Filed with the Securities and Exchange Commission on June 8, 2012

Securities Act of 1933 File No. 002-80859

Investment Company Act of 1940 File No. 811-03651

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-1A

 

 

Pre-Effective Amendment No.

 

Post-Effective Amendment No.  85

 

and/or

 

 

Amendment No.  85

 

(Check appropriate box or boxes.)

 

TOUCHSTONE STRATEGIC TRUST

(Exact name of Registrant as Specified in Charter)

 

303 Broadway, Suite 1100, Cincinnati, Ohio  45202

(Address of Principal Executive Offices)      Zip Code

 

Registrant’s Telephone Number, including Area Code (513) 878-4066

 

Jill T. McGruder, 303 Broadway, Suite 1100  Cincinnati, OH 45202

(Name and Address of Agent for Service)

 

With Copy to:

 

John M. Ford, Esq.

Pepper Hamilton LLP

3000 Two Logan Square

Philadelphia, PA 19103

 

It is proposed that this filing will become effective

(check appropriate box)

 

o immediately upon filing pursuant to paragraph (b)

o on (date) pursuant to paragraph (b)

o 60 days after filing pursuant to paragraph (a)(1)

o on (date) pursuant to paragraph (a)(1)

x 75 days after filing pursuant to paragraph (a)(2)

o on (date) pursuant to paragraph (a)(2) of rule 485.

 

If appropriate, check the following box:

 

o This post-effective amendment designates a new effective date for a previously filed post-effective amendment.

 

 

 

September [      ], 2012

 

Prospectus

 

Touchstone Strategic Trust

 

		Class A		Class C		Class Y		Institutional
Touchstone Micro Cap Value Fund		MXCAX		MXCSX		MXAIX		[TICKER]
Touchstone Small Company Value Fund		FTVAX		FTVCX		FTVIX		[TICKER]
Touchstone International Value Fund		FSIEX		FTECX		FIEIX		[TICKER]
Touchstone Strategic Income Fund		FFSAX		FRACX		MXIIX		[TICKER]

 

The Securities and Exchange Commission has not approved the Funds’ shares as an investment or determined whether this Prospectus is accurate or complete.  Anyone who tells you otherwise is committing a crime.

 

 

Table of Contents

 

		Page
TOUCHSTONE MICRO CAP VALUE FUND SUMMARY		3
TOUCHSTONE SMALL COMPANY VALUE FUND SUMMARY		9
TOUCHSTONE INTERNATIONAL VALUE FUND SUMMARY		15
TOUCHSTONE STRATEGIC INCOME FUND SUMMARY		20
INVESTMENT STRATEGIES AND RISKS		28
THE FUNDS’ MANAGEMENT		35
CHOOSING A CLASS OF SHARES		39
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS		42
INVESTING WITH TOUCHSTONE		42
DISTRIBUTION AND TAXES		52
FINANCIAL HIGHLIGHTS		55

 

2

 

TOUCHSTONE MICRO CAP VALUE FUND SUMMARY

 

The Fund’s Investment Goal

 

The Fund seeks capital appreciation.

 

The Fund’s Fees and Expenses

 

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts for Class A shares if you and your family invest, or agree to invest in the future, at least $50,000 or more in the Touchstone Funds. More information about these and other discounts is available from your financial professional and in the section entitled “Choosing a Class of Shares” in the Fund’s prospectus on page 39 and in the section entitled “Choosing a Share Class” in the Fund’s Statement of Additional Information on page [    ].

 

		Class A		Class C		Class Y		Institutional
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a % of offering price)		5.75	%	None		None		None
Maximum Deferred Sales (Load) (as a % of original purchase price or the amount redeemed, whichever is less)		None		1.00	%	None		None
Wire Redemption Fee		Up to $15		Up to $15		Up to $15		Up to $15
Annual Fund Operating Expenses (expenses that you pay each year as a % of the value of your investment)
Management Fees		1.00	%	1.00	%	1.00	%	1.00	%
Distribution and/or Service (12b-1) Fees		0.25	%	1.00	%	None		None
Other Expenses(1)		0.54	%	0.53	%	0.56	%	0.38	%
Acquired Fund Fees and Expenses		0.02	%	0.02	%	0.02	%	0.02	%
Total Annual Fund Operating Expenses		1.81	%	2.55	%	1.58	%	1.40	%
Fee Waivers and/or Expense Reimbursement(2)		(0.19	%)	(0.18	%)	(0.21	%)	(0.13	%)
Total Annual Fund Operating Expenses after Fee Waiver/Expense Reimbursement		1.62	%	2.37	%	1.37	%	1.27	%

 

---

(1)        “Other Expenses” have been restated to reflect estimated amounts for the current fiscal year.

(2)        Touchstone Advisors and the Trust have entered into an expense limitation agreement whereby Touchstone Advisors has contractually agreed to waive a portion of its fees and/or reimburse certain Fund expenses in order to limit annual fund operating expenses to 1.60%, 2.35%, 1.35% and 1.25% for Class A shares, Class C shares, Class Y shares, and Institutional shares, respectively.  This expense limitation will remain in effect until at least [September 10, 2013] but can be terminated by a vote of the Board of Trustees of the Fund if they deem the termination to be beneficial to the Fund shareholders. Touchstone Advisors is entitled to recoup, subject to approval by the Board of Trustees of the Fund, such amounts reduced or reimbursed for a period of up to three (3) years from the year in which Touchstone Advisors reduced its compensation and/or assumed expenses for the Fund. No recoupment will occur unless the Fund’s expenses are below the expense limitation.  See the discussion entitled “Contractual Fee Waiver Agreement” under the section entitled “The Funds’ Management” in the Fund’s prospectus for more information.

 

Example.   This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then, except as indicated, redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same (reflecting the contractual fee waiver).  Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

3

---

 

		Assuming Redemption at End of Period												Assuming No Redemption
		Class A			Class C			Class Y			Institutional			Class C
1 Year		$	730		$	340		$	139		$	129		$	240
3 Years		$	1,094		$	775		$	477		$	429		$	775
5 Years		$	1,482		$	1,337		$	839		$	751		$	1,337
10 Years		$	2,567		$	2,867		$	1,855		$	1,664		$	2,867

 

Portfolio Turnover.   The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).  A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.  These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance.  During the fiscal year ended July 31, 2011, the portfolio turnover rate of the Fund was 59% of the average value of its portfolio.

 

The Fund’s Principal Investment Strategies

 

Under normal circumstances, the Fund invests at least 80% of its assets in equity securities of micro cap companies. This is a non-fundamental policy that the Fund can change upon 60 days’ prior notice to shareholders. Micro cap companies are those companies contained within the Russell Microcap® Value Index, or companies with similar size characteristics at the time of initial purchase. As of September 30, 2011, the market capitalization of companies included in the Russell Microcap Value Index ranged from $11 million to $635 million. As of September 30, 2011, the average market capitalization range for companies contained within the Russell Microcap Value Index was approximately $236 million and the median market capitalization was approximately $130 million. The size of the companies in the Russell Microcap Value Index will change with market conditions. Equity securities consist of common stock and securities convertible into common stock.

 

The Fund seeks to provide broad exposure to micro cap domestic equities and seeks to outperform the Russell Microcap Value Index over a long-term investment horizon. The Fund’s sub-advisor, Fifth Third Asset Management, Inc. (“FTAM”), seeks to invest in companies that it considers to be “statistically cheap” (based on factors which may include, for example, low ratio of price to earnings, price to cash flow, price to book value, and price to sales). FTAM also looks for companies that it believes are undervalued relative to their earning power and long term earnings growth prospects, adjusted for risk. FTAM may filter out less attractive companies by analyzing cash flows, evaluating financial strength, performing normalized earnings analysis and reviewing purchase and sale activity in company shares by company executives, and through fundamental analysis, which may include a review of assets, earnings, sales, products, markets, and management, among other indicators. Ideally, after filtering out companies that do not meet FTAM’s criteria above, FTAM looks for companies that it believes have a positive catalyst (e.g., new products, management changes, acquisition, etc.).

 

FTAM also utilizes a strict sell discipline and may consider selling a security when: it becomes fully valued or less attractive; one of the Fund’s holdings has performed well and reached or approached FTAM’s price target; a company fails to pass FTAM’s investment screens; or there is deterioration in a company’s fundamentals, management or financial reporting.

 

FTAM will look to manage risk through several strategies, which will typically include: maintaining minimum and maximum sector weightings relative to the Russell Microcap Value Index; monitoring risk statistics relative to the Russell Microcap Value Index; and monitoring trade volume.

 

The Fund may also invest up to 10% of its assets in foreign securities.

 

4

---

 

Investment Advisor

Touchstone Advisors, Inc.

 

Investment Sub-Advisor		Portfolio Manager(s)		Investment Experience		Primary Title with Investment Sub-Advisor
Barrow, Hanley, Mewhinney & Strauss, LLC		David A. Hodges, CFA		Managing the Fund since [September 2012]		Managing Director and Portfolio Manager
		Randolph S. Wrighton, Jr., CFA		Managing the Fund since [September 2012]		Director and Assistant Portfolio Manager

 

Buying and Selling Fund Shares

 

Minimum Investment Requirements

 

		Class A, Class C and Class Y
		Initial Investment			Additional Investment
Regular Account		$	2,500		$	50
Retirement Account or Custodial Account under the Uniform Gifts/Transfers to Minors Act		$	1,000		$	50
Investments through the Automatic Investment Plan		$	100		$	50

 

		Institutional
		Initial Investment			Additional Investment
Regular Account		$	500,000		$	50

 

You may buy and sell shares in the Fund on a day when the New York Stock Exchange is open for trading.  Class A shares and Class C shares may be purchased and sold directly from Touchstone Securities, Inc. or through your financial advisor. Class Y shares are available only through your financial institution.  Institutional shares are available through Touchstone Securities, Inc. or your financial institution. For more information about buying and selling shares see the section “Investing with Touchstone” of the Fund’s prospectus or call 1.800.543.0407.

 

Tax Information

 

The Fund intends to make distributions that may be taxed as ordinary income or capital gains except when shares are held through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Shares that are held in a tax-deferred account may be taxed as ordinary or capital gains once they are withdrawn from the tax-deferred account.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s web site for more information.

 

19

---

 

TOUCHSTONE STRATEGIC INCOME FUND SUMMARY

 

The Fund’s Investment Goal

 

The Fund seeks a high level of income consistent with reasonable risk.  The Fund seeks capital appreciation as a secondary goal.

 

The Fund’s Fees and Expenses

 

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.  You may qualify for sales charge discounts for Class A shares if you and your family invest, or agree to invest in the future, at least $50,000 or more in the Touchstone Funds. More information about these and other discounts is available from your financial professional and in the section entitled “Choosing a Class of Shares” in the Fund’s prospectus on page 39 and in the section entitled “Choosing a Share Class” in the Fund’s Statement of Additional Information on page [    ].

 

		Class A		Class C		Class Y		Institutional
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a % of offering price)		5.75	%	None		None		None
Maximum Deferred Sales (Load) (as a % of original purchase price or the amount redeemed, whichever is less)		None		1.00	%	None		None
Wire Redemption Fee		Up to $15		Up to $15		Up to $15		Up to $15
Annual Fund Operating Expenses (expenses that you pay each year as a % of the value of your investment)
Management Fees		0.70	%	0.70	%	0.70	%	0.70	%
Distribution and/or Service (12b-1) Fees		0.25	%	1.00	%	None		None
Other Expenses(1)		0.37	%	0.39	%	0.33	%	0.31	%
Acquired Fund Fees and Expenses		0.05	%	0.05	%	0.05	%	0.05	%
Total Annual Fund Operating Expenses		1.37	%	2.14	%	1.08	%	1.06	%
Fee Waivers and/or Expense Reimbursement(2)		(0.38	%)	(0.40	%)	(0.34	%)	(0.42	%)
Total Annual Fund Operating Expenses after Fee Waiver/Expense Reimbursement		0.99	%	1.74	%	0.74	%	0.64	%

 

---

(1)        “Other Expenses” have been restated to reflect estimated amounts for the current fiscal year.

(2)        Touchstone Advisors and the Trust have entered into an expense limitation agreement whereby Touchstone Advisors has contractually agreed to waive a portion of its fees and/or reimburse certain Fund expenses in order to limit annual fund operating expenses to 0.94%, 1.69% , 0.69% and 0.59% for Class A shares, Class C shares, Class Y shares and Institutional shares, respectively.  This expense limitation will remain in effect until at least [September 10, 2013] but can be terminated by a vote of the Board of Trustees of the Fund if they deem the termination to be beneficial to the Fund shareholders. Touchstone Advisors is entitled to recoup, subject to approval by the Board of Trustees of the Fund, such amounts reduced or reimbursed for a period of up to three (3) years from the year in which Touchstone Advisors reduced its compensation and/or assumed expenses for the Fund. No recoupment will occur unless the Fund’s expenses are below the expense limitation.  See the discussion entitled “Contractual Fee Waiver Agreement” under the section entitled “The Funds’ Management” in the Fund’s prospectus for more information.

 

Example.   This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then, except as indicated, redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same (reflecting the contractual fee waiver).  Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

20

---

 

		Assuming Redemption at End of Period												Assuming No Redemption
		Class A			Class C			Class Y			Institutional			Class C
1 Year		$	670		$	277		$	76		$	65		$	177
3 Years		$	949		$	631		$	309		$	294		$	631
5 Years		$	1,248		$	1,111		$	560		$	542		$	1,111
10 Years		$	2,095		$	2,437		$	1,282		$	1,251		$	2,437

 

Portfolio Turnover.   The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).  A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.  These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance.  During the fiscal year ended July 31, 2011, the portfolio turnover rate of the Fund was 42% of the average value of its portfolio.

 

The Fund’s Principal Investment Strategies

 

Under normal circumstances, the Fund invests at least 80% of its assets in income-producing securities such as debt securities, common stocks, preferred stocks and common and preferred shares of closed-end investment companies (also known as “closed-end funds”) having portfolios consisting primarily of income-producing securities. Debt securities in which the Fund may invest include, but are not limited to, U.S. government agency securities and variable or floating-rate instruments. Certain of the debt securities and preferred stocks in which the Fund may invest may be convertible into common shares.

 

The Fund’s sub-advisor, Fifth Third Asset Management, Inc. (“FTAM”), seeks to provide value by investing in asset classes that appear to be attractive based on their risks and in companies with cheap (e.g., attractive price to cash flow ratio) cash flows in each asset class.

 

FTAM may invest in debt securities of any maturity, and will increase its investment in short term debt securities during periods when it believes interest rates will rise and will increase its investment in long-term debt securities during periods when it believes interest rates will decline. FTAM seeks to maximize risk-adjusted returns through fundamental research, quantitative modeling, and capital structure analysis. In performing this research, modeling and analysis, FTAM evaluates companies based on such factors as sales, assets, earnings, markets, and management, and FTAM searches for companies with favorable debt-to-equity ratios. The Fund seeks returns by investing across a broader array of investments than traditional investment grade fixed income funds, and FTAM believes that a low correlation between various asset classes leads to stability of expected returns.

 

In selecting corporate debt securities for the Fund, FTAM intends to invest principally in securities rated BBB or better by Standard & Poor’s (or the equivalent using Moody’s), but may invest in securities rated as low as BB, B, CCC or CC or unrated securities when these investments are believed by FTAM to be sound and consistent with an objective of reasonable risk. The Fund will not invest more than 20% of its assets in (i) securities rated BB or lower by Standard & Poor’s and/or (ii) unrated securities which, in the opinion of FTAM, are of quality comparable to those rated BB or lower. Securities rated lower than BBB by Standard & Poor’s, sometimes referred to as “junk bonds,” are lower-rated securities and have speculative characteristics.

 

The Fund may invest in any diversified closed end income fund as long as the Fund’s total portfolio maintains no more than 20% of its assets in securities rated BB or lower. The Fund may consider closed-end funds as a “pass through” security, and will look at the composition of the underlying portfolio. Therefore, the Fund may invest in any single closed-end fund even if more than 20% of the closed-end fund’s assets are invested in securities rated BB or lower. The closed-end funds in which the Fund may invest may in turn invest in debt and equity securities of United States or foreign issuers.

 

21

---

 

The Fund may enter into foreign currency contracts to settle planned purchases or sales of securities or to protect against a possible loss resulting from the adverse change in the relationship between the U.S. dollar and a foreign currency involved in an underlying transaction. The Fund may enter into futures contracts to gain exposure to, or hedge against changes in the value of interest rates or foreign currencies. The Fund may enter into interest rate, total return, credit default, and other forms of swap agreements to manage its exposure to interest rates and credit risk.  The Fund may utilize call and put options to gain investment exposure or to hedge against portfolio volatility.

 

FTAM may consider selling a portfolio holding when: deterioration in a company’s strategic position, growth prospects, or financial reporting is detected; an individual security comprises too large a position in the portfolio; a company with declining financial fundamentals has risk volatility of more than one standard deviation in FTAM’s proprietary credit risk model; a company’s valuations are no longer attractive; or a better opportunity arises.

 

The Principal Risks

 

The Fund’s share price will fluctuate. You could lose money on your investment in the Fund, and the Fund could also return less than other investments.  As with any mutual fund, there is no guarantee that the Fund will achieve its investment goal.  The Fund is subject to the principal risks listed below.

 

Closed-End Fund Risk:   The risks of investment in other investment companies typically reflect the risk of the types of securities in which the investment companies invest. The value of the shares of closed-end investment companies may be lower than the value of the portfolio securities held by the closed-end investment company. When the Fund invests in another investment company, shareholders of the Fund bear their proportionate share of the other investment company’s fees and expenses as well as its share of the Fund’s fees and expenses. There may also not be an active trading market available for shares of some closed-end funds. Additionally, trading of closed-end fund shares may be halted or delisted by the listing exchange.

 

Convertible Securities Risk:   Convertible securities are subject to the risks of both debt securities and equity securities. The values of convertible securities tend to decline as interest rates rise and, due to the conversion feature, tend to vary with fluctuations in the market value of the underlying security.

 

Credit Risk:   An issuer may be unable to make timely payments of either principal or interest. This may cause the issuer’s securities to decline in value. Credit risk is particularly relevant to those portfolios that invest a significant amount of their assets in junk bonds or lower-rated securities.

 

Debt Securities Risk:  The prices of the Fund’s fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments.

 

Derivatives Risk:  Derivatives may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the Fund’s original investment. Use of derivatives may increase the amount and affect the timing and character of taxes payable by shareholders. When a derivative is used as a hedge against an opposite position that the Fund also holds, any loss generated by the derivative should be substantially offset by gains on the hedged investment, and vice versa. Hedges are sometimes subject to imperfect matching between the derivative and underlying security, and there can be no assurance that the Fund’s hedging transactions will be effective.

 

Equity Securities Risk:   The Fund is subject to the risk that stock prices will fall over short or extended periods of time. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by these companies may suffer a decline in response to such developments which could result in a decline in the value of the Fund’s shares.

 

Foreign Securities Risk:   Investing in foreign securities poses additional risks since political and economic events unique in a country or region will affect those markets and their issuers.  These events will not necessarily affect the U.S.

 

22

---

 

economy or similar issuers located in the United States.  In addition, investments in foreign securities are generally denominated in foreign currency.  As a result, changes in the value of those currencies compared to the U.S. dollar may affect (positively or negatively) the value of the Fund’s investments.  These currency movements may happen separately from, or in response to, events that do not otherwise affect the value of the security in the issuer’s home country.  There is a risk that foreign securities may not be subject to accounting standards or governmental supervision comparable to U.S. companies and that less public information about their operations may exist.  There is risk associated with the clearance and settlement procedures in non-U.S. markets, which may be unable to keep pace with the volume of securities transactions and may cause delays.  Foreign markets may be less liquid and more volatile than U.S. markets and offer less protection to investors. Over-the-counter securities may also be less liquid than exchange-traded securities.

 

Forward Currency Exchange Contract Risk: A forward foreign currency exchange contract is an agreement to buy or sell a specific currency at a future date and at a price set at the time of the contract. Forward foreign currency exchange contracts may reduce the risk of loss from a change in value of a currency, but they also limit any potential gains, do not protect against fluctuations in the value of the underlying position and are subject to counterparty risk.

 

Futures Contracts Risk: The risks associated with futures include: the potential inability to terminate or sell a position, the lack of a liquid secondary market for the Fund’s position and the risk that the counterparty to the transaction will not meet its obligations.

 

Interest Rate Risk:   As interest rates rise, the value of fixed income securities the Fund owns will likely to decrease. Longer-term securities are generally more volatile, so the longer the average maturity or duration of these securities, the greater their price risk. Duration is a measure of the expected life, taking into account any prepayment or call features of the security, of a fixed income security that is used to determine the price sensitivity of the security for a given change in interest rates. Specifically, duration is the change in the value of a fixed income security that will result from a 1% change in interest rates, and generally is stated in years. Maturity, on the other hand, is the date on which a fixed income security becomes due for payment of principal.

 

Management Risk : The value of your investment may decrease if the portfolio managers’ judgment about the attractiveness, value or market trends affecting a particular security, issuer, industry or sector or about market movements is incorrect.

 

Market Risk: Market risk is the risk that the market value of a security may fluctuate, sometimes rapidly and unpredictably.

 

Non-Investment Grade Debt Securities Risk:   Non-investment grade debt securities are sometimes referred to as “junk bonds” and are considered speculative with respect to their issuers’ ability to make payments of interest and principal. There is a high risk that the Fund could suffer a loss from investments in non-investment grade debt securities caused by the default of an issuer of such securities. Part of the reason for this high risk is that, in the event of a default or bankruptcy, holders of non-investment grade debt securities generally will not receive payments until the holders of all other debt have been paid. In addition, the market for non-investment grade debt securities has, in the past, had more frequent and larger price changes than the markets for other securities. Non-investment grade debt securities can also be more difficult to sell for good value.

 

Options Risk:   Options trading is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The value of options can be highly volatile, and their use can result in loss if the sub-advisor is incorrect in its expectation of price fluctuations. The successful use of options for hedging purposes also depends in part on the ability of the sub-advisor to predict future price fluctuations and the degree of correlation between the options and securities markets.  When options are purchased over the counter, the Fund bears the risk that the counter-party that wrote the option will be unable or unwilling to perform its obligations under the option contract. Such options may also be illiquid, and in such cases, the Fund may have difficulty closing out its position.

 

23

 

Preferred Stock Risk: Preferred stock represents an equity or ownership interest in an issuer that pays dividends at a specified rate and that has precedence over common stock in the payment of dividends. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed prior to its maturity, which can have a negative impact on the stock’s price when interest rates decline.

 

Prepayment Risk: The risk that a debt security may be paid off and proceeds invested earlier than anticipated. Prepayment risk is more prevalent during periods of falling interest rates.

 

Swap Agreements Risk:   The Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Fund’s exposure to credit risk. Further, there is a risk that no suitable counterparties are willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment goal.

 

Value Investing Risk: A value-oriented investment approach is subject to the risk that a security believed to be undervalued does not appreciate in value as anticipated or experiences a decline in value.

 

As with any mutual fund, there is no guarantee that the Fund will achieve its investment goal. You can find more information about the Fund’s investments and risks under the “Investment Strategies and Risks” section of the Fund’s Prospectus.

 

The Fund’s Performance*

 

The bar chart and the performance table below illustrate the risks and volatility of an investment in the Fund by showing changes in the Fund’s performance from calendar year to calendar year and by showing how the Fund’s average annual total returns for 1 year, 5 years and 10 years compare with the Barclays U.S. Aggregate Bond Index.  The bar chart does not reflect any sales charges, which would reduce your return.  For information on the prior history of the Fund, please see the section entitled “The Trust” in the Fund’s Statement of Additional Information.  Past performance (before and after taxes) does not necessarily indicate how the Fund will perform in the future.  Updated performance is available at no cost by visiting www.TouchstoneInvestments.com or by calling 1.800.543.0407.

 

Touchstone Strategic Income Fund —Class A shares Total Return as of December 31

 

 

24

---

 

Best Quarter: 2 nd  Quarter 2009 +21.98%       Worst Quarter:  3 rd  Quarter 2008 -18.49%

 

The year-to-date return for the Fund’s Class A shares as of March 31, 2012 is 3.51%.

 

* Institutional shares have not been operational and offered prior to the date of the Fund’s prospectus.  Institutional shares would have had substantially similar annual returns because the shares are invested in the same portfolio. Annual returns would differ only to the extent that the Classes have different expenses.

 

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your after-tax returns may differ from those shown and depend on your tax situation. The after-tax returns do not apply to shares held in an IRA, 401(k) or other tax-deferred account.  After-tax returns are only shown for Class A shares and after-tax returns for other Classes will vary.

 

Class A shares began operations on April 1, 2004, Class C shares began operations on October 29, 2001 and Class Y shares began operations on September 1, 1998.  The performance figures for Class A shares prior to April 1, 2004 represent the performance of the Fifth Third/Maxus Income Fund Investor Shares with an inception date of March 10, 1985 and are adjusted to reflect expenses and applicable sales charges.

 

Average Annual Total Returns For the periods ended December 31, 2011		1 Year		5 Years		10 Years
Class A Shares
Return Before Taxes		0.50	%	3.47	%	5.07	%
Return After Taxes on Distributions		-1.19	%	1.23	%	3.09	%
Return After Taxes on Distributions and Sale of Fund Shares		0.31	%	1.61	%	3.16	%
Class C Shares
Return Before Taxes		4.97	%	3.75	%	4.86	%
Class Y Shares
Return Before Taxes		5.94	%	4.77	%	5.90	%
Barclays U.S. Aggregate Bond Index (reflects no deduction for fees, expenses or taxes)		7.84	%	6.50	%	5.78	%

 

Investment Advisor

Touchstone Advisors, Inc.

 

Investment  Sub-Advisor		Portfolio Manager(s)		Investment Experience		Primary Title with Investment Sub- Advisor
Fifth Third Asset Management, Inc.		Peter Kwiatkowski, CFA		Managing the Fund since February 2002		Director and Portfolio Manager
		David Withrow, CFA		Managing the Fund since November 2007		Director and Portfolio Manager
		Mitchell Stapley, CFA		Managing the Fund since November 2007		Chief Fixed Income Officer
		Mirko Mikelic		Managing the Fund since November 2007		Senior Portfolio Manager
		John Cassady, CFA		Managing the Fund since November 2009		Senior Portfolio Manager
		Dan Popowics, CFA		Managing the Fund since August 2009		Portfolio Manager

 

25

---

 

Jason Schwartz, CFA

Managing the Fund since November 2010

Portfolio Manager

 

26

 

INVESTMENT STRATEGIES AND RISKS

 

Can a Fund Depart From its Principal Investment Strategies?

 

In addition to the investments and strategies described in this prospectus, each Fund also may invest in other securities, use other strategies and engage in other investment practices. These investments and strategies are described in detail in our Statement of Additional Information (“SAI”).

 

Each Fund’s investment goal is non-fundamental, and may be changed by the Trust’s Board of Trustees without shareholder approval.  You would be notified at least 30 days before any change takes effect.  The investments and strategies described throughout this prospectus are those that the Funds use under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, each Fund may invest up to 100% of its assets in cash, repurchase agreements and short-term obligations (i.e., fixed and variable rate securities and high quality debt securities of corporate and government issuers) that would not ordinarily be consistent with the Fund’s goals. This defensive investing may increase a Fund’s taxable income. A Fund will do so only if the Advisor or the Fund’s sub-advisor believes that the risk of loss in using the Fund’s normal strategies and investments outweighs the opportunity for gains. Of course, there can be no guarantee that any Fund will achieve its investment goal.

 

Portfolio Composition

 

Certain of the Funds have adopted policies to invest, under normal circumstances, at least 80% of the value of the Fund’s “assets” in certain types of investments suggested by its name (the “80% Policy”). For purposes of these 80% Policies, the term “assets” means net assets plus the amount of borrowings for investment purposes. A Fund must comply with its 80% Policy at the time the Fund invests its assets. Accordingly, when a Fund no longer meets the 80% requirement as a result of circumstances beyond its control, such as changes in the value of portfolio holdings, it would not have to sell its holdings but would have to make any new investments in such a way as to comply with the 80% Policy.

 

Additional Information About Fund Investments

 

Foreign Companies (or Issuers):  Foreign companies (or issuers) are companies that meet all of the following criteria:

 

·                   They are organized under the laws of a foreign country

·                   They maintain their principal place of business in a foreign country

·                   The principal trading market for their securities is located in a foreign country

·                   They derive at least 50% of their revenues or profits from operations in foreign countries

·                   They have at least 50% of their assets located in foreign countries

 

Emerging Market Countries:  Emerging market countries are generally countries that are not included in the MSCI World Index.  As of April 30, 2012, the countries in the MSCI World Index included: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.  The country composition of the MSCI World Index can change over time.  When a Fund invests in securities of a company in an emerging market country, it invests in securities issued by a company that meets one or more of the following criteria:

 

·                   It is organized under the laws of an emerging market country.

·                   It maintains its principal place of business in an emerging market country.

·                   The principal trading market for its securities is located in an emerging market country.

·                   It derives at least 50% of its revenues or profits from operations within emerging market countries.

·                   It has at least 50% of its assets located in emerging market countries.

 

28

---

 

Other Investment Companies (All Funds):   The Funds may invest in securities issued by other investment companies.  This may include money market funds, index funds, exchange traded funds (e.g., iShares® and SPDRs) and similar securities of other issuers.  When a Fund invests in other investment companies, shareholders indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying Fund expenses.  Touchstone Advisors has received an exemptive order from the Securities and Exchange Commission (“SEC”) that permits the Funds to invest their uninvested cash or cash collateral in one or more affiliated money market funds.  Each Fund may invest up to 25% of its total assets in affiliated money market funds, subject to that Fund’s investment limitations and certain other conditions pursuant to the exemptive order.

 

Exchange-Traded Funds (All Funds): The Funds may invest in shares of exchange-traded funds (“ETFs”).  Investing in an ETF generally offers instant exposure to an index or a broad range of markets, sectors, geographic regions or industries.  When investing in ETFs, shareholders bear their proportionate share of the Fund’s expenses and their proportionate share of ETF expenses which are similar to the Fund’s expenses. Also, although ETFs seek to provide investment results that correspond generally to the price and yield performance of a particular market index, the price movement of an ETF may not track the underlying index.

 

Derivatives (All Funds):  Each Fund may, but is not required to, use derivative instruments for any of the following purposes:

 

·                   To hedge against adverse changes - caused by changing interest rates, stock market prices or currency exchange rates - in the market value of securities held by or to be bought for a Fund;

·                   As a substitute for purchasing or selling securities;

·                   To shorten or lengthen the effective portfolio maturity or duration;

·                   To enhance a Fund’s potential gain in non-hedging or speculative situations; or

·                   To lock in a substantial portion of the unrealized appreciation in a stock without selling it.

 

A derivative instrument will obligate or entitle a Fund to deliver or receive an asset or a cash payment that is based on the change in value of a designated security, currency or index. Even a small investment in derivative instruments can have a large impact on a portfolio’s yield, stock prices and currency exposure. Therefore, using derivatives can disproportionately increase losses and reduce opportunities for gains when interest rates, stock prices or currency rates are changing. A Fund may not fully benefit from or may lose money on derivatives if changes in their value do not correspond accurately to changes in the value of the Fund’s holdings.

 

Counterparties to over-the-counter derivative contracts present the same types of credit risk as issuers of fixed income securities. Derivatives can also make a Fund’s holdings less liquid and harder to value, especially in declining markets. In addition, much of the income and gains generated by derivatives will be taxed as ordinary income. Derivative instruments include futures, options, swaps and to the extent consistent with a Fund’s investment goals, forward currency exchange contracts.  With the exception of the Touchstone Strategic Income Fund, under normal circumstances, investments in these types of derivatives will typically be limited to an amount less than 10% of each Fund’s assets based on daily mark-to-market value.

 

Change in Market Capitalization : A Fund may specify in its principal investment strategy a market capitalization range for acquiring portfolio securities. If a security that is within the range for a Fund at the time of purchase later falls outside the range, which is most likely to happen because of market fluctuation, the Fund may continue to hold the security if, in the sub-advisor’s judgment, the security remains otherwise consistent with the Fund’s investment goal and strategies. However, this change could affect the Fund’s flexibility in making new investments.

 

Lending of Portfolio Securities (All Funds):   The Funds may lend their portfolio securities to brokers, dealers and financial institutions under guidelines adopted by the Board of Trustees, including a requirement that the Fund must receive collateral equal to no less than 100% of the market value of the securities loaned. The risk in lending portfolio securities, as with other extensions of credit, consists of possible loss of rights in the collateral should the borrower fail

 

29

 

financially. In determining whether to lend securities, a Fund’s sub-advisor will consider all relevant facts and circumstances, including the creditworthiness of the borrower.  More information on securities lending is available in the SAI.

 

What are the Principal Risks of Investing in the Funds?

 

The following is a list of principal risks that may apply to your investment in a Fund. Further information about investment risks is available in the Funds’ SAI:

 

Closed-End Fund Risk (Touchstone Strategic Income Fund): The risks of investment in other investment companies typically reflect the risk of the types of securities in which the investment companies invest. The value of the shares of closed-end investment companies may be lower than the value of the portfolio securities held by the closed-end investment company. When the Fund invests in another investment company, shareholders of the Fund bear their proportionate share of the other investment company’s fees and expenses as well as its share of the Fund’s fees and expenses. There may also not be an active trading market available for shares of some closed-end funds. Additionally, trading of closed-end fund shares may be halted or delisted by the listing exchange.

 

Convertible Securities Risk (Touchstone Micro Cap Value Fund, Touchstone Small Company Value Fund and Touchstone Strategic Income Fund): Convertible securities are subject to the risks of both debt securities and equity securities. The values of convertible securities tend to decline as interest rates rise and, due to the conversion feature, tend to vary with fluctuations in the market value of the underlying security.

 

Credit Risk (Touchstone Strategic Income Fund): The securities in a Fund’s portfolio are subject to the possibility that a deterioration, whether sudden or gradual, in the financial condition of an issuer, or a deterioration in general economic conditions, could cause an issuer to fail to make timely payments of principal or interest, when due. This may cause the issuer’s securities to decline in value.

 

Debt Securities Risk (Touchstone Strategic Income Fund): The prices of the Fund’s fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments.

 

Derivatives Risk (Touchstone Strategic Income Fund): A derivative instrument will obligate or entitle the Fund or an underlying fund to deliver or receive an asset or a cash payment that is based on the change in value of a designated security, currency or index.  Even a small investment in derivative instruments can have a large impact on a portfolio’s yield, stock prices and currency exposure. Therefore, using derivatives can disproportionately increase losses and reduce opportunities for gains when interest rates, stock prices or currency rates are changing. The Fund or an underlying fund may not fully benefit from or may lose money on derivatives if changes in their value do not correspond accurately to changes in the value of the Fund’s or underlying fund’s holdings.  Counterparties to over-the-counter derivative contracts present the same types of credit risk as issuers of fixed income securities. Derivatives can also make the Fund’s holdings less liquid and harder to value, especially in declining markets. In addition, much of the income and gains generated by derivatives will be taxed as ordinary income.

 

Emerging Markets Risk (Touchstone International Value Fund):  Emerging markets may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with the Fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar.

 

Equity Securities Risk (All Funds): A Fund is subject to the risk that stock prices will fall over short or extended periods of time. Historically, the equity markets have moved in cycles. The value of a Fund’s equity securities may fluctuate from day to day. Individual companies may report poor results or be negatively affected by industry and/or economic trends

 

30

---

 

and developments. The prices of securities issued by these companies may decline in response to such developments, which could result in a decline in the value of a Fund’s shares. These factors contribute to price volatility, which is a principal risk of investing in the Funds. In addition, common stocks represent a share of ownership in a company, and rank after bonds and preferred stock in their claim on the company’s assets in the event of bankruptcy.

 

Foreign Securities Risk (All Funds): Investing in foreign securities poses additional risks since political and economic events unique in a country or region will affect those markets and their issuers.  These events will not necessarily affect the U.S. economy or similar issuers located in the United States.  In addition, investments in foreign securities are generally denominated in foreign currency.  As a result, changes in the value of those currencies compared to the U.S. dollar may affect (positively or negatively) the value of a Fund’s investments.  These currency movements may happen separately from, or in response to, events that do not otherwise affect the value of the security in the issuer’s home country.  There is a risk that foreign securities may not be subject to accounting standards or governmental supervision comparable to U.S. companies and that less public information about their operations may exist.  There is risk associated with the clearance and settlement procedures in non-U.S. markets, which may be unable to keep pace with the volume of securities transactions and may cause delays.  Foreign markets may be less liquid and more volatile than U.S. markets and offer less protection to investors. Over-the-counter securities may also be less liquid than exchange-traded securities.

 

Forward Currency Exchange Contract Risk (Touchstone Strategic Income Fund):  A forward foreign currency exchange contract is an agreement to buy or sell a specific currency at a future date and at a price set at the time of the contract. Forward foreign currency exchange contracts may reduce the risk of loss from a change in value of a currency, but they also limit any potential gains, do not protect against fluctuations in the value of the underlying position and are subject to counterparty risk.

 

Futures Contracts Risk (Touchstone Strategic Income Fund):  A futures contract provides for the future sale by one party and purchase by another party of a specified quantity of the security or other financial instrument at a specified price and time.  A futures contract on an index is an agreement in which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written.  The risks associated with futures include: the potential inability to terminate or sell a position, the lack of a liquid secondary market for the Fund’s position and the risk that the counterparty to the transaction will not meet its obligations.

 

Interest Rate Risk (Touchstone Strategic Income Fund):   As interest rates rise, the value of fixed income securities the Fund owns will likely to decrease. Longer-term securities are generally more volatile, so the longer the average maturity or duration of these securities, the greater their price risk. Duration is a measure of the expected life, taking into account any prepayment or call features of the security, of a fixed income security that is used to determine the price sensitivity of the security for a given change in interest rates. Specifically, duration is the change in the value of a fixed income security that will result from a 1% change in interest rates, and generally is stated in years. Maturity, on the other hand, is the date on which a fixed income security becomes due for payment of principal.

 

Management Risk (All Funds): The value of your investment may decrease if the sub-advisor’s judgment about the attractiveness, value or market trends affecting a particular security, issuer, industry or sector or about market movements is incorrect.

 

Market Risk (All Funds): Market risk is the risk that the market value of a security may fluctuate, sometimes rapidly and unpredictably.

 

Micro Cap Risk (Touchstone Micro Cap Value Fund and Touchstone Small Company Value Fund): Micro-capitalization companies are substantially riskier than investments in larger, more established companies. The stocks of micro-capitalization companies are less stable in price and less liquid than the stocks of larger companies.

 

31

 

Mid Cap Risk (Touchstone Small Company Value Fund and Touchstone International Value Fund) : The Fund is subject to the risk that medium capitalization stocks may underperform other types of stocks or the equity markets as a whole. Stocks of mid-sized companies may be subject to more abrupt or erratic market movements than stocks of larger, more established companies. Mid-sized companies may have limited product lines or financial resources, and may be dependent upon a particular niche of the market.

 

Non-Investment Grade Debt Securities Risk (Touchstone Strategic Income Fund):  Non-investment grade debt securities are sometimes referred to as “junk bonds” and are considered speculative with respect to their issuers’ ability to make payments of interest and principal.  There is a high risk that an underlying fund could suffer a loss from investments in non-investment grade debt securities caused by the default of an issuer of such securities. Part of the reason for this high risk is that, in the event of a default or bankruptcy, holders of non-investment grade debt securities generally will not receive payments until the holders of all other debt have been paid. In addition, the market for non-investment grade debt securities has, in the past, had more frequent and larger price changes than the markets for other securities. These bonds are often thinly traded and can be more difficult to sell and value accurately than investment grade bonds. Because objective pricing data may be less readily available, judgment may play a greater role in the valuation process. Successful investment in non-investment grade debt securities involves greater investment risk and is highly dependent on the sub-advisor’s credit analysis and market analysis. In addition, the entire high yield bond market can experience sudden and sharp price swings due to a variety of factors, including changes in economic forecasts, stock market activity, large or sustained sales by major investors, a high-profile default, or just a change in the market’s psychology.

 

Options Risk (Touchstone Strategic Income Fund):   Options trading is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The value of options can be highly volatile, and their use can result in loss if the sub-advisor is incorrect in its expectation of price fluctuations. The successful use of options for hedging purposes also depends in part on the ability of the sub-advisor to predict future price fluctuations and the degree of correlation between the options and securities markets.  When options are purchased over the counter, the Fund bears the risk that the counter-party that wrote the option will be unable or unwilling to perform its obligations under the option contract. Such options may also be illiquid, and in such cases, the Fund may have difficulty closing out its position.

 

Portfolio Turnover Risk (Touchstone Small Company Value Fund):   The Fund may sell its portfolio securities, regardless of the length of time that they have been held, if the Advisor and/or sub-advisor determines that it would be in the Fund’s best interest to do so. It may be appropriate to buy or sell portfolio securities due to economic, market, or other factors that are not within the Advisor’s or sub-advisor’s control. These transactions will increase the Fund’s “portfolio turnover.”  A 100% portfolio turnover rate would occur if all of the securities in the Fund were replaced during a given period. High turnover rates generally result in higher brokerage costs to the Fund and in higher net taxable gain for shareholders, and may reduce the Fund’s returns.

 

Preferred Stock Risk (Touchstone Small Company Value Fund and Touchstone Strategic Income Fund): Preferred stock represents an equity or ownership interest in an issuer that pays dividends at a specified rate and that has precedence over common stock in the payment of dividends. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed prior to its maturity, which can have a negative impact on the stock’s price when interest rates decline.

 

Prepayment Risk (Touchstone Strategic Income Fund): The risk that a debt security may be paid off and proceeds invested earlier than anticipated. Prepayment risk is more prevalent during periods of falling interest rates.

 

Small Cap Risk (Touchstone Small Company Value Fund and Touchstone International Value Fund):  The Fund is subject to the risk that small capitalization stocks may underperform other types of stocks or the equity markets as a whole. Small cap stock risk is the risk that stocks of smaller companies may be subject to more abrupt or erratic market

 

32

 

movements than stocks of larger, more established companies. Small companies may have limited product lines or financial resources, or may be dependent upon a small or inexperienced management group. In addition, small cap stocks typically are traded in lower volume, and their issuers typically are subject to greater degrees of changes in their earnings and prospects.

 

Swap Agreements Risk (Touchstone Strategic Income Fund): The Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Swap agreements also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Fund’s exposure to credit risk. Further, there is a risk that no suitable counterparties are willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment goal.

 

Value Investing Risk (All Funds): A value oriented investment approach is subject to the risk that a security believed to be undervalued does not appreciate in value or experience a decline in value.

 

What are Some of the Non-Principal Risks of Investing in the Funds?

 

Manager of Managers Risk (All Funds): The Advisor engages one or more sub-advisors to make investment decisions on its behalf for a portion or all of each Fund. There is a risk that the Advisor may be unable to identify and retain sub-advisors who achieve superior investment returns relative to other similar sub-advisors.

 

Market Disruption Risk (All Funds): The United States, certain member states of the European Union and other countries have experienced during the past few years significant disruption to their financial markets impacting the liquidity and volatility of securities generally, including securities in which the Funds may invest.  During periods of extreme market volatility, prices of securities held by the Funds may be negatively impacted due to imbalances between market participants seeking to sell the same or similar securities and market participants willing or able to buy such securities.  As a result, the market prices of securities held by the Funds could go down, at times without regard to the financial condition of or specific events impacting the issuer of the security.

 

The recent instability in the financial markets has led governments to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity. Federal, state, and other governments, their regulatory agencies, or self regulatory organizations may take actions that affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Legislation or regulation may also change the way in which the Funds themselves are regulated. Such legislation or regulation could limit or preclude the Funds’ ability to achieve their investment goals.

 

Governments or their agencies may also acquire distressed assets from financial institutions and acquire ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear, and such a program may have positive or negative effects on the liquidity, valuation and performance of the Funds’ portfolio holdings. Furthermore, volatile financial markets can expose the Funds to greater market and liquidity risk and potential difficulty in valuing portfolio instruments held by the Funds. The Funds have established procedures to assess the liquidity of portfolio holdings and to value instruments for which market prices may not be readily available. The Advisor and Sub-Advisors will monitor developments and seek to manage the Funds in a manner consistent with achieving the Funds’ investment goals, but there can be no assurance that they will be successful in doing so.

 

Portfolio Turnover Risk (All Funds except the Touchstone Small Company Value Fund):   Each Fund may sell its portfolio securities, regardless of the length of time that they have been held, if the Advisor and/or sub-advisor determines that it would be in a Fund’s best interest to do so. It may be appropriate to buy or sell portfolio securities due to economic, market, or other factors that are not within the Advisor’s or sub-advisor’s control. These transactions will increase a Fund’s “portfolio turnover.” A 100% portfolio turnover rate would occur if all of the securities in a Fund were replaced

 

33

---

 

during a given period. High turnover rates generally result in higher brokerage costs to a Fund and in higher net taxable gain for shareholders, and may reduce a Fund’s returns.

 

Where Can I Find Information About the Funds’ Portfolio Holdings Disclosure Policies?

 

A description of the Funds’ policies and procedures for disclosing portfolio securities to any person is available in the SAI and can also be found on the Funds’ website at www.TouchstoneInvestments.com.

 

34

 

THE FUNDS’ MANAGEMENT

 

Investment Advisor
Touchstone Advisors, Inc. (“Touchstone Advisors” or the “Advisor”)
303 Broadway, Suite 1100, Cincinnati, OH 45202

 

Touchstone Advisors has been a registered investment advisor since 1994. As of March 31, 2012, Touchstone Advisors had approximately $9.75 billion in assets under management. As the Funds’ Advisor, Touchstone Advisors continuously reviews, supervises and administers the Funds’ investment programs and also ensures compliance with the Funds’ investment policies and guidelines.

 

Touchstone Advisors is responsible for selecting each Fund’s sub-advisor(s), subject to approval by the Board of Trustees. Touchstone Advisors selects a sub-advisor that has shown good investment performance in its areas of expertise. Touchstone Advisors considers various factors in evaluating a sub-advisor, including:

 

·                   Level of knowledge and skill

·                   Performance as compared to its peers or benchmark

·                   Consistency of performance over 5 years or more

·                   Level of compliance with investment rules and strategies

·                   Employees facilities and financial strength

·                   Quality of service

 

Touchstone Advisors will also continually monitor each sub-advisor’s performance through various analyses and through in-person, telephone and written consultations with a sub-advisor. Touchstone Advisors discusses its expectations for performance with each sub-advisor and provides evaluations and recommendations to the Board of Trustees, including whether or not a sub-advisor’s contract should be renewed, modified or terminated.

 

The Securities and Exchange Commission (the “SEC”) has granted an exemptive order that permits the Trust or Touchstone Advisors, under certain conditions, to select or change unaffiliated sub-advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval. The Funds must still obtain shareholder approval of any sub-advisory agreement with a sub-advisor affiliated with the Trust or Touchstone Advisors other than by reason of serving as a sub-advisor to one or more Funds. Shareholders of a Fund will be notified of any changes in its sub-advisory arrangements.

 

Two or more sub-advisors may manage a Fund, with each managing a portion of the Fund’s assets. If a Fund has more than one sub-advisor, Touchstone Advisors allocates how much of a Fund’s assets are managed by each sub-advisor. Touchstone Advisors may change these allocations from time to time, often based upon the results of its evaluations of the sub-advisors.

 

Touchstone Advisors is also responsible for running all of the operations of the Funds, except those that are subcontracted to a sub-advisor, custodian, transfer agent, sub-administrative agent or other parties.  For its services, Touchstone Advisors is entitled to receive a base investment advisory fee from each Fund as listed below at an annualized rate, based on the average daily net assets of the Fund. Touchstone Advisors pays sub-advisory fees to each sub-advisor from its advisory fee.

 

35

---

 

Fund		Annual Fee Rate
Touchstone Micro Cap Value Fund		1.00	%
Touchstone Small Company Value Fund		0.90	%
Touchstone International Value Fund		1.00	%
Touchstone Strategic Income Fund		0.70	%

 

Contractual Fee Waiver Agreement

 

Touchstone Advisors has contractually agreed to waive fees and reimburse expenses to the extent necessary to ensure certain Funds’ total annual operating expenses (excluding dividend expenses relating to short sales, interest, taxes, brokerage commissions, other expenditures which are capitalized in accordance with generally accepted accounting principles, the cost of “Acquired Fund Fees and Expenses,” if any, and other extraordinary expenses not incurred in the ordinary course of business) do not exceed the contractual limits set forth below.  The contractual limits set forth below have been adjusted for each class of each Fund to include the effect of Rule 12b-1 fees, shareholder servicing fees and other anticipated class specific expenses, if applicable. Fee waivers and/or expense reimbursements are calculated and applied monthly, based on each Fund’s average net assets during such month. These fee waivers and expense reimbursements will remain in effect until at least [September 10, 2013].  The terms of Touchstone Advisors’ contractual waiver agreement provide that Touchstone Advisors is entitled to recoup, subject to approval by the Funds’ Board of Trustees, such amounts waived or reimbursed for a period of up to three (3) years from the year in which Touchstone Advisors reduced its compensation and/or assumed expenses for a Fund.  No recoupment will occur unless a Fund’s operating expenses are below the expense limitation amount.

 

		Contractual Limit on
Fund		Total Operating Expenses
Touchstone Micro Cap Value Fund
Class A		1.60	%
Class C		2.35	%
Class Y		1.35	%
Institutional		1.25	%
Touchstone Small Company Value Fund
Class A		1.20	%
Class C		1.95	%
Class Y		0.95	%
Institutional		0.85	%
Touchstone International Value Fund
Class A		1.36	%
Class C		2.11	%
Class Y		1.11	%
Institutional		0.96	%
Touchstone Strategic Income Fund
Class A		0.94	%
Class C		1.69	%
Class Y		0.69	%
Institutional		0.59	%

 

36