.2 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 equities, income trusts and real estate investment trusts (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.

Over the six months to June 30, 2022 the Fund's investment in the Financial Services sector has decreased from 18.1% of the portfolio (equities, cash and cash equivalents) to 14.1%, due to the trimming of all positions at favorable prices for realized gains, along with price decreases in all positions. The Fund's investment in the Industrials sector decreased from 12.0% of the portfolio to 9.4%, mainly due to the sale of the Fund's holdings in Intertape Polymer Group Inc. for a substantial gain. The Consumer Discretionary and Real Estate sectors both decreased as a percentage of the portfolio due to price decreases across the board. The Fund's investment in the Utilities sector increased from 6.8% to 8.3% due to the price strength of Boralex Inc. The Manager has retained the cash proceeds of security sales during the period in response to substantial market volatility and uncertainty, resulting in an increase in cash and cash equivalents from 7.5% to 15.5%.

The Fund had net unrealized depreciation of $0.6 million in its portfolio as at June 30, 2022, with significant unrealized losses of $1.1 million in the Materials sector in which valuations have yet to recover from the effects of the COVID 19 pandemic, offset by unrealized gains in each of the Utilities, Financial Services and Consumer Staples sectors.

The Fund had net realized gains of $0.6 million, primarily from the sale of the Fund's holding in Intertape Polymer Group Inc. with smaller gains from the trimming of several positions, most notably in Bank of Nova Scotia and TD Bank Group.

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